<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, 1999, 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, 1999: 11,147,462 including 479,366 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, 1999 and December
31, 1998
Consolidated statements of income -- Six months and three
months ended June 30, 1999 and 1998
Consolidated statements of shareholders' equity -- Six
months ended June 30, 1999
Consolidated statements of cash flows -- Six months ended
June 30, 1999 and 1998
Notes to consolidated financial statements -- June 30, 1999
Independent accountants' review report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 6,345 $ 4,320
Accounts receivable, less allowances for doubtful accounts
of $3,080 at June 30, 1999 and $2,803 at December 31,
1998................................................... 105,750 95,718
Inventories............................................... 169,821 150,052
Deferred tax assets....................................... 2,232 2,232
Other current assets...................................... 6,161 5,468
-------- --------
Total Current Assets.............................. 290,309 257,790
Property, Plant and Equipment............................... 203,092 160,625
Less accumulated depreciation............................. 78,717 70,468
-------- --------
124,375 90,157
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $10,627 at June 30, 1999
and $8,105 at December 31, 1998........................ 110,455 99,351
Deferred taxes............................................ 8,900 8,900
Other..................................................... 47,737 33,356
-------- --------
$581,776 $489,554
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 59,213 $ 46,410
Accrued expenses.......................................... 54,310 32,076
Current portion of long-term liabilities.................. 2,039 2,372
-------- --------
Total Current Liabilities......................... 115,562 80,858
Long-Term Liabilities, less current portion
Long-term debt............................................ 287,766 237,483
Other postretirement benefits............................. 25,823 26,286
Other..................................................... 4,167 3,740
-------- --------
317,756 267,509
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... 11,148 11,148
Additional paid-in capital................................ 55,755 55,755
Retained earnings......................................... 89,305 80,420
Treasury stock, at cost................................... (6,677) (4,554)
Accumulated other comprehensive earnings (loss)........... (1,073) (1,582)
-------- --------
148,458 141,187
-------- --------
$581,776 $489,554
======== ========
</TABLE>
Note: The balance sheet at December 31, 1998 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
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales....................................... $186,917 $140,765 $358,320 $277,268
Cost of products sold........................... 153,104 117,179 293,540 230,350
-------- -------- -------- --------
Gross profit.................................. 33,813 23,586 64,780 46,918
Selling, general and administrative expenses.... 20,195 13,393 38,147 27,530
-------- -------- -------- --------
Operating income.............................. 13,618 10,193 26,633 19,388
Interest expense................................ 5,693 4,341 11,071 8,493
-------- -------- -------- --------
Income before income taxes.................... 7,925 5,852 15,562 10,895
Income taxes.................................... 3,389 2,516 6,677 4,685
-------- -------- -------- --------
Net income.................................... $ 4,536 $ 3,336 $ 8,885 $ 6,210
======== ======== ======== ========
Net income per common share:
Basic......................................... $ .42 $ .30 $ .83 $ .56
======== ======== ======== ========
Diluted....................................... $ .42 $ .30 $ .82 $ .55
======== ======== ======== ========
Common shares used in the computation:
Basic......................................... 10,714 10,993 10,753 10,995
======== ======== ======== ========
Diluted....................................... 10,839 11,270 10,888 11,258
======== ======== ======== ========
</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
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, 1999............ $11,148 $55,755 $80,420 $(4,554) $(1,582) $141,187
Comprehensive income:
Net income....................... 8,885 8,885
Foreign currency translation
adjustment.................... 509 509
--------
Comprehensive income.......... 9,394
Purchase of treasury stock......... (2,123) (2,123)
------- ------- ------- ------- ------- --------
Balance June 30, 1999.............. $11,148 $55,755 $89,305 $(6,677) $(1,073) $148,458
======= ======= ======= ======= ======= ========
</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
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 8,885 $ 6,210
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 10,326 7,512
-------- --------
19,211 13,722
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... (1,986) (6,328)
Inventories and other current assets................... (10,033) (15,542)
Accounts payable and accrued expenses.................. 7,887 (3,200)
Other.................................................. (8,109) (4,858)
-------- --------
Net Cash Provided (Used) by Operating Activities..... 6,970 (16,206)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (9,092) (10,896)
Costs of acquisitions, net of cash acquired............... (35,664) (6,036)
Purchase of investments................................... (445) (101)
-------- --------
Net Cash (Used) by Investing Activities................ (45,201) (17,033)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 49,000 36,500
Issuance of 9.25% Senior Notes, net of deferred financing
costs.................................................. 49,508 -0-
Payments on debt.......................................... (56,129) (1,145)
Purchase of treasury stock................................ (2,123) (238)
Issuance of common stock under stock option plan.......... -0- 239
-------- --------
Net Cash Provided by Financing Activities.............. 40,256 35,356
-------- --------
Increase in Cash and Cash Equivalents.................. 2,025 2,117
Cash and Cash Equivalents at Beginning of Period....... 4,320 1,814
-------- --------
Cash and Cash Equivalents at End of Period............. $ 6,345 $ 3,931
======== ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(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, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998.
NOTE B -- ACQUISITIONS AND DISPOSITION
During April 1998, the Company completed the acquisition of Direct
Fasteners Limited ("Direct") located in Ontario, Canada. The transaction was
accounted for as a purchase. Direct is a logistics provider of fastener related
components. The aggregate purchase price and the results of operations of Direct
prior to the date of acquisition were not material to the Company.
During September 1998, the Company completed the sale of the assets of
Friendly and Safe Packaging Systems, Inc. to Kerr Group. The transaction had an
immaterial effect on the consolidated results of operations and financial
position of the Company.
During October 1998, the Company acquired all of the stock of GIS
Industries, Inc. ("Gateway"). The transaction has been accounted for as a
purchase. Gateway is a logistics provider of fastener related components and
manufacturer of fabricated metal products and fasteners. The aggregate purchase
price and the results of operations of Gateway prior to the date of acquisition
were not material to the Company.
During the first six months of 1999, the Company acquired all of the stock
of The Metalloy Corporation ("Metalloy") and Columbia Nut and Bolt Corp.
("Columbia") and substantially all of the assets of St. Louis Screw & Bolt Co.
("St. Louis Screw") and PMC Industries, Inc. ("PMC") for cash. Metalloy is a
full service aluminum casting and machining company. Columbia is a logistics
provider of fastener related components. St. Louis Screw is a manufacturer of
bolts and PMC provides 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 the date of acquisition were not material to the Company.
In July 1999, the Company acquired all of the outstanding stock of
Industrial Fasteners Corp. ("Industrial"), a logistics provider of fastener
related components. Industrial Fasteners also manufactures fasteners, primarily
screws, rivets, and pins. The acquisition will be accounted for as a purchase.
The purchase price and the results of operations of Industrial prior to the date
of acquisition were not material to the Company.
8
<PAGE> 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE C -- INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-------- -----------
<S> <C> <C>
In process and finished goods............................... $137,219 $124,783
Raw materials and supplies.................................. 32,602 25,269
-------- --------
$169,821 $150,052
======== ========
</TABLE>
NOTE D -- SHAREHOLDERS' EQUITY
At June 30, 1999, 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
including 488,306 shares held in treasury.
NOTE E -- NET INCOME PER COMMON SHARE
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
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR
Net income.......................................... $ 4,536 $ 3,336 $ 8,885 $ 6,210
======= ======= ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted
average shares.................................... 10,714 10,993 10,753 10,995
Effect of dilutive securities:
Employee stock options............................ 125 277 135 263
------- ------- ------- -------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions... 10,839 11,270 10,888 11,258
======= ======= ======= =======
Net income per common share-basic................... $ .42 $ .30 $ .83 $ .56
======= ======= ======= =======
Net income per common share-diluted................. $ .42 $ .30 $ .82 $ .55
======= ======= ======= =======
</TABLE>
NOTE G -- ACCOUNTING PRONOUNCEMENTS
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 was applied prospectively and is
effective for financial statements for fiscal years beginning after December 15,
1998. The impact of this new standard did not 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 adopted 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 was immaterial.
9
<PAGE> 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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. Statement 133 requires derivatives to be
recorded on the balance sheet at fair value and establishes accounting for three
different types of hedges: 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 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.
NOTE H -- SEGMENTS
During the first quarter of 1999 the Company, upon completion of the
acquisition of Metalloy, redefined its operating segments. The Company retained
its Integrated Logistics Solutions ("ILS") segment and further segregated its
former Manufactured Products segment into an Aluminum Products segment and a
Manufactured Products segment. ILS is a leading national supplier of fasteners
(e.g. nuts, bolts and screws) and other industrial products to original
equipment manufacturers, 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 original
equipment manufacturers. In addition, Aluminum Products also provides
value-added services such as design and engineering, machining and assembly.
Manufactured Products is a diverse group of manufacturing businesses that design
and manufacture a broad range of high quality products which includes capital
equipment, rubber products and forged and machined products for specific
customer applications.
Results by Business Segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales, including intersegment sales:
ILS....................................... $109,123 $ 92,370 $215,535 $184,828
Aluminum products......................... 37,128 9,859 68,747 19,763
Manufactured products..................... 40,666 38,536 74,038 72,677
-------- -------- -------- --------
$186,917 $140,765 $358,320 $277,268
======== ======== ======== ========
Income before income taxes:
ILS....................................... $ 10,030 $ 8,784 $ 20,995 $ 16,704
Aluminum products......................... 4,144 472 7,115 1,105
Manufactured products..................... 1,765 2,357 2,737 4,444
-------- -------- -------- --------
15,939 11,613 30,847 22,253
Amortization of excess purchase price over net
assets acquired.............................. (894) (609) (1,708) (990)
Corporate costs................................ (1,427) (811) (2,506) (1,875)
Interest expense............................... (5,693) (4,341) (11,071) (8,493)
-------- -------- -------- --------
$ 7,925 $ 5,852 $ 15,562 $ 10,895
======== ======== ======== ========
</TABLE>
10
<PAGE> 11
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-------- --------
<S> <C> <C>
Identifiable assets were as follows:
ILS............................................ $319,607 $288,713
Aluminum products.............................. 93,920 40,063
Manufactured products.......................... 158,696 147,009
General corporate.............................. 9,553 13,769
-------- --------
$581,776 $489,554
======== ========
</TABLE>
NOTE I -- 9.25% SENIOR SUBORDINATED NOTES
On June 3, 1999, the Company sold $50 million of its 9.25% Senior
Subordinated Notes due 2007. The Company used the net proceeds to reduce the
amount borrowed under its credit facility. Interest on the Senior Subordinated
Notes is payable semi-annually on June 1 and December 1 of each year.
11
<PAGE> 12
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, 1999, and the related
consolidated statements of income for the three months and six months ended June
30, 1999 and 1998, the consolidated statement of shareholders' equity for the
six months ended June 30, 1999 and the consolidated statements of cash flows for
the six months ended June 30, 1999 and 1998. 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, 1998 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 15, 1999, 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, 1998, 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 20, 1999
12
<PAGE> 13
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. All significant intercompany
transactions have been eliminated in consolidation. The financial information
for the six and three-month periods ended June 30, 1999 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 acquisitions made during, and
subsequent to, the second quarter of 1998. During 1998, the Company acquired two
businesses for $40.2 million. During October 1998, the Company acquired all of
the shares of GIS Industries, Inc. ("Gateway"). Gateway is a logistics provider
of fastener related components and a manufacturer of metal products and
fasteners. During April 1998, the Company acquired all of the shares of Direct
Fasteners Limited ("Direct"), a logistics provider of fastener related
components located in Ontario, Canada. During the first six months of 1999, the
Company acquired all of the shares of The Metalloy Corporation ("Metalloy") and
Columbia Nut and Bolt Corp. ("Columbia") and substantially all of the assets of
St. Louis Screw & Bolt Co. ("St. Louis Screw") and PMC Industries, Inc. ("PMC")
for an aggregate purchase price of $35.7 million. Metalloy is a full service
aluminum casting and machining company. Columbia is a logistics provider of
fastener related components. St. Louis Screw is a manufacturer of bolts and PMC
produces capital equipment and associated parts for the oil drilling industry.
In July, 1999, the Company acquired all of the outstanding stock of Industrial
Fasteners Corp. ("Industrial"). Industrial is a logistics provider of fastener
related components and manufactures fasteners, primarily screws, rivets, and
pins. All acquisitions are accounted for as purchases and consequently their
results are included in the consolidated financial statements from their
respective dates of acquisition.
OVERVIEW
The Company operates diversified manufacturing and logistics businesses
that serve a wide variety of industrial markets. The Company manages its
businesses based upon three operating segments: Integrated Logistics Solutions
("ILS"), Aluminum Products, and Manufactured Products. ILS is a leading national
supplier of fasteners (e.g., nuts, bolts and screws) and other industrial
products 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 1998, the Company has grown significantly, both internally
and through acquisitions. Over this period, the Company's net sales increased at
a 42% compounded annual growth rate ("CAGR"), from $94.5 million to $551.8
million, and income from continuing operations on a fully taxed basis increased
at a 40% CAGR from $2.4 million to $12.9 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 in the Aluminum and
Manufactured Products segments.
Between January 1, 1994 and June 30, 1999, the Company's continuing
operations incurred $73.3 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.
13
<PAGE> 14
RESULTS OF OPERATIONS
FIRST HALF 1999 VERSUS FIRST HALF 1998
Net sales increased by $81.0 million, or 29%, from $277.3 million for the
first half of 1998 to $358.3 million for the first half of 1999. This growth
results from acquisitions that the Company made subsequent to June 30, 1998 and
relates primarily to the ILS and the Aluminum Products segments. For ILS, the
growth in net sales amounted to $30.7 million of which $23.8 million related to
acquisitive growth and the remainder to internal growth. For Aluminum Products,
net sales increased by $49.0 million and related primarily to the acquisition of
Metalloy.
Gross profit increased by $17.9 million, or 38%, from $46.9 million for the
first half of 1998 to $64.8 million for the first half of 1999 and is directly
related to acquisitions made in the preceding twelve months. The Company's
consolidated gross margin increased to 18.1% for the first six months of 1999
from 16.9% for the first six months of 1998. This increase in consolidated gross
margin was due to increased margins in both the Aluminum Products and ILS
segments offset by a slight decline in gross margins in the Manufactured
Products segment. The increase in Aluminum Products was due to increased
production at General Aluminum thereby allocating fixed manufacturing overhead
over a greater production base and to the acquisition of Metalloy that has a
higher overall gross margin than the existing business. The increase in margins
in the ILS segment is a result of spreading operating costs over a growing
revenue base resulting from the recent acquisitions in ILS and favorable raw
material sourcing. The decline in margins in the Manufactured Products segment
results primarily from reduced production activity at Ajax Manufacturing Company
that caused fixed overhead costs to be spread over a reduced production base.
Selling, general and administrative costs increased by 39% to $38.1 million
for the first six months of 1999 from $27.5 million for the first six months of
1998. The increase was primarily related to acquisitions that have been
consummated subsequent to June 30, 1998. Consolidated selling, general and
administrative expenses as a percentage of net sales were 10.6% during the
current period and 9.9% for the first six months of 1998. The increase in rate
for 1999 is caused by the acquisitions having a higher administrative expense
relationship to sales than the existing core operations.
Interest expense increased by $2.6 million from $8.5 million for the
six-month period ended June 30, 1998 to $11.1 million for the six-month period
ended June 30, 1999 due to higher average debt outstanding during the current
period offset by lower average interest rates in 1999 versus 1998. For the
six-month period ended June 30, 1999, the Company averaged outstanding
borrowings of $270.9 million as compared to $194.2 million outstanding for the
six months ended June 30, 1998. The $76.7 million increase related primarily to
acquisitions completed during the latter part of 1998 and the first half of
1999. The average borrowing rate of 8.2% for the six months ended June 30, 1999
is 58 basis points lower than the average rate of 8.8% for the six months ended
June 30, 1998 primarily because of increased borrowings under the Company's bank
revolving credit which carries lower effective interest rates.
The effective income tax rate for the six-month periods ended June 30, 1999
and 1998 was 43%. At December 31, 1998, subsidiaries of the Company had $1.1
million of net operating loss carryforwards for tax purposes.
SECOND QUARTER 1999 VERSUS SECOND QUARTER 1998
Net sales increased by $46.1 million, or 33%, from $140.8 million for the
quarter ended June 30,1998 to $186.9 million for the three months ended June 30,
1999. This growth results primarily from acquisitions that the Company made
subsequent to June 30, 1998 and relates primarily to the ILS and the Aluminum
Products segments. For ILS, the growth in net sales amounted to $16.8 million of
which $11.0 million related to acquisitive growth and the remainder to internal
growth. For Aluminum Products, net sales increased by $27.3 million and related
primarily to the acquisition of Metalloy.
Gross profit increased by $10.2 million, or 43%, from $23.6 million for the
quarter ended June 30, 1998 to $33.8 million for the quarter ended June 30, 1999
and is directly related to acquisitions made in the preceding twelve months. The
Company's consolidated gross margin increased to 18.1% for the current period
from
14
<PAGE> 15
16.8% for the quarter ended June 30, 1998. All segments experienced increased
margins compared to the year earlier period. The increase in Aluminum Products
was due to increased production at General Aluminum thereby allocating fixed
manufacturing overhead over a greater production base and to the acquisition of
Metalloy, which has a higher overall gross margin than the existing business.
The increase in margins in both the ILS and Manufactured Products segments is a
result of spreading operating costs over a growing revenue base and in ILS
favorable raw material sourcing.
Selling, general and administrative costs increased by 51% to $20.2 million
for the quarter ended June 30,1999 from $13.4 million for the quarter ended June
30, 1998. The majority of the increase was related to acquisitions that have
been consummated subsequent to the second quarter of 1998. Consolidated selling,
general and administrative expenses as a percentage of net sales were 10.8% of
net sales in the current period and 9.5% of net sales in the corresponding
period of the prior year. The increase in rates is caused by the acquisitions
having a higher administrative expense relationship to sales than the existing
core operations.
Interest expense increased by $1.4 million from $4.3 million for the
quarter ended June 30, 1998 to $5.7 million for the quarter ended June 30, 1999
due to higher average debt outstanding during the current period offset by lower
average interest rates in 1999 versus 1998. For the quarter ended June 30, 1999,
the Company averaged outstanding borrowings of $276.5 million as compared to
$204.8 million outstanding for the quarter ended June 30, 1998. The $71.7
million increase related to acquisitions completed during the latter part of
1998 and the first half of 1999. Interest rates averaged 8.2% for the quarter
ended June 30, 1999 compared to 8.5% for the quarter ended June 30, 1998.
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 and the sale of Senior Subordinated Notes. On November 2, 1998,
Park-Ohio amended and restated its credit agreement with a group of banks under
which it may borrow up to $150 million on an unsecured basis. The proceeds of
the new credit agreement, which expires on April 30, 2001, will be used for
general corporate purposes. Amounts borrowed under the new credit agreement may
be borrowed at Park-Ohio's election at either (i) the bank's prime lending rate
less 100-30 basis points or (ii) LIBOR plus 90-170 basis points depending on the
aggregate amount borrowed under the new credit agreement. As of July 31, 1999,
$101.5 million was outstanding under the facility.
On June 3, 1999, the Company sold an additional $50 million of its 9.25%
Senior Subordinated Notes due 2007 bringing the amount of Notes outstanding to
$200 million. The Company used the net proceeds from the sale of the Notes
($49.5 million) to repay outstanding bank borrowings.
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 1999 are projected
to be approximately $15 million that will be used to invest in the Company's
current facilities for projected new business, for scheduled improvements and
new equipment to expand existing products.
The ratio of current assets to current liabilities was 2.51 at June 30,
1999 versus 3.19 at December 31, 1998. Working capital decreased by $2.2
million, after giving effect to acquisitions made subsequent to December 31,
1998, to $174.7 million at June 30, 1999 from $176.9 million at December 31,
1998.
During the first six months of 1999, the Company generated $19.2 million
from operations before changes in operating assets and liabilities. After giving
effect to the use of $12.2 million in the operating accounts, the Company
provided $7.0 million from operating activities compared to the use of $16.2
million for the first half of 1998. During the period, the Company invested $9.1
million in capital expenditures, used $35.7 for acquisitions and used $2.6
million for other purposes, primarily the purchase of treasury shares. These
activities were funded by issuing $49.5 million of 9.25% Senior Subordinated
Notes with a net decrease of $6.6 million in long-term debt, primarily bank
borrowings.
15
<PAGE> 16
YEAR 2000 CONVERSION
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During 1996, we developed a Year 2000 Task Force, which was established to
monitor and track the Year 2000 compliance at our operating units. The Task
Force developed a Year 2000 plan in order to minimize the risk to our operating
units and its customers. The plan to resolve the Year 2000 issues involves four
phases: assessment, remediation, testing and implementation.
To date, the Task Force has completed its assessment of our computer
hardware and software applications, process control equipment, and other
non-information technology equipment. After taking into consideration
investments in new equipment and systems that have already been made, this
assessment has determined that with only a few exceptions, the systems are Year
2000 compliant. The exceptions require upgrades of software programs or changes
to existing programs. The remediation and testing phases are currently underway,
and upgrades and software corrections are being completed. The target for
completion of all phases is by the third quarter of 1999. We also expect
critical contingency plans to be developed by the end of the third quarter of
1999. Based upon the assessments and remediations completed to date, we do not
expect that the Year 2000 issue will have a material effect on our business
operations, consolidated financial condition, cash flows, or results of
operations.
In addition, the Task Force is reviewing the Year 2000 compliance of our
key suppliers, customers and service providers ("significant third parties") in
an effort to reduce the potential adverse effect on our operations from
non-compliance by those parties. This review has begun and is expected to be
completed by September 30, 1999. Interfaces to external suppliers and customers
are part of this assessment and validation process. As these significant third
parties are reviewed, the Task Force intends to develop contingency plans, if
necessary, for those parties that exhibit possible Year 2000 problems. We have
identified the most likely risk of Year 2000 non-compliance as the risk that
significant third parties will not be Year 2000 compliant. Due to the general
uncertainty inherent in the Year 2000 problem, we are unable to determine at
this time whether the consequence of Year 2000 compliance failures will have a
material affect on our results of operations or financial condition. If Year
2000 compliance is not achieved by these significant third parties, over which
we have no control, it could, depending on duration, have a material adverse
effect on our operations.
We are utilizing both internal and external resources to remedy, test, and
implement the software and operating equipment for Year 2000 modifications. The
total cost to achieve Year 2000 compliance is estimated at $9 million.
Approximately 75% of this cost represents new systems, which the Company may
have initiated during the period, notwithstanding the Year 2000 issue. To date,
the Company has incurred approximately $8.5 million for new systems and
equipment, with the majority of these costs for the conversion/development of
systems. The remaining $.5 million will be funded through operating cash flows.
We generally do not separately identify the direct costs of internal employees
working on Year 2000 projects.
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 substantially mitigated.
However, we perform scheduled plant maintenance in the third quarter to coincide
with customer plant shut downs.
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.
16
<PAGE> 17
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 and the Year
2000 conversion. 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: 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 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 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; dependence on information systems; and our ability, as well as the
ability of our vendors and customers to achieve Year 2000 compliance. 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 the our plans and
objectives will be achieved.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at June 30, 1999, and for the three
and six-month periods ended June 30, 1999 and 1998, have been reviewed, prior to
filing, by Ernst & Young LLP, our independent accountants, and their report is
included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk including changes in interest rates. We are
subject to interest rate risk on our floating rate revolving credit facility
which consisted of borrowings of $85.5 million at June 30, 1999. A 100 basis
point increase in the interest rate would result in an increase in interest
expense of $.2 million during the period.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders on April 29, 1999. The
stockholders approved the election of three directors to serve until the annual
meeting of stockholders in the year 2002. The votes cast for each nominee were
as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
--------- --------
<S> <C> <C>
Kevin R. Greene 9,898,794 893,462
Thomas E. McGinty 9,896,394 895,862
Felix J. Tarorick 9,898,594 893,662
</TABLE>
Directors whose term of office as a director continued after the annual
meeting were: Edward F. Crawford, Matthew V. Crawford, Lewis E. Hatch Jr.,
Lawrence O. Selhorst and James W. Wert.
No other matters were submitted to a vote of the stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(4) Indenture dated June 3, 1999 by and among Park-Ohio Industries,
Inc. and Norwest Bank Minnesota, N.A., as trustee (filed as
Exhibit 4.2 of Park-Ohio Industries, Inc. Registration Statement
on Form S-4, filed July 23, 1999, SEC File No. 333-83117 and
incorporated by reference and made a part hereof).
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
We did not file any reports on Form 8-K during the three months ended June
30, 1999.
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, 1999
---------------------------------
19
<PAGE> 20
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
(4) Indenture dated June 3, 1999 by and among Park-Ohio
Industries, Inc. and Norwest Bank Minnesota, N.A., as
trustee (filed as Exhibit 4.2 of Park-Ohio Industries, Inc.
Registration Statement on Form S-4, filed July 23, 1999, SEC
File No. 333-83117 and incorporated by reference and made a
part hereof)
(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 20, 1999 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, 1999.
<TABLE>
<CAPTION>
SHARES/DOLLARS
REGISTRATION STATEMENT DESCRIPTION REGISTERED
- ---------------------- ----------- --------------
<S> <C> <C>
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
Form S-8 (333-58161) 1998 Long-Term Incentive Plan 550,000
</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 11, 1999
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000076282
<NAME> PARK-OHIO HOLDINGS CORP.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 6,345
<SECURITIES> 0
<RECEIVABLES> 105,750
<ALLOWANCES> 3,080
<INVENTORY> 169,821
<CURRENT-ASSETS> 290,309
<PP&E> 203,092
<DEPRECIATION> 78,717
<TOTAL-ASSETS> 581,776
<CURRENT-LIABILITIES> 115,562
<BONDS> 287,766
0
0
<COMMON> 11,148
<OTHER-SE> 137,310
<TOTAL-LIABILITY-AND-EQUITY> 581,776
<SALES> 358,320
<TOTAL-REVENUES> 358,320
<CGS> 293,540
<TOTAL-COSTS> 293,540
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<INTEREST-EXPENSE> 11,071
<INCOME-PRETAX> 15,562
<INCOME-TAX> 6,677
<INCOME-CONTINUING> 8,885
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<CHANGES> 0
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<EPS-BASIC> .83
<EPS-DILUTED> .82
</TABLE>
