<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
<TABLE>
<S> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ____________ TO____________
</TABLE>
COMMISSION FILE NO. 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:
(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 [ ]
Number of shares outstanding of registrant's Common Stock, par value $1.00 per
share, as of July 31, 2000: 10,544,387.
The Exhibit Index is located on page 18.
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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, 2000 and December
31, 1999
Consolidated statements of operations -- Six months and
three months ended June 30, 2000 and 1999
Consolidated statement of shareholders' equity -- Six months
ended June 30, 2000
Consolidated statements of cash flows -- Six months ended
June 30, 2000 and 1999
Notes to consolidated financial statements -- June 30, 2000
Independent accountants' review report
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,325 $ 5,867
Accounts receivable, less allowances for doubtful accounts
of $3,300 at June 30, 2000 and $3,296 at December 31,
1999................................................... 122,492 112,896
Inventories............................................... 185,321 192,270
Deferred tax assets....................................... 600 600
Other current assets...................................... 11,153 5,250
-------- --------
Total Current Assets.............................. 322,891 316,883
Property, Plant and Equipment............................... 206,754 211,093
Less accumulated depreciation............................. 87,712 86,721
-------- --------
119,042 124,372
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $10,358 at June 30, 2000
and $11,941 at December 31, 1999....................... 125,094 137,905
Deferred taxes............................................ 2,400 2,400
Other..................................................... 51,844 48,321
-------- --------
$621,271 $629,881
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 69,334 $ 72,452
Accrued expenses.......................................... 38,586 33,064
Current portion of long-term liabilities.................. 2,443 2,557
-------- --------
Total Current Liabilities......................... 110,363 108,073
Long-Term Liabilities, less current portion
Long-term debt............................................ 334,504 339,813
Other postretirement benefits............................. 24,748 25,470
Other..................................................... 1,886 1,840
-------- --------
361,138 367,123
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... 11,210 11,148
Additional paid-in capital................................ 56,184 55,684
Retained earnings......................................... 92,967 96,674
Treasury stock, at cost................................... (8,657) (7,969)
Accumulated other comprehensive earnings (loss)........... (1,372) (852)
Unearned compensation -- restricted stock awards.......... (562) -0-
-------- --------
149,770 154,685
-------- --------
$621,271 $629,881
======== ========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to consolidated financial statements.
4
<PAGE> 5
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales....................................... $204,539 $186,917 $410,899 $358,320
Cost of products sold........................... 167,246 153,104 337,329 293,540
-------- -------- -------- --------
Gross profit.................................. 37,293 33,813 73,570 64,780
Selling, general and administrative expenses.... 21,392 20,195 42,436 38,147
-------- -------- -------- --------
Operating income.............................. 15,901 13,618 31,134 26,633
Interest expense................................ 7,720 5,693 15,225 11,071
Loss on sale of Kay Home Products............... 15,318 -0- 15,318 -0-
-------- -------- -------- --------
Income (loss) before income taxes............. (7,137) 7,925 591 15,562
Income taxes.................................... 1,130 3,389 4,298 6,677
-------- -------- -------- --------
Net income (loss)............................. $ (8,267) $ 4,536 $ (3,707) $ 8,885
======== ======== ======== ========
Net income (loss) per common share:
Basic......................................... $ (.79) $ .42 $ (.35) $ .83
======== ======== ======== ========
Diluted....................................... $ (.79) $ .42 $ (.35) $ .82
======== ======== ======== ========
Common shares used in the computation:
Basic......................................... 10,528 10,714 10,539 10,753
======== ======== ======== ========
Diluted....................................... 10,528 10,839 10,539 10,888
======== ======== ======== ========
</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 UNEARNED
STOCK CAPITAL EARNINGS STOCK (LOSS) COMPENSATION TOTAL
------- ---------- -------- -------- ------------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 2000........... $11,148 $55,684 $96,674 $(7,969) $ (852) $ -0- $154,685
Issuance of restricted stock...... 62 500 (562) -0-
Comprehensive income:
Net loss........................ (3,707) (3,707)
Foreign currency translation
adjustment................... (520) (520)
--------
Comprehensive income
(loss)..................... (4,227)
Purchase of treasury stock........ (688) (688)
------- ------- ------- ------- ------- ------ --------
Balance June 30, 2000............. $11,210 $56,184 $92,967 $(8,657) $(1,372) $ (562) $149,770
======= ======= ======= ======= ======= ====== ========
</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
-----------------------
2000 1999
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $(3,707) $ 8,885
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 10,520 10,326
Loss on sale of Kay Home Products...................... 15,318 -0-
------- --------
22,131 19,211
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................... (13,841) (1,986)
Inventories and other current assets................... (2,188) (10,033)
Accounts payable and accrued expenses.................. 2,580 7,887
Other.................................................. (4,707) (8,109)
------- --------
Net Cash Provided by Operating Activities............ 3,975 6,970
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (9,584) (9,092)
Costs of acquisitions, net of cash acquired............... -0- (35,664)
Proceeds from sale of Kay Home Products................... 9,177 -0-
Purchase of investments................................... -0- (445)
------- --------
Net Cash (Used) by Investing Activities................ (407) (45,201)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 14,000 49,000
Issuance of 9.25% Senior Subordinated Notes, net of
deferred financing costs............................... -0- 49,508
Payments on debt.......................................... (19,422) (56,129)
Purchase of treasury stock................................ (688) (2,123)
------- --------
Net Cash (Used) Provided by Financing Activities....... (6,110) 40,256
------- --------
(Decrease)Increase in Cash and Cash Equivalents........ (2,542) 2,025
Cash and Cash Equivalents at Beginning of Period....... 5,867 4,320
------- --------
Cash and Cash Equivalents at End of Period............. $ 3,325 $ 6,345
======= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(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 and six month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
NOTE B -- ACQUISITIONS AND DISPOSITION
During 1999, the Company acquired all of the stock of The Metalloy
Corporation ("Metalloy"), Columbia Nut and Bolt Corp. ("Columbia"), Industrial
Fasteners Corporation ("Industrial"), M.P. Colinet ("Colinet") and substantially
all of the assets of St. Louis Screw and Bolt ("St. Louis Screw") and PMC
Industries, Inc. ("PMC") for cash. Metalloy is a full service aluminum casting
and machining company. Columbia and Industrial are logistics providers of "Class
C" production components. St. Louis Screw is a manufacturer of bolts and PMC and
Colinet provide capital equipment and associated parts for the oil drilling
industry. Each of these transactions has been accounted for as a purchase. The
purchase price and the results of operations of each of these businesses prior
to their respective dates of acquisition were not deemed to be significant as
defined in Regulation S-X.
On June 30, 2000 the Company completed the sale of substantially all of the
assets of Kay Home Products, which was part of the Manufactured Products
segment, for cash of approximately $9.2 million and recorded a loss of
approximately $15.3 million. Kay Home Products was a non-core business producing
and distributing barbecue grills, tray tables, screen houses and plant stands.
NOTE C -- INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
-------- -----------
<S> <C> <C>
In process and finished goods.......................... $155,539 $160,648
Raw materials and supplies............................. 29,782 31,622
-------- --------
$185,321 $192,270
======== ========
</TABLE>
NOTE D -- SHAREHOLDERS' EQUITY
At June 30, 2000, 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 10,548,687 shares were issued and
outstanding.
8
<PAGE> 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE E -- NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR
Net income (loss).................................... $(8,267) $ 4,536 $(3,707) $ 8,885
======= ======= ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted
average shares..................................... 10,528 10,714 10,539 10,753
Effect of dilutive securities:
Employee stock options............................... -0- 125 -0- 135
------- ------- ------- -------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions.... 10,528 10,839 10,539 10,888
======= ======= ======= =======
Net income (loss) per common share-basic............. $ (.79) $ .42 $ (.35) $ .83
======= ======= ======= =======
Net income (loss) per common share-diluted........... $ (.79) $ .42 $ (.35) $ .82
======= ======= ======= =======
</TABLE>
NOTE F -- ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998 and subsequently amended in June 2000, to
provide guidance on its implementation. Statement 133 requires derivatives to be
recorded on the balance sheet at fair value and establishes accounting for three
different types of hedges: hedges of changes in fair value of assets,
liabilities, or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. Statement 133, as delayed by the issuance of
Statement 138, is effective for years beginning after June 15, 2000 and is not
expected to have a significant impact on the Company's financial position or
results of operations.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB")101, "Revenue Recognition in
Financial Statements." SAB 101 outlines the basic criteria that must be met to
recognize revenue, and provides guidelines for disclosure related to revenue
recognition policies. This guidance is required to be implemented in the fourth
quarter of 2000. The Company is currently reviewing this guidance in order to
determine the impact of its provisions, if any, on the consolidated financial
statements. The impact of SAB 101, if any, will be reported as a change in
accounting principle in accordance with APB Opinion No. 20 and FASB Statement
No. 3.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: An Interpretation of APB
Opinion No. 25," which is effective July 1, 2000. This interpretation clarifies
various accounting issues for stock compensation plans. The Company has
determined that the interpretation will not have a significant effect on its
financial statements.
NOTE G -- SEGMENTS
The Company manages its business based upon three operating segments:
Integrated Logistics Solutions ("ILS"), Aluminum Products and Manufactured
Products. ILS is a leading national supplier of "Class C" production components
to original equipment manufacturers ("OEMs"), other manufacturers and
distributors. In connection with the supply of such industrial products, ILS
provides a variety of value-added, cost-
9
<PAGE> 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
effective procurement solutions. Aluminum Products manufactures cast aluminum
components primarily for automotive OEMs. In addition, Aluminum Products also
provides value-added services such as design and engineering, machining and
assembly. Manufactured Products operates a diverse group of manufacturing
businesses that design and manufacture a broad range of high quality products
for specific customer applications. Intersegment sales are immaterial.
Results by Business Segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales:
ILS....................................... $129,862 $109,123 $264,591 $215,535
Aluminum products......................... 31,283 37,128 65,064 68,747
Manufactured products..................... 43,394 40,666 81,244 74,038
-------- -------- -------- --------
$204,539 $186,917 $410,899 $358,320
======== ======== ======== ========
Income (loss) before income taxes:
ILS....................................... $ 12,085 $ 10,030 $ 25,715 $ 20,995
Aluminum products......................... 2,646 4,144 5,276 7,115
Manufactured products..................... 3,948 2,131 5,789 3,103
-------- -------- -------- --------
18,679 16,305 36,780 31,213
Amortization of excess purchase price over net
assets acquired.............................. (988) (894) (1,981) (1,708)
Corporate costs................................ (1,790) (1,793) (3,665) (2,872)
Interest expense............................... (7,720) (5,693) (15,225) (11,071)
Loss on the sale of Kay Home Products.......... (15,318) -0- (15,318) -0-
-------- -------- -------- --------
$ (7,137) $ 7,925 $ 591 $ 15,562
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Identifiable assets were as follows:
ILS.................................................... $349,095 $343,522
Aluminum products...................................... 107,282 97,717
Manufactured products.................................. 154,417 170,267
General corporate...................................... 10,477 18,375
-------- --------
$621,271 $629,881
======== ========
</TABLE>
NOTE H -- RECLASSIFICATION
Certain amounts have been reclassified to conform to current year
presentation.
NOTE I -- INVOLUNTARY CONVERSION OF ASSETS
On June 6, 2000 the Company experienced a fire at one of its manufacturing
facilities located in Cicero, Illinois. The Company carries both property damage
and business interruption insurance and as a result, does not expect the fire to
have a material adverse impact on the Company's financial results. The total
loss from business interruption, extra expenses and property damage has not been
determined. The deductible portion of the loss was recorded during the quarter
ended June 30, 2000. The Company has recorded the book value of property damaged
by the fire as a receivable which is included in other current assets at June
30, 2000.
10
<PAGE> 11
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, 2000, and the related
consolidated statements of operations for the three-month and six-month periods
ended June 30, 2000 and 1999, the consolidated statement of shareholders' equity
for the six-month period ended June 30, 2000 and the consolidated statements of
cash flows for the six-month period ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Park-Ohio
Holdings Corp. and subsidiaries as of December 31, 1999 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 22,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 19, 2000
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The consolidated financial statements of the Company include the accounts
of Park-Ohio 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, 2000 is not directly
comparable on a period-to-period basis to the financial information for the six
and three-month periods ended June 30, 1999 due to acquisitions and a
divestiture made subsequent to the second quarter of 1999. In July 1999, the
Company acquired all of the shares of Columbia Nut and Bolt Corp. ("Columbia")
and Industrial Fasteners Corporation ("Industrial"). Columbia and Industrial are
logistics providers of "Class C" production components. In September 1999, the
Company acquired all of the shares of M.P. Colinet ("Colinet"). Colinet provides
capital equipment and associated parts for the oil drilling industry and is
complementary to PMC Industries, a subsidiary of the Company acquired in
February, 1999. These acquisitions are accounted for as purchases and
consequently their results are included in the consolidated financial statements
from their respective dates of acquisition. On June 30, 2000, the Company sold
substantially all the assets of Kay Home Products, for cash of approximately
$9.2 million and recorded a pretax loss of approximately $15.3 million. Kay Home
Products was a non-core business producing and distributing barbecue grills,
tray tables, screen houses and plant stands.
Reported diluted net loss per common share was $.79 for the quarter ended
June 30, 2000 and $.35 for the six months ended June 30, 2000. Excluding the
loss from the sale of Kay Home Products, the Company would have reported net
income per common share -- diluted of $.47 for the quarter ended June 30, 2000
and $.90 for the six months ended June 30, 2000.
OVERVIEW
The Company operates diversified manufacturing and logistics businesses
that serve a wide variety of industrial markets. The Company has three operating
segments: Integrated Logistics Solutions ("ILS"), Aluminum Products, and
Manufactured Products. ILS is a leading national supplier of "Class C"
production components to original equipment manufacturers ("OEMs"), other
manufacturers and distributors. In connection with the supply of such industrial
products, ILS provides a variety of value-added, cost-effective procurement
solutions. The principal customers of ILS are in the transportation, industrial,
electrical and lawn and garden equipment industries. Aluminum Products
manufactures cast aluminum components primarily for automotive OEMs. Aluminum
Products also provides value-added services such as design and engineering,
machining and assembly. Manufactured Products operates a diverse group of niche
manufacturing businesses that design and manufacture a broad range of high
quality products engineered for specific customer applications. The principal
customers of Manufactured Products are OEMs and end-users in the automotive,
railroad, truck and aerospace industries.
Between 1993 and 1999, the Company has grown significantly, both internally
and through acquisitions. Over this period, the Company's net sales increased at
a 40% compound annual growth rate ("CAGR"), from $94.5 million to $717.2
million, and income from continuing operations on a fully taxed basis increased
at a 38% CAGR from $2.4 million to $16.3 million.
Recent growth has been primarily attributable to the Company's strategy of
making selective acquisitions in order to complement internal growth.
Historically, the Company has acquired under-performing businesses with
potential for: (i) significant cost reductions through improved labor, supplier
and customer relations and increased purchasing power and (ii) revenue
enhancement due to better asset utilization and management practices, as well as
increased access to capital. The Company's internal growth has been driven
primarily by the addition of ILS customers under total fastening service ("TFS")
contracts and by the leveraging of existing customer relationships in the
Aluminum and Manufactured Products segments.
Between January 1, 1994 and June 30, 2000, the Company's continuing
operations incurred $96.5 million of capital expenditures, the majority of which
was used to expand and upgrade existing manufacturing facilities and enhance the
Company's management information systems.
12
<PAGE> 13
RESULTS OF OPERATIONS
First Half 2000 versus First Half 1999
Net sales increased by $52.6 million, or 15%, from $358.3 million for the
first half of 1999 to $410.9 million for the first half of 2000. Of the $52.6
million in growth for the first half, $39.1 million represented organic growth,
primarily ILS, while the remainder was from acquisitions made subsequent to June
30, 1999. For ILS, net sales increased 23%, or $49.1 million, of which $35.6
million related to internal growth (a 17% internal growth rate) and the
remainder to the acquisitions of Columbia and Industrial. For Aluminum Products,
net sales decreased 5%, or $3.7 million, resulting from an $8.8 million decrease
related to the ending of sales contracts at Metalloy which were expected at the
time of its purchase in 1999, partially offset by a $5.1 million increase in
sales from internal growth. For Manufactured Products, net sales increased 10%,
or $7.2 million, related to internal growth. Because it closed on June 30, 2000,
the divestiture of Kay Home Products did not affect Manufactured Products net
sales for the first half of 2000.
Gross profit increased by $8.8 million, or 14%, from $64.8 million for the
first half of 1999 to $73.6 million for the first half of 2000. Of the increase
in gross profit, $4.7 million was attributable to the organic increase in sales
and the remainder to acquisitions. The Company's consolidated gross margin
decreased to 17.9% for the first six months of 2000 from 18.1% for the first six
months of 1999. This decrease in consolidated gross margin was due to decreased
margins in both the Aluminum Products and ILS segments offset by an increase in
gross margins in the Manufactured Products segment. For Aluminum Products, the
decrease in gross margins related to the ending of sales contracts at Metalloy
which were expected at the time of its purchase in 1999, resulting in the
allocation of fixed manufacturing overhead over a smaller production base. The
decrease in gross margins in the ILS segment related to a shift in product mix
to lower margin items. The increase in margins in the Manufactured Products
segment resulted from increased sales of higher margin products, particularly in
the oil drilling capital equipment business, and from increased production
levels which allocated fixed overhead costs over a larger productive base.
Selling, general and administrative ("SG&A") expenses increased by 11% to
$42.4 million for the first six months of 2000 from $38.1 million for the first
six months of 1999. The increase was related to recent acquisitions and to
increased sales. Columbia and Industrial, acquired in July 1999, incurred $2.0
million of SG&A expenses in the first six months of 2000. In the first half of
2000, SG&A costs benefited from an increase in net pension credits of $1.8
million, reflecting favorable investment returns on pension plan assets.
Consolidated SG&A expenses as a percentage of net sales decreased to 10.3% for
the first six months of 2000 from 10.6% for the first six months of 1999.
Interest expense increased by $4.1 million from $11.1 million for the first
six months of 1999 to $15.2 million for 2000 due to higher average debt
outstanding during the current period and higher average interest rates in 2000
versus 1999. During the first six months of 2000, the Company averaged
outstanding borrowings of $344.5 million as compared to $270.9 million for the
first six months of 1999. The $73.6 million increase in outstanding borrowings
related to acquisitions in the preceding twelve months and to increases in
working capital. The average interest rate of 8.84% for the six months ended
June 30, 2000 was 67 basis points higher than the average rate of 8.17% for
1999. This rate increase was due to both the $50 million add-on in June 1999 to
the Company's Senior Subordinated Notes at 9.25%, and to increased rates on the
Company's revolving credit facility caused by Federal Reserve actions.
Before considering the tax effect of the divestiture of Kay Home Products,
the effective income tax rate for the six-month period ended June 30, 2000 was
41%, while for the six months ended June 30, 1999 it was 43%. The decrease in
tax rate resulted from the relative reduction of non-deductible goodwill for tax
purposes and to a corresponding increase in research and experimental credits.
The divestiture of Kay Home Products generated a book loss of $15.3 million,
($13.2 million net of tax). The effective income tax rate for the first half of
2000 was impacted by the $10.2 million of non-deductible goodwill associated
with the business sold.
Second Quarter 2000 versus Second Quarter 1999
Net sales increased by $17.6 million, or 9%, from $186.9 million for the
quarter ended June 30, 1999 to $204.5 million for the three months ended June
30, 2000. Of the $17.6 million in growth for the quarter,
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$6.5 million represented organic growth, primarily ILS, while the remainder was
from acquisitions made subsequent to June 30, 1999. For ILS, net sales increased
19%, or $20.7 million, of which $9.6 million related to internal growth (a 9%
internal growth rate) and the remainder to the acquisitions of Columbia and
Industrial. For Manufactured Products, net sales increased by $2.7 million
related to internal growth. Because it closed on June 30, 2000, the divestiture
of Kay Home Products did not affect net sales for the second quarter. For
Aluminum Products, net sales decreased 16%, or $5.8 million, resulting from an
$8.0 million decrease related to the ending of sales contracts at Metalloy which
were expected at the time of its purchase in 1999, partially offset by a $2.2
million increase in sales from internal growth.
Gross profit increased by $3.5 million, or 10%, from $33.8 million for the
quarter ended June 30, 1999 to $37.3 million for the quarter ended June 30,
2000. Of the increase in gross profit, $1.1 million was attributable to an
organic increase in sales and the remainder to acquisitions. The Company's
consolidated gross margin increased to 18.2% for the current period from 18.1%
for the quarter ended June 30, 1999. Manufactured Products experienced increased
margins compared to the year earlier period, resulting primarily from increased
production activity, which allocated fixed overhead costs over a larger
productive base. Aluminum Products' gross margins declined slightly due to
decreased production volumes, which allocated fixed overhead over a smaller
production base. Gross Margins also declined slightly at ILS as a result of a
shift in product mix.
Selling, general and administrative ("SG&A") expenses increased by 6% to
$21.4 million for the quarter ended June 30, 2000 from $20.2 million for the
quarter ended June 30, 1999. The increase was related to Columbia and
Industrial, acquired in July, 1999, which incurred $.9 million of SG&A expenses
in the second quarter of 2000, and to increased sales. In second quarter 2000,
SG&A expenses benefited from an increase in net pension credits of $1.0 million,
reflecting favorable investment returns on pension plan assets. Consolidated
SG&A expenses as a percentage of net sales decreased to 10.5% in the second
quarter of 2000 from 10.8% in the second quarter of 1999.
Interest expense increased by $2.0 million from $5.7 million in second
quarter 1999 to $7.7 million in 2000 due to higher average debt outstanding
during the current period and higher average interest rates in 2000 versus 1999.
For the quarter ended June 30, 2000, the Company averaged outstanding borrowings
of $344.7 million as compared to $276.5 million outstanding for the quarter
ended June 30, 1999. The $68.2 million increase in outstanding borrowings
related to acquisitions in the preceding twelve months and to increases in
working capital. The average interest rate of 8.96% for second quarter 2000 was
72 basis points higher than the average rate of 8.24% for 1999. This rate
increase was due to both the $50 million add-on in June 1999 to the Company's
Senior Subordinated Notes at 9.25%, and to increased rates on the Company's
revolving credit facility caused by Federal Reserve actions.
Before considering the tax effect of the divestiture of Kay Home Products,
the effective income tax rate for the quarter ended June 30, 2000 was 41%, while
for the quarter ended June 30, 1999 it was 43%. The decrease in tax rate results
from the relative reduction of non-deductible goodwill for tax purposes and to a
corresponding increase in research and experimental credits. The divestiture of
Kay Home Products generated a book loss of $15.3 million, ($13.2 million net of
tax). The effective income tax rate for the second quarter of 2000 was impacted
by the $10.2 million of non-deductible goodwill associated with the business
sold.
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 1, 1999,
Park-Ohio amended its credit agreement with a group of banks under which it may
borrow up to $175 million on an unsecured basis. The proceeds from the amended
credit agreement, which expires on April 30, 2001, will be used for general
corporate purposes. Amounts borrowed under the credit agreement may be borrowed
at Park-Ohio's election at either (i) the bank's prime lending rate less 100
basis points to plus 20 basis points or (ii) LIBOR plus 90-220 basis points
depending on the aggregate amount borrowed under the credit agreement. As of
June 30, 2000, $133.0 million was outstanding under the facility. The Company's
ability to
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refinance or extend its borrowings under this facility will depend on a variety
of factors, including the Company's operating performance and the outlook for
the Company and its industry groups and the availability of credit for borrowers
in the Company's industry groups and in the economy generally.
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 2000 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 2.93 at both June
30, 2000 and at December 31, 1999. Working capital increased by $3.7 million, to
$212.5 million at June 30, 2000 from $208.8 million at December 31, 1999, to
support the internal growth of the Company.
During the first six months of 2000, the Company generated $22.1 million
from operations before changes in operating assets and liabilities. After giving
effect to the use of $18.1 million in the operating accounts, the Company
provided $4.0 million from operating activities compared to $7.0 million for the
first half of 1999. During the first six months of 2000, the Company invested
$9.6 million in capital expenditures, generated $9.2 million from the
divestiture of Kay Home Products and used $.7 million for other purposes,
primarily the purchase of treasury shares. The remaining cash provided, along
with a decrease in cash of $2.5 million was used to reduce long-term debt,
primarily bank borrowings, by $5.4 million.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
As a result of the significant growth in our net sales and operating income
in recent years, seasonal fluctuations have been mitigated. However, the
Company's results of operations are typically stronger in the first six months
rather than the last six months of each calendar year due to scheduled plant
maintenance in the third quarter coinciding with customer plant shutdowns and to
holidays in the fourth quarter.
The timing of orders placed by our customers has varied with, among other
factors, orders for customers' finished goods, customer production schedules,
competitive conditions and general economic conditions. The variability of the
level and timing of orders has, from time to time, resulted in significant
periodic and quarterly fluctuations in the operations of our business units.
This variability is particularly evident at the capital equipment businesses,
included in the Manufactured Products segment, which typically ship a few large
systems per year.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain forward-
looking statements, including without limitation, discussion regarding the
Company's capital resources and anticipated levels of capital expenditures.
Forward-looking statements are necessarily subject to risks, uncertainties and
other factors, many of which are outside our control, which could cause actual
results to differ materially from such statements. These uncertainties and other
factors include such things as: our ability to renegotiate or extend the
existing credit facility, general business conditions, competitive factors,
including pricing pressures and product innovation and quality; raw material
availability and pricing; changes in our relationships with customers and
suppliers; our ability to successfully integrate recent and future acquisitions
into existing operations; changes in general domestic economic conditions such
as inflation rates, interest rates and tax rates; increasingly stringent
domestic and foreign governmental regulations including those affecting the
environment; inherent uncertainties involved in assessing our potential
liability for environmental remediation-related activities; the outcome of
pending and future litigation and other claims; dependence on
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the automotive industry; dependence on key management; and dependence on
information systems. Any forward-looking statement speaks only as of the date on
which such statement is made, and we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
us that our plans and objectives will be achieved.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at June 30, 2000, and for the
three-month and six-month periods ended June 30, 2000 and 1999, have been
reviewed by Ernst & Young LLP, our independent accountants, and their report is
included herein.
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 $133.0 million at June 30,
2000. A 100 basis point increase in the interest rate would have resulted in an
increase in interest expense of approximately $.7 million during the six months
ended June 30, 2000.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 4, 2000. The
stockholders approved the election of three directors to serve until the annual
meeting of stockholders in the year 2003. The votes cast for each nominee were
as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Matthew V. Crawford......................................... 10,064,071 485,720
Lewis E. Hatch Jr........................................... 10,070,882 478,909
Lawrence O. Selhorst........................................ 10,081,515 468,276
</TABLE>
Directors whose term of office as a director continued after the annual
meeting were: Edward F. Crawford, Kevin R. Greene, Thomas E. McGinty, Felix J.
Tarorick 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:
<TABLE>
<C> <S>
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
</TABLE>
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2000.
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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/ RICHARD PAUL ELLIOTT
-----------------------------------
Name: Richard Paul Elliott
Title: Vice President and Chief
Financial Officer
Dated August 14, 2000
---------------------------------
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EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
</TABLE>
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