<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 MARCH 31, 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 May 10, 1999: 11,147,462 including 373,806 shares in treasury.
The Exhibit Index is located on page 19.
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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 -- March 31, 1999 and December
31, 1998
Consolidated statements of income -- Three months ended
March 31, 1999 and 1998
Consolidated statement of shareholders' equity--Three months
ended March 31, 1999
Consolidated statements of cash flows -- Three months ended
March 31, 1999 and 1998
Notes to consolidated financial statements -- March 31, 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)
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 4,489 $ 4,320
Accounts receivable, less allowances for doubtful accounts
of $3,060 at March 31, 1999 and $2,803 at December 31,
1998................................................... 101,761 95,718
Inventories............................................... 168,072 150,052
Deferred tax assets....................................... 2,232 2,232
Other current assets...................................... 6,614 5,468
-------- --------
Total Current Assets.............................. 283,168 257,790
Property, Plant and Equipment............................... 198,909 160,625
Less accumulated depreciation............................. 74,488 70,468
-------- --------
124,421 90,157
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $8,919 at March 31, 1999
and $8,105 at December 31, 1998........................ 109,873 99,351
Deferred taxes............................................ 8,900 8,900
Other..................................................... 38,814 33,356
-------- --------
$565,176 $489,554
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 62,066 $ 46,410
Accrued expenses.......................................... 54,990 32,076
Current portion of long-term liabilities.................. 2,034 2,372
-------- --------
Total Current Liabilities......................... 119,090 80,858
Long-Term Liabilities, less current portion
Long-term debt............................................ 270,032 237,483
Other postretirement benefits............................. 26,152 26,286
Other..................................................... 4,572 3,740
-------- --------
300,756 267,509
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......................................... 84,768 80,420
Treasury stock, at cost................................... (5,008) (4,554)
Accumulated other comprehensive earnings (loss)........... (1,333) (1,582)
-------- --------
145,330 141,187
-------- --------
$565,176 $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
MARCH 31
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS --
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $171,403 $136,503
Cost of products sold....................................... 140,436 113,171
-------- --------
Gross profit.............................................. 30,967 23,332
Selling, general and administrative expenses................ 17,952 14,137
-------- --------
Operating income.......................................... 13,015 9,195
Interest expense............................................ 5,378 4,152
-------- --------
Income before income taxes................................ 7,637 5,043
Income taxes................................................ 3,289 2,169
-------- --------
Net income................................................ $ 4,348 $ 2,874
======== ========
Net income per common share:
Basic..................................................... $ .40 $ .26
======== ========
Diluted................................................... $ .40 $ .26
======== ========
Common shares used in the computation:
Basic..................................................... 10,793 10,996
======== ========
Diluted................................................... 10,938 11,246
======== ========
</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............. 4,348 4,348
Foreign currency
translation
adjustment.......... 249 249
--------
Comprehensive
income......... 4,597
Purchase of treasury
stock.................. (454) (454)
------- ------- ------- ------- ------- --------
Balance March 31, 1999... $11,148 $55,755 $84,768 $(5,008) $(1,333) $145,330
======= ======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 4,348 $ 2,874
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 4,984 3,731
-------- --------
9,332 6,605
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... 2,002 (9,348)
Inventories and other current assets................... (8,737) (17,148)
Accounts payable and accrued expenses.................. 11,419 10,249
Other.................................................. (2,629) (2,296)
-------- --------
Net Cash Provided (Used) by Operating Activities..... 11,387 (11,938)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (6,304) (6,254)
Costs of acquisitions, net of cash acquired............... (29,146) -0-
Purchase of investments................................... (446) (101)
-------- --------
Net Cash (Used) by Investing Activities................ (35,896) (6,355)
FINANCING ACTIVITIES
Proceeds from bank arrangements for acquisitions.......... 29,000 -0-
Proceeds from bank arrangements for operations............ -0- 17,500
Payments on debt.......................................... (3,868) (74)
Purchase of treasury stock................................ (454) (237)
Issuance of common stock under stock option plan.......... -0- 73
-------- --------
Net Cash Provided by Financing Activities.............. 24,678 17,262
-------- --------
Increase (Decrease) in Cash and Cash Equivalents....... 169 (1,031)
Cash and Cash Equivalents at Beginning of Period....... 4,320 1,814
-------- --------
Cash and Cash Equivalents at End of Period............. $ 4,489 $ 783
======== ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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-month period ended March 31, 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 distributor of fasteners. 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 operation and financial
position of the Company.
During October 1998, the Company acquired all of the shares of GIS
Industries, Inc. ("Gateway"). The transaction has been accounted for as a
purchase. Gateway is a distributor of fasteners and a 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 1999, the Company acquired all of the shares of The Metalloy
Corporation ("Metalloy") and substantially all of the assets of St. Louis Screw
and Bolt ("St. Louis Screw") and PMC Industries, Inc. ("PMC") for cash. Metalloy
is a full service aluminum casting and machining company. 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 Metalloy and
the two other businesses 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>
MARCH 31 DECEMBER 31
1999 1998
-------- -----------
<S> <C> <C>
In process and finished goods............................... $135,709 $124,783
Raw materials and supplies.................................. 32,363 25,269
-------- --------
$168,072 $150,052
======== ========
</TABLE>
8
<PAGE> 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE D -- SHAREHOLDERS' EQUITY
At March 31, 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 and
outstanding including 367,706 shares held in treasury.
NOTE E -- 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 Holdings' common stock (on a
share-for-share basis), (ii) all of the shares of Merger Corp.'s common stock
issued and outstanding immediately prior to the Merger were converted into 100
shares of Park-Ohio's common stock and (iii) all of the shares of Holdings'
common stock issued and outstanding immediately prior to the Merger were
canceled.
Prior to the Merger, there was no public market for Holdings' 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.
9
<PAGE> 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE F -- NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C>
NUMERATOR
Net income.................................................. $4,348 $2,874
====== ======
DENOMINATOR
Denominator for basic earnings per share-weighted average
shares.................................................... 10,793 10,996
Effect of dilutive securities:
Employee stock options.................................... 145 250
Denominator for diluted earnings per share-adjusted weighted
average
------ ------
shares and assumed conversions.............................. 10,938 11,246
====== ======
Net income per common share-basic........................... $ .40 $ .26
====== ======
Net income per common share-diluted......................... $ .40 $ .26
====== ======
</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 is applied prospectively and is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company adopted the SOP in the first quarter of 1999. 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.
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, 1999 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, a full service aluminum casting and machining company,
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
10
<PAGE> 11
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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 critical 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 for specific customer applications.
Results by Business Segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales, including intersegment sales:
ILS.................................................... $106,412 $ 91,794
Aluminum products...................................... 31,619 9,904
Manufactured products.................................. 33,372 34,805
-------- --------
$171,403 $136,503
======== ========
Income before income taxes:
ILS.................................................... $ 10,965 $ 7,920
Aluminum products...................................... 2,971 633
Manufactured products.................................. 972 2,087
-------- --------
14,908 10,640
Amortization of excess purchase price over net assets
acquired.................................................. (814) (381)
Corporate costs............................................. (1,079) (1,064)
Interest expense............................................ (5,378) (4,152)
-------- --------
$ 7,637 $ 5,043
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Identifiable assets were as follows:
ILS.................................................... $307,369 $288,713
Aluminum products...................................... 96,118 40,063
Manufactured products.................................. 155,496 147,009
General corporate...................................... 6,193 13,769
-------- --------
$565,176 $489,554
======== ========
</TABLE>
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 March 31, 1999, and the related
consolidated statements of income for the three months ended March 31, 1999 and
1998, the consolidated statement of shareholders' equity for the three months
ended March 31, 1999 and the consolidated statements of cash flows for the three
months ended March 31, 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
April 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 three-month period ended March 31, 1999 is not directly comparable on a
period-to-period basis to the financial information for the three-month period
ended March 31, 1998 due to acquisitions made subsequent to the first 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 distributor of fasteners and a manufacturer of metal
products and fasteners. During April, 1998, the Company acquired all of the
shares of Direct Fasteners Limited ("Direct"), a distributor of fasteners
located in Ontario, Canada. During 1999, the Company acquired all of the shares
of The Metalloy Corporation ("Metalloy") and St. Louis Screw and Bolt ("St.
Louis") and the assets of PMC Industries, Inc. ("PMC") for $29.1 million ("the
1999 Acquisitions"). Metalloy is a full service aluminum casting and machining
company. St. Louis Screw is a manufacturer of bolts and PMC provides capital
equipment and associated parts for the oil drilling industry. 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 defines its
businesses into 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 also manufactures cast
aluminum critical components primarily for automotive OEMs. Aluminum Products
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 March 31, 1999, the Company's continuing
operations incurred $70.5 million of capital expenditures, the majority of which
was used to expand and upgrade existing manufacturing facilities and enhance the
Company's management information systems.
RESULTS OF OPERATIONS
THREE MONTHS 1999 VERSUS THREE MONTHS 1998
Net sales increased by $34.9 million, or 26%, from $136.5 million for the
first three months of 1998 to $171.4 million for the three months ended March
31, 1999. This growth results from acquisitions that the
13
<PAGE> 14
Company made subsequent to March 31, 1998 and relates primarily to the ILS and
the Aluminum Products segments. For ILS, the growth in net sales from
acquisitions amounted to $12.7 million and related to Gateway and Direct. For
Aluminum Products, net sales increased by $21.7 million and related primarily to
the acquisition of Metalloy.
Gross profit increased by $7.6 million, or 33%, from $23.3 million for the
first three months of 1998 to $30.9 million for the first three months 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 three
months of 1999 from 17.1% for the first three months of 1998. This increase in
consolidated gross margin was due to increased margins in both the Aluminum
Products and ILS segments more than offsetting a decline in gross margins in the
Manufactured Products segment. The increase in the Aluminum Products segment
gross margin 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 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 which caused fixed overhead costs to be
spread over a lesser production base.
Selling, general and administrative costs increased by 28% to $18.0 million
for the first three months of 1999 from $14.1 million for the first three months
of 1998. This increase was related to the acquisitions that have been
consummated subsequent to the first quarter of 1998. Consolidated selling,
general and administrative expenses as a percentage of net sales was
approximately the same for both periods.
Interest expense increased by $1.2 million from $4.2 million for the
three-month period ended March 31, 1998 to $5.4 million for the three-month
period ended March 31, 1999 due to higher average debt outstanding during the
current period offset by lower average interest rates in 1999 versus 1998. For
the three-month period ended March 31, 1999, the Company averaged outstanding
borrowings of $265.2 million as compared to $182.6 million outstanding for the
three months ended March 31, 1998. The $82.6 million increase related primarily
to acquisitions completed during the latter part of 1998 and the first quarter
of 1999 with the remainder primarily related to working capital increases to
support the realized and anticipated growth in business and to capital
expenditures to support growth in the business. The average borrowing rate of
8.1% for the three months ended March 31, 1999 is 1.0% lower than the average
rate of 9.1% for the three months ended March 31, 1998 primarily because of
averaging increased borrowings under the Company's bank revolving credit which
carry lower effective interest rates with the Company's subordinated debt which
carries a higher coupon rate.
The effective income tax rate for the three-month periods ended March 31,
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.
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 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 New Credit Agreement, the proceeds of which will be used
for general corporate purposes, expires on April 30, 2001. 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 April 30, 1999, $113 million was outstanding under the
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 1999 are projected
to be approximately $15 million which will be used to invest in the Company's
current
14
<PAGE> 15
facilities for projected new business and for scheduled improvements and new
equipment to expand existing products.
The ratio of current assets to current liabilities was 2.38 at March 31,
1999 versus 3.19 at December 31, 1998. Working capital decreased by $12.8
million to $164.1 million at March 31, 1999 from $176.9 million at December 31,
1998 largely as a result of implementing systems throughout the Company to more
efficiently utilize and minimize levels of working capital necessary to operate
the Company's diverse and separate operations and to purchase accounting
adjustments related to the 1999 Acquisitions.
During the first three months of 1999, the Company generated $9.3 million
from operations before changes in operating assets and liabilities. After giving
effect to the generation of $2.1 million in the operating accounts, the Company
provided $11.4 million from operating activities. During the period, the Company
invested $6.3 million in capital expenditures, used $29.1 for acquisitions and
used $900 thousand for other purposes. These activities were primarily funded by
a net increase in bank borrowings of $25.1 million.
We have signed letters of intent to acquire two fastener logistics
companies located in the eastern United States. These two companies had combined
1998 net sales of approximately $35 million. We believe these two acquisition
candidates will enhance Integrated Logistics Solutions by providing new
customers, geographic expansion on the east coast and an experienced sales and
operating management team. We expect to borrow approximately $30 million under
our revolving credit facility to complete these two acquisitions. We expect to
close these two acquisitions by June 30, 1999.
YEAR 2000 CONVERSION
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's 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, the Company developed a Y2K Task Force, which was established
to monitor and track the Y2K compliance at its operating units. The Task Force
developed a Y2K plan in order to minimize the risk to the Company's operating
units and its customers. The plan to resolve the Y2K issues involves four
phases: assessment, remediation, testing and implementation.
To date, the Task Force has completed its assessment of the Company's
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 Y2K
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. Essentially, the
target for completion for all phases of the Company's primary systems is by June
30, 1999. Based upon the assessments and remediations completed to date, the
Company does not expect that the Y2K issue will have a material effect on its
business operations, consolidated financial condition, cash flows, or results of
operations.
In addition, the Task Force is reviewing the Y2K compliance of the
Company's key suppliers, customers and service providers ("significant third
parties") in an effort to reduce the potential adverse effect on its operations
from non-compliance by such parties. This significant third party review has
begun and is expected to be completed by June 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 significant third parties that exhibit
possible Y2K problems. If Y2K compliance is not achieved by these significant
third parties, over which the Company has no control, it could, depending on
duration, have a material adverse effect on the Company's operations. While the
Company has not yet identified any potential exposure to the failure of such
suppliers to become Y2K compliant, and currently believe such exposure is
minimal, the reasonably likely worst case scenario is that the failure of
15
<PAGE> 16
suppliers to become compliant could cause delays in the receipt of raw materials
or supplies. This may result in interruptions in production of certain products
for a period of time which may delay shipments by the Company. The reasonably
likely worst case scenario if customers fail to become compliant could cause
sales orders to be delayed or not received which may cause a reduction in sales
and shipments by the Company. The reasonably likely worst case scenario if the
Company's systems are not Y2K compliant would be that operational and
administrative costs could increase if automated functions become limited or
would need to be performed manually.
The Company is utilizing both internal and external resources to remedy,
test, and implement the software and operating equipment for Y2K modifications.
The total cost to achieve Y2K 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 Y2K issue. To date, the
Company has incurred approximately $8.0 million for new systems and equipment,
with the majority of these costs for the conversion/development of systems. The
remaining $1.0 million will be funded through operating cash flows. The Company
does not separately identify the direct costs of internal employees working on
Y2K projects.
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
capital equipment businesses, included in the Manufactured Products segment,
which typically ship a few large systems per year.
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 Y2K
conversion. 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 Y2K compliance. Any
forward-looking statement speaks only as of the date on which such 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.
16
<PAGE> 17
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at March 31, 1999, and for the
three-month periods ended March 31, 1999 and 1998, have been reviewed, prior to
filing, by Ernst & Young LLP, the Company's independent accountants, and their
report is included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk including changes in interest rates.
The Company is subject to interest rate risk on its floating rate revolving
credit facility which consisted of borrowings of $111.5 million at March 31,
1999. A 100 basis point increase in the interest rate would result in an
increase in interest expense of $.3 million during the period.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
first quarter of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
The Company did not file any reports on Form 8-K during the three months ended
March 31, 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 May 11, 1999
---------------------------------
19
<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 April 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 March 31, 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 750,000
1996 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 statements 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
May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 101,761
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<INVENTORY> 168,072
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<PP&E> 198,909
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<COMMON> 11,148
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