<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 SEPTEMBER 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 October 31, 2000: 10,496,191.
The Exhibit Index is located on page 19.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -- September 30, 2000 and
December 31, 1999
Consolidated statements of income -- Nine months and three
months ended September 30, 2000 and 1999
Consolidated statement of shareholders' equity -- Nine
months ended September 30, 2000
Consolidated statements of cash flows -- Nine months ended
September 30, 2000 and 1999
Notes to consolidated financial statements -- September 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)
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 599 $ 5,867
Accounts receivable, less allowances for doubtful accounts
of $3,519 at September 30, 2000 and $3,296 at December
31, 1999............................................... 120,025 112,896
Inventories............................................... 192,545 192,270
Deferred tax assets....................................... 600 600
Other current assets...................................... 15,738 5,250
-------- --------
Total Current Assets.............................. 329,507 316,883
Property, Plant and Equipment............................... 214,812 211,093
Less accumulated depreciation............................. 91,770 86,721
-------- --------
123,042 124,372
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $11,251 at September 30,
2000 and $11,941 at December 31, 1999.................. 128,423 137,905
Deferred taxes............................................ 2,400 2,400
Other..................................................... 57,627 48,321
-------- --------
$640,999 $629,881
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 71,271 $ 72,452
Accrued expenses.......................................... 43,985 33,064
Current portion of long-term liabilities.................. 2,444 2,557
-------- --------
Total Current Liabilities......................... 117,700 108,073
Long-Term Liabilities, less current portion
Long-term debt............................................ 343,324 339,813
Other postretirement benefits............................. 24,393 25,470
Other..................................................... 1,902 1,840
-------- --------
369,619 367,123
Shareholders' Equity
Capital stock, par value $1 a share:
Serial Preferred Stock................................. -0- -0-
Common Stock........................................... 11,210 11,148
Additional paid-in capital................................ 56,135 55,684
Retained earnings......................................... 97,710 96,674
Treasury stock, at cost................................... (9,092) (7,969)
Accumulated other comprehensive earnings (loss)........... (1,776) (852)
Unearned compensation -- restricted stock awards.......... (507) -0-
-------- --------
153,680 154,685
-------- --------
$640,999 $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 INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales....................................... $170,923 $178,087 $581,822 $536,407
Cost of products sold........................... 143,217 146,542 480,546 440,082
-------- -------- -------- --------
Gross profit.................................. 27,706 31,545 101,276 96,325
Selling, general and administrative expenses.... 16,747 18,108 59,183 56,255
-------- -------- -------- --------
Operating income.............................. 10,959 13,437 42,093 40,070
Interest expense................................ 7,601 6,658 22,826 17,729
Loss on sale of Kay Home Products............... -0- -0- 15,318 -0-
Gain from fire insurance........................ (4,700) -0- (4,700) -0-
-------- -------- -------- --------
Income before income taxes.................... 8,058 6,779 8,649 22,341
Income taxes.................................... 3,260 2,903 7,558 9,581
-------- -------- -------- --------
Net income.................................... $ 4,798 $ 3,876 $ 1,091 $ 12,760
======== ======== ======== ========
Net income per common share:
Basic......................................... $ .46 $ .36 $ .10 $ 1.19
======== ======== ======== ========
Diluted....................................... $ .46 $ .36 $ .10 $ 1.17
======== ======== ======== ========
Common shares used in the computation:
Basic......................................... 10,456 10,664 10,511 10,723
======== ======== ======== ========
Diluted....................................... 10,462 10,827 10,513 10,868
======== ======== ======== ========
</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) $154,685
Issuance of restricted stock...... 62 500 (562) -0-
Amortization of restricted
stock........................... (55) 55 -0-
Comprehensive income:
Net income...................... 1,091 1,091
Foreign currency translation
adjustment................. (924) (924)
--------
Comprehensive income............ 167
Exercise of stock options....... (49) 172 123
Purchase of treasury stock........ (1,295) (1,295)
------- ------- ------- ------- ------- ----- --------
Balance September 30, 2000........ $11,210 $56,135 $97,710 $(9,092) $(1,776) $(507) $153,680
======= ======= ======= ======= ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 1,091 $12,760
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 15,343 15,090
Loss on sale of Kay Home Products...................... 15,318 -0-
Gain from fire insurance............................... (4,700) -0-
-------- -------
27,052 27,850
Changes in operating assets and liabilities excluding
acquisitions and divestitures of businesses:
Accounts receivable.................................... (11,374) (8,312)
Inventories and other current assets................... (9,296) (25,268)
Accounts payable and accrued expenses.................. 5,645 12,660
Other.................................................. (7,655) (9,147)
-------- -------
Net Cash Provided (Used) by Operating Activities..... 4,372 (2,217)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (17,513) (13,226)
Costs of acquisitions, net of cash acquired............... (3,530) (65,237)
Proceeds from sale of Kay Home Products................... 9,177 -0-
Other..................................................... -0- (445)
-------- -------
Net Cash (Used) by Investing Activities................ (11,866) (78,908)
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 23,000 88,500
Issuance of 9.25% Senior Subordinated Notes, net of
deferred financing costs............................... -0- 49,508
Payments on debt.......................................... (19,602) (56,267)
Purchase of treasury stock................................ (1,295) (3,021)
Issuance of common stock under stock option plan.......... 123 259
-------- -------
Net Cash Provided by Financing Activities.............. 2,226 78,979
-------- -------
(Decrease)in Cash and Cash Equivalents................. (5,268) (2,146)
Cash and Cash Equivalents at Beginning of Period....... 5,867 4,320
-------- -------
Cash and Cash Equivalents at End of Period............. $ 599 $ 2,174
======== =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine-month periods
ended September 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.
During September 2000, the Company acquired IBM's Automation Connection and
SiView Mate software product lines and related assets for cash of approximately
$3.5 million. The transaction has been accounted for as a purchase and the
results of operations prior to the date 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 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>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
<S> <C> <C>
In process and finished goods.......................... $161,859 $160,648
Raw materials and supplies............................. 30,686 31,622
-------- --------
$192,545 $192,270
======== ========
</TABLE>
8
<PAGE> 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE D -- SHAREHOLDERS' EQUITY
At September 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 10,496,191 shares were
issued and outstanding.
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- -------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATOR
Net income............................................. $4,798 $3,876 $1,091 $12,760
====== ====== ====== =======
DENOMINATOR
Denominator for basic earnings per share-weighted
average shares....................................... 10,456 10,664 10,511 10,723
Effect of dilutive securities:
Employee stock options............................... 6 163 2 145
------ ------ ------ -------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions...... 10,462 10,827 10,513 10,868
====== ====== ====== =======
Net income per common share-basic...................... $ .46 $ .36 $ .10 $ 1.19
====== ====== ====== =======
Net income per common share-diluted.................... $ .46 $ .36 $ .10 $ 1.17
====== ====== ====== =======
</TABLE>
NOTE F -- ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board's ("FASB") 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 No. 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 No. 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.
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.
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.
9
<PAGE> 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
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 logistics provider 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, supply chain management solutions to major
OEM's. 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 niche manufacturing businesses that design
and manufacture a broad range of high quality products engineered for specific
customer applications. Intersegment sales are immaterial.
Results by Business Segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales:
ILS....................................... $111,934 $112,710 $376,525 $328,245
Aluminum products......................... 24,871 29,686 89,935 98,433
Manufactured products..................... 34,118 35,691 115,362 109,729
-------- -------- -------- --------
$170,923 $178,087 $581,822 $536,407
======== ======== ======== ========
Income (loss) before income taxes:
ILS....................................... $ 10,025 $ 10,169 $ 35,740 $ 31,164
Aluminum products......................... (486) 1,860 4,790 8,975
Manufactured products..................... 4,039 3,637 9,828 6,740
-------- -------- -------- --------
13,578 15,666 50,358 46,879
Amortization of excess purchase price over net
assets acquired.............................. (894) (1,018) (2,875) (2,726)
Corporate costs................................ (1,725) (1,211) (5,390) (4,083)
Interest expense............................... (7,601) (6,658) (22,826) (17,729)
Loss on the sale of Kay Home Products.......... -0- -0- (15,318) -0-
Gain from fire insurance....................... 4,700 -0- 4,700 -0-
-------- -------- -------- --------
$ 8,058 $ 6,779 $ 8,649 $ 22,341
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Identifiable assets were as follows:
ILS.................................................... $355,181 $343,522
Aluminum products...................................... 107,617 97,717
Manufactured products.................................. 159,060 170,267
General corporate...................................... 19,141 18,375
-------- --------
$640,999 $629,881
======== ========
</TABLE>
NOTE H -- RECLASSIFICATIONS
Certain amounts have been reclassified to conform to current year
presentation.
10
<PAGE> 11
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE I -- INVOLUNTARY CONVERSION OF ASSETS
On June 6, 2000, the Company experienced a fire at one of its manufacturing
facilities. 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 amount due from the
insurance company for business interruption, property damage, and other related
expenses has not been determined. The deductible portion of the loss was
recorded during the quarter ended June 30, 2000. The Company has received a
partial settlement from its insurance carrier for certain machinery and
equipment and has recorded a gain of $4.7 million during the quarter ended
September 30, 2000. The net book value of the other property damaged by the fire
has been recorded as a receivable which is included in other current assets at
September 30, 2000.
NOTE J -- COMPREHENSIVE EARNINGS
Total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net earnings........................................... $4,798 $3,876 $1,091 $12,760
Foreign currency translation........................... (404) 339 (924) 588
------ ------ ------ -------
Total comprehensive earnings........................... $4,394 $4,215 $ 167 $13,348
====== ====== ====== =======
</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 September 30, 2000, and the related
consolidated statements of income for the three-month and nine-month periods
ended September 30, 2000 and 1999, the consolidated statement of shareholders'
equity for the nine-month period ended September 30, 2000 and the consolidated
statements of cash flows for the nine-month period ended September 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
is derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
October 19, 2000
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 nine and three-month periods ended September 30, 2000 is not directly
comparable on a period-to-period basis to the financial information for the nine
and three-month periods ended September 30, 1999 due to a divestiture made
subsequent to the third quarter of 1999 and a gain recognized relating to fire
insurance. 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. In June 2000 one of the Company's
manufacturing plants was destroyed in a fire. A $4.7 million pretax gain was
recognized, which represented the difference between replacement cost and net
book value of a portion of equipment destroyed at the time of the fire.
Reported diluted net income per share was $.46 for the quarter ended
September 30, 2000 and $.10 for the nine months ended September 30, 2000.
Excluding the loss from the sale of Kay Home Products, the Company would have
reported net income per common share -- diluted of $.46 for the quarter ended
September 30, 2000 and $1.36 for the nine months ended September 30, 2000.
OVERVIEW
The Company has three operating segments: Integrated Logistics Solutions
("ILS"), Aluminum Products, and Manufactured Products. ILS is a leading
logistics provider 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 supply chain management solutions to major OEM's. 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. In
addition, 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 logistics service contracts and by the
leveraging of existing customer relationships in the Aluminum and Manufactured
Products segments.
RESULTS OF OPERATIONS
Nine Months 2000 versus Nine Months 1999
Net sales increased by $45.4 million, or 8%, from $536.4 million for the
first three quarters of 1999 to $581.8 million for the first three quarters of
2000. Of the $45.4 million in growth for the first nine months $34.0 million
represented organic growth, $13.5 million was from acquisitions made in July
1999, while sales decreased by $2.1 million due to the divestiture of Kay Home
Products. For ILS, net sales increased 15%, or $48.3 million, of which $34.8
million related to internal growth and the remainder to the acquisitions made in
July 1999. For Aluminum Products, net sales decreased 9%, or $8.5 million. This
decrease resulted from a $13.7 million decrease related to the ending of sales
contracts at Metalloy which were expected at the time of
13
<PAGE> 14
its purchase in 1999, partially offset by $5.2 million increased sales from
internal growth. For Manufactured Products, net sales increased 5%, or $5.6
million, consisting of $7.7 million of internal growth (7%) less a sales
decrease of $2.1 million due to the divestiture of Kay Home Products.
Gross profit increased by $5.0 million, or 5%, from $96.3 million for the
first three quarters of 1999 to $101.3 million for the first three quarters of
2000. Of the increase in gross profit, $1.0 million was attributable to the
organic increase in sales and $4.1 million to acquisitions offset by $.1 million
due to the divestiture of Kay Home Products. However, the Company's consolidated
gross margin decreased to 17.4% for the first nine months of 2000 from 18.0% for
the first nine months of 1999. This decrease in consolidated gross margin was
primarily due to decreased margins in Aluminum Products, 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 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. These more than offset the
gross margin effects of a strike at one plant and the temporary shutdown of
another due to a fire, both of which occurred in the Manufactured Products
segment.
Selling, general and administrative ("SG&A") expenses increased by 5% to
$59.2 million for the first nine months of 2000 from $56.3 million for the first
nine months of 1999. The increase was related to increased sales and
acquisitions made in the second half of 1999, partially offset by the
divestiture of the Kay Home Products. Kay Home Products, divested on June 30,
2000, incurred $.8 million of SG&A expenses in the third quarter of 1999. In the
first three quarters of 2000, SG&A costs benefited from an increase in net
pension credits of $2.2 million, reflecting favorable investment returns on
pension plan assets. Consolidated SG&A expenses as a percentage of net sales
decreased to 10.2% for the first nine months of 2000 from 10.5% for the first
nine months of 1999.
Interest expense increased by $5.1 million from $17.7 million for the first
nine months of 1999 to $22.8 million for the first nine months of 2000 due to
higher average debt outstanding during the current period and by higher average
interest rates in 2000 versus 1999. During the first nine months of 2000, the
Company averaged outstanding borrowings of $343.1 million as compared to $284.0
million for the first nine months of 1999. The $59.1 million increase related to
acquisitions in the preceding twelve months and to increases in working capital.
The average interest rate of 8.87% for the nine months ended September 30, 2000
was 55 basis points higher than the average rate of 8.32% for 1999. This rate
increase was due both to 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 primarily caused by Federal Reserve action.
Before considering the tax effect of the divestiture of Kay Home Products
and the gain on fire insurance, the effective income tax rate for the nine-month
period ended September 30, 2000 was 41%, while for the nine months ended
September 30, 1999 it was 43%. The decrease in tax rate resulted from creating a
foreign sales corporation and to an increase in research and experimental
credits. The divestiture of Kay Home Products generated a book loss of $15.3
million, reducing income taxes by $2.1 million due to the exclusion of goodwill
for tax purposes. Income taxes of $1.9 million were provided for the $4.7
million pretax fire insurance gain. The Company's consolidated net income for
the first nine months of 2000 was therefore $1.1 million on consolidated income
before income taxes of $8.6 million.
Third Quarter 2000 versus Third Quarter 1999
Net sales decreased by $7.2 million, or 4%, from $178.1 million for the
quarter ended September 30, 1999 to $170.9 million for the quarter ended
September 30, 2000. Of the $7.2 million decrease for the quarter, $5.1 million
represented organic decreases in sales primarily in Aluminum Products, and $2.1
million resulted from the divestiture of Kay Home Products. For ILS, net sales
decreased 1%, or $.8 million, due to an approximate $7 million decrease in sales
to the heavy truck market, mostly offset by growth in sales to other markets.
For Aluminum Products, net sales decreased 16%, or $4.8 million, resulting from
the
14
<PAGE> 15
ending of sales contracts at Metalloy which were expected at the time of its
purchase in 1999. For Manufactured Products, net sales decreased 4%, or $1.6
million, consisting of $.5 million internal growth less a sales decrease of $2.1
million due to the divestiture of Kay Home Products.
Gross profit decreased by $3.8 million, or 12%, from $31.5 million for the
quarter ended September 30, 1999 to $27.7 million for the quarter ended
September 30, 2000. Of the decrease in gross profit, $3.7 million represented
organic decreases in all three segments and the remainder to the divestiture of
Kay Home Products. The Company's consolidated gross margin decreased to 16.2%
for the current period from 17.7% for the quarter ended September 30, 1999.
Aluminum Products' gross margins declined due to decreased production volumes,
which allocated fixed overhead over a smaller production base. Manufactured
Products experienced increased margins compared to the year earlier period,
resulting primarily from a shift in product mix. This more than offset the gross
margin effects of a strike at one plant and the temporary shutdown of another
due to a fire, both of which occurred in the Manufactured Products segment.
Selling, general and administrative ("SG&A") expenses decreased by 8% to
$16.7 million for the quarter ended September 30, 2000 from $18.1 million for
the quarter ended September 30, 1999. The decrease was related to decreased
sales and the divestiture of Kay Home Products. Kay Home Products, divested on
June 30, 2000, incurred $.8 million of SG&A expenses in the third quarter 1999.
In third quarter 2000, SG&A expenses benefited from an increase in net pension
credits of $.4 million, reflecting favorable investment returns on pension plan
assets. Consolidated SG&A expenses as a percentage of net sales decreased to
9.8% in third quarter 2000 from 10.2% in third quarter of 1999.
Interest expense increased by $.9 million from $6.7 million in third
quarter 1999 to $7.6 million in the same period 2000 due to higher average debt
outstanding during the current period and higher average interest rates in 2000
versus 1999. For the quarter ended September 30, 2000, the Company averaged
outstanding borrowings of $338.0 million as compared to $308.0 million
outstanding for the quarter ended September 30, 1999. The $30.0 million increase
related to acquisitions in the preceding twelve months and to increases in
working capital. The average interest rate of 9.00% for third quarter 2000 was
35 basis points higher than the average rate of 8.65% in the same period of
1999. This rate increase was due to increased rates on the Company's revolving
credit facility primarily caused by Federal Reserve action.
Before considering the tax effect of the gain on fire insurance, the
effective income tax rate for the quarter ended September 30, 2000 was 41%,
while for the quarter ended September 30, 1999 it was 43%. The decrease in tax
rate results from creating a foreign sales corporation and an increase in
research and experimental credits.
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 new 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 September 30, 2000, $142 million was outstanding under the facility. The
Company is currently negotiating a new bank agreement. The Company's ability to
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.
15
<PAGE> 16
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. Net cash outflow for capital expenditures in
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. In addition,
approximately $7 million of capital expenditures will be incurred for machinery
and equipment to replace those destroyed in the rubber plant fire, paid for from
insurance proceeds. Further capital expenditures may be made in 2000 to replace
the fire-destroyed building and tooling, and will be funded from insurance
proceeds.
The ratio of current assets to current liabilities was 2.80 at September
30, 2000 versus 2.93 at December 31, 1999. Working capital increased by $3.0
million, to $211.8 million at September 30, 2000 from $208.8 million at December
31, 1999, to support the internal growth of the Company.
During the first nine months of 2000, the Company generated $27.1 million
from operations before changes in operating assets and liabilities. After giving
effect to the use of $22.7 million in the operating accounts, the Company
provided $4.4 million from operating activities compared to the use of $2.2
million for the first three quarters of 1999. During the first nine months of
2000, the Company invested $17.5 million in capital expenditures, including $5.6
for replacement of fire-destroyed equipment and tooling, generated $9.2 million
from the divestiture of Kay Home Products, used $3.5 million for an acquisition
and used $1.3 million for other purposes, primarily the purchase of treasury
shares. The remaining cash used, along with a decrease in cash of $5.3 million
was offset by an increase in long-term debt, primarily bank borrowings, by $3.4
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 to coincide 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; 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
16
<PAGE> 17
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 the our plans and
objectives will be achieved.
REVIEW BY INDEPENDENT ACCOUNTANTS
The consolidated financial statements at September 30, 2000, and for the
three- and nine-month periods ended September 30, 2000 and 1999, 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
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 $142 million at September 30,
2000. A 100 basis point increase in the interest rate would have resulted in an
increase in interest expense of approximately $1.1 million during the nine
months ended September 30, 2000.
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
third quarter of 2000.
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 September 30, 2000.
17
<PAGE> 18
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 November 13, 2000
---------------------------------
18
<PAGE> 19
EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
(15) Letter re: unaudited financial information
(27) Financial data schedule (Electronic filing only)
</TABLE>
19
