SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 0-3134
PARK-OHIO HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1867219
----------------------------------------------------- -----------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
23000 EUCLID AVENUE
CLEVELAND, OHIO 44117
----------------------------------------------------- -----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (216) 692-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
------------------------------------------------------
(TITLE OF CLASS)
PARK-OHIO HOLDINGS CORP. IS A SUCCESSOR ISSUER TO PARK-OHIO INDUSTRIES, INC.
Indicate by check mark whether the registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 2002: Approximately $30,000,000.
Number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, as of March 22, 2002: 10,496,191.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON MAY 23, 2002 ARE INCORPORATED BY REFERENCE
INTO PART III OF THIS FORM 10-K.
PARK-OHIO HOLDINGS CORP.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
ITEM NO. PAGE NO.
-------- --------
PART I
1. Business.................................................... 1
2. Properties.................................................. 6
3. Legal Proceedings........................................... 7
4. Submission of Matters to a Vote of Security Holders......... 8
4A. Executive Officers of the Registrant........................ 8
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters..................................... 8
6. Selected Consolidated Financial Data........................ 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
7A. Quantitative and Qualitative Disclosure about Market Risk... 17
8. Financial Statements and Supplementary Data................. 18
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 37
PART III
Part III information will appear in the Registrant's Proxy
Statement in connection with its 2001 Annual Meeting of
Shareholders. Such Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to Regulation
14A and such information will be incorporated herein by
reference as of the date of such filing..................... 37
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 38
SIGNATURES ............................................................ 39
PART I
ITEM 1. BUSINESS
THE COMPANY
Park-Ohio Holdings Corp. ("Holdings") was incorporated as an Ohio
corporation in 1998. Holdings, primarily through the subsidiaries owned by its
direct subsidiary, Park-Ohio Industries, Inc. ("Park-Ohio") is a leading
provider of logistics services and a manufacturer of highly engineered products.
Reference herein to the "Company" includes, where applicable, Holdings,
Park-Ohio and its direct and indirect subsidiaries and its predecessor
companies, which have operated for more than 150 years.
The Company operates through three segments, Integrated Logistics Solutions
("ILS"), Aluminum Products and Manufactured Products. ILS is a leading logistics
provider of production components to large, multinational manufacturing
companies, other manufacturers and distributors. In connection with the supply
of such production components, ILS provides a variety of value-added,
cost-effective supply chain management services. The principal customers of ILS
are in the semiconductor equipment, technology, industrial equipment, aerospace
and defense, electrical controls, heating, ventilating and air-conditioning
("HVAC"), heavy-duty truck, vehicle parts and accessories, appliances and
motors, and lawn and garden equipment industries. Aluminum Products manufactures
cast aluminum components for automotive, agricultural equipment, heavy duty
truck and construction equipment manufacturers. 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 original equipment manufacturers ("OEMs") and end-users in the
aerospace, automotive, railroad, truck and oil industries. As of December 31,
2001, the Company employed approximately 3,200 persons.
OPERATIONS
The following chart highlights the Company's three business segments, the
primary industries they serve and the key products they sell.
NET SALES
FOR THE
YEAR ENDED
DEC. 31,
SEGMENT PRIMARY INDUSTRIES SERVED SELECTED PRODUCTS/SERVICES 2001
------- ------------------------- -------------------------- ----------
(MILLIONS)
INTEGRATED LOGISTICS Semiconductor equipment, Cross-industry supply chain $417.0
SOLUTIONS technology, industrial management services;
equipment, aerospace and planning, implementing and
defense, electrical managing the physical flow
controls, HVAC, heavy duty of production components to
truck, vehicle parts and large multi-national
accessories, appliances and manufacturing companies
motors, lawn and garden
equipment
ALUMINUM PRODUCTS Automotive, agricultural Engineering and $ 84.8
equipment, heavy duty truck manufacturing of aluminum
and construction equipment castings
1
NET SALES
FOR THE
YEAR ENDED
DEC. 31,
SEGMENT PRIMARY INDUSTRIES SERVED SELECTED PRODUCTS/SERVICES 2001
------- ------------------------- -------------------------- ----------
(MILLIONS)
MANUFACTURED PRODUCTS Aerospace, automotive, Engineering and $134.6
railroad, truck and oil manufacturing of the
following: forged and
machined products such as
aircraft landing gears,
locomotive crankshafts and
camshafts; induction heating
systems; industrial rubber
products; and oil pipe
threading systems
INTEGRATED LOGISTICS SOLUTIONS
ILS is a leading provider of cross-industry supply chain management
services and specializes in the process of planning, implementing, and managing
the physical flow of production components to large multinational manufacturing
companies from the point of manufacturing to the point of use. ILS generated net
sales of $417.0 million, or 66% of the Company's net sales for the year ended
December 31, 2001. ILS operates out of branches, or logistics services
warehouses, located throughout the United States, Canada, Puerto Rico, Mexico
and England, and has a central distribution center located in Dayton, Ohio. ILS
continues to consolidate its network of branches to reduce costs and serve its
customers more efficiently, including planned closure of twenty branches and two
manufacturing plants (of which eleven branches and one plant were closed as of
December 31, 2001). ILS recorded restructuring and impairment charges related to
these closures in the third and fourth quarters of 2001.
Large, multinational manufacturing companies continue to make it a priority
to reduce their total cost of production components. Administrative and overhead
costs to source, plan, purchase, quality assure, inventory and handle production
components comprise a large portion of total cost. ILS has the size, experience,
information systems and focus to reduce these costs substantially while
providing reliable just-in-time delivery. ILS also provides a wide array of
value-added services which are increasingly demanded by manufacturers.
Products and Services. Supply chain management, which is ILS' primary focus
for future growth, involves offering customers supply chain management services
and comprehensive, on-site management for most of their production component
needs. Some production components are characterized by low per unit supplier
prices relative to the indirect costs of supplier management, quality assurance,
inventory management and delivery to the production line. In addition, ILS
delivers an increasingly broad range of higher cost production components
including valves, fittings, steering components and many others. Supply chain
management customers receive various value-added services, such as part usage
and cost analysis, supplier selection, quality assurance, bar coding, product
packaging and tracking, just-in-time delivery, electronic billing services and
ongoing technical support. ILS also provides engineering and design services to
its customers. Applications-engineering specialists and the direct sales force
work closely with the engineering staff of OEM customers to recommend the
appropriate production components for a new product or to suggest alternative
components that reduce overall production costs, streamline assembly or enhance
the appearance or performance of the end product.
Supply chain management services are typically provided to customers
pursuant to sole-source supply chain services contracts. These agreements enable
ILS' customers to both reduce procurement costs and better focus on their core
manufacturing competencies by: (i) significantly reducing the cost of production
component procurement by outsourcing many internal purchasing, quality assurance
and inventory fulfillment responsibilities; (ii) reducing the amount of working
capital invested in inventory; (iii) achieving purchasing efficiencies and cost
reductions as a result of supplier consolidation; and
2
(iv) receiving technical expertise in the selection of production components for
certain manufacturing processes. Although supply chain services are often
inventory intensive, the Company believes that such agreements foster
longer-lasting supply relationships with customers, who increasingly rely on ILS
for their production component needs, as compared to traditional buy/sell
distribution relationships. Sales pursuant to sole-source supply chain service
contracts have increased significantly in recent years and represented over 68%
of ILS' total supply chain management sales in 2001. ILS' remaining sales are
generated through the wholesale supply of industrial products to other
manufacturers and distributors pursuant to master or authorized distributor
relationships.
ILS also engineers and manufactures precision cold formed and cold extruded
products including locknuts, SPAC(R) nuts and wheel hardware, which are
principally used in applications where controlled tightening is required due to
high vibration. ILS produces both standard items and specialty products to
customer specifications, which are used in large volumes by customers in the
automotive, truck and railroad industries.
Markets and Customers. In 2001, approximately 88% of ILS' net sales were to
domestic customers. Remaining sales were primarily to manufacturing facilities
of large, multinational customers located in Canada, Mexico and the United
Kingdom. Supply chain management services and production components are used
extensively in a variety of industries, and demand is generally related to the
state of the economy and to the overall level of manufacturing activity.
ILS markets and sells its services to over 15,000 customers domestically
and internationally. The principal markets served by ILS are semiconductor
equipment, technology, industrial equipment, aerospace and defense, electrical
controls, HVAC, heavy duty truck, vehicle parts and accessories, appliances and
motors, and lawn and garden equipment industries. The five largest customers,
within which ILS sells through sole-source contracts to multiple operating
divisions or locations, accounted for approximately 26% of sales of ILS in 2001.
Three of the five largest customers are in the heavy-duty truck industry. The
loss of any one of these customers would have a material adverse effect on this
segment.
Competition. There are numerous competitors in the supply chain services
industry. Management believes that substantially all of ILS' competitors operate
on a regional basis and do not provide customers with the wide array of supply
chain management services offered by ILS. ILS competes primarily on the basis of
its value-added services, delivery capabilities, geographic reach, extensive
product selection, price and reputation for high service levels with primarily
domestic competitors who are capable of providing inventory management programs.
ALUMINUM PRODUCTS
The Aluminum Products segment generated net sales of $84.8 million, or 13%
of the Company's net sales for the year ended December 31, 2001. Management
believes Aluminum Products is one of the few part suppliers that has the
capabilities of providing high volume, high quality permanent mold, sand-cast,
die-cast and lost-foam products. Aluminum Products casts and machines these
products at multiple locations in four states. In 2001, Aluminum Products closed
a casting plant, and consolidated the operations of a machining plant into
another existing plant and recorded related restructuring and impairment charges
in the fourth quarter of 2001.
Aluminum Products' cast aluminum parts are manufactured for automotive,
agricultural equipment, heavy duty truck and construction equipment OEMs
primarily located in North America. Aluminum Products' principal products
include: transmission pump housings, intake manifolds, planetary pinion
carriers, oil filter adapters, clutch retainers, bearing cups, brackets, oil
pans and flywheel spacers. Aluminum Products also provides value-added services
such as machining, drilling, tapping and part assembly. Although these parts are
lightweight, they possess high durability and integrity characteristics even
under extreme pressure and temperature conditions. Demand by OEMs for aluminum
castings has increased in recent years as OEMs have sought lighter alternatives
to heavier steel and iron components. Lighter aluminum cast components increase
an automobile's fuel efficiency without decreasing structural integrity.
Management believes this replacement trend will continue as end-users and
govern-
3
ment standards regarding automotive fuel efficiency become increasingly
stringent. The three largest customers, of which Aluminum Products sells to
multiple operating divisions through sole source contracts, accounted for
approximately 86% of Aluminum Products sales in 2001. The loss of any one of
these customers would have a material adverse effect on this segment. The
domestic aluminum castings industry is highly competitive. Aluminum Products
competes principally on the basis of its ability to: (i) engineer and
manufacture high quality, cost effective, machined castings utilizing multiple
casting technologies in large volumes; (ii) provide timely delivery; and (iii)
retain the manufacturing flexibility necessary to quickly adjust to the needs of
its customers. Although there are a number of smaller domestic companies with
aluminum casting capabilities, the customers' stringent quality and service
standards enable only large suppliers with the requisite quality certifications
to compete effectively. As one of these suppliers, Aluminum Products is
structured to benefit as customers continue to consolidate their supplier base.
MANUFACTURED PRODUCTS
The Manufactured Products segment includes forged and machined products,
capital equipment, and industrial rubber products. Manufactured Products
generated net sales of $134.6 million, or 21% of the Company's net sales for the
year ended December 31, 2001. The five largest customers, within which
Manufactured Products sells primarily through sole source contracts to multiple
operating divisions, accounted for approximately 22% of Manufactured Products
sales in 2001. The loss of business from any one of these customers would have
an adverse effect on this segment.
The Company's forged and machined products business is carried out
primarily at two operating units consisting of Park Drop Forge and Ohio
Crankshaft. The forging process enables metal to be shaped while generally
retaining higher structural integrity than metal shaped through other processes.
Park Drop Forge manufactures closed-die metal forgings of up to 6,000 pounds,
including crankshafts and aircraft landing gears. Park Drop Forge's products are
sold primarily to machining companies, including Ohio Crankshaft and
sub-assemblers who finish the products for sale to OEMs in the railroad and
aerospace industries. Ohio Crankshaft machines, induction hardens and surface
finishes crankshafts and camshafts used primarily in locomotives. Forged and
machined products are sold to a wide variety of domestic and international OEMs
and other manufacturers in the transportation, and construction industries. The
Company's forged and machined products business competes domestically and
internationally with other small to medium-sized businesses on the basis of
product quality and precision.
The Company manufactures large industrial equipment through its operating
units consisting of Tocco, Feco, PMC-Colinet and Ajax. Tocco specializes in the
engineering and construction of induction heating systems primarily for the
automotive and truck industries. Tocco's induction heating systems are
engineered and built to customer specifications and are used primarily by OEMs
for surface hardening. Feco produces complete oven systems that combine heat
processing and curing technologies with material handling and conveying methods.
Feco's principal products include industrial drying and curing ovens for
automotive components, metal can curing ovens, specialized conveyor and
automation systems for lightweight containers, and plastic and glass bottle
coating and finishing systems. PMC-Colinet produces tube threading machines and
related parts for the oil drilling industry. Ajax engineers, manufactures and
services mechanical forging presses ranging in size from 500 to 8,000 tons that
are used worldwide in the automotive and truck manufacturing industries. In
December 2001, the Company finalized plans to discontinue the operations of Ajax
and dispose of existing working capital and fixed assets. The Company wrote
these assets down to expected realizable value as part of the restructuring and
impairment charges recorded in the fourth quarter of 2001. The Company's capital
equipment units compete with large domestic and international equipment
manufacturers on the basis of service capability, ability to meet customer
specifications, delivery performance and engineering expertise.
The Company manufactures injection and transfer molded products, lathe-cut
goods, roll coverings and various items requiring rubber to metal bonding for
use in industrial applications through three
4
operating units consisting of Geneva Rubber, Cicero Flexible Products and Castle
Rubber. Geneva Rubber manufactures injection molded rubber products for
customers in the automotive, telecommunications and heavy truck industries. Its
products include primary wire harnesses, transoceanic cable boots and shock and
vibration mounts. Cicero Flexible Products develops and manufactures injection
molded silicone rubber products for customers in the automotive, food processing
and consumer appliance industries, such as wire harnesses, spark plug boots and
nipples and general sealing gaskets. The Company has closed the Chicago-area
plant of Cicero Flexible Products. Castle Rubber manufactures valve seals, power
and conveyor rolls and slitter rings. In December 2001, the Company finalized
plans to discontinue operations of Castle Rubber and dispose of existing working
capital and fixed assets. The Company wrote down assets to expected realizable
values and recorded restructuring and impairment charges in the fourth quarter
of 2001 relating to both Cicero and Castle. The industrial rubber products
operating units compete primarily on the basis of price and product quality with
other domestic small to medium-sized manufacturers of rubber products.
SALES AND MARKETING
ILS markets its products and services in the United States, Mexico, Canada
and Europe, primarily through its direct sales force, which is assisted by
applications engineers who provide the technical expertise necessary to assist
the engineering staff of OEM customers in designing new products and improving
existing products. ILS often obtains new customers as a result of referrals from
existing customers. Aluminum Products and Manufactured Products primarily market
and sell their products in North America through both internal sales personnel
and independent sales representatives. In some instances, the internal
engineering staff assists in the sales and marketing effort through joint design
and applications-engineering efforts with major customers.
RAW MATERIALS AND SUPPLIERS
ILS purchases substantially all of its production components from third
party suppliers. Aluminum Products and Manufactured Products purchase
substantially all of their raw materials, principally metals and certain
component parts incorporated into their products, from third-party suppliers and
manufacturers. Management believes that raw materials and component parts other
than certain specialty fasteners are available from alternative sources. ILS has
multiple sources of supply for standard products, but has limited supply sources
for certain specialty products. Approximately 25% of ILS' delivered components
are purchased from suppliers in foreign countries, primarily Canada, Taiwan,
Japan and Korea. The Company is dependent upon the ability of such suppliers to
meet stringent quality and performance standards and to conform to delivery
schedules. Most raw materials required by Aluminum Products and Manufactured
Products are commodity products available from several domestic suppliers.
CUSTOMER DEPENDENCE
The Company has thousands of customers who demand quality, delivery and
service. Numerous customers have recognized our performance by awarding the
Company with supplier quality awards. Ford is the only customer accounting for
more than 10% of our consolidated sales within the past three years (only in the
year 2000).
BACKLOG
Management believes that backlog is not a meaningful measure for ILS, as a
majority of ILS' customers require just-in-time delivery of production
components. Management believes that Aluminum Products' and Manufactured
Products' backlog as of any particular date is not a meaningful measure of sales
for any future period as a significant portion of sales are on a release or firm
order basis.
5
ENVIRONMENTAL REGULATIONS
The Company is subject to numerous federal, state and local laws and
regulations designed to protect public health and the environment
("Environmental Laws"), particularly with regard to discharges and emissions, as
well as handling, storage, treatment and disposal, of various substances and
wastes. Pursuant to certain Environmental Laws, owners or operators of
facilities may be liable for the costs of response or other corrective actions
for contamination identified at or emanating from current or former locations,
without regard to whether the owner or operator knew of, or was responsible for,
the presence of any such contamination, and for related damages to natural
resources. Additionally, persons who arrange for the disposal or treatment of
hazardous substances or materials may be liable for costs of response at sites
where they are located, whether or not the site is owned or operated by such
person.
In general, the Company has not experienced difficulty in complying with
Environmental Laws in the past, and compliance with Environmental Laws has not
had a material adverse effect on the Company's financial condition, liquidity
and results of operations. The Company's capital expenditures on environmental
control facilities were not material during the past five years and such
expenditures are not expected to be material to the Company in the foreseeable
future.
The Company has been identified as a potentially responsible party at
third-party sites under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or comparable state laws which provide
for strict and, under certain circumstances, joint and several liability. The
Company is participating in the cost of certain clean-up efforts at several of
these sites. The availability of third-party payments or insurance for
environmental remediation activities is subject to risks associated with the
willingness and ability of the third party to make payments. However, the
Company's share of such costs has not been material and based on available
information, the Company does not expect its exposure at any of these locations
to have a material adverse effect on its results of operations, liquidity or
financial condition.
INFORMATION AS TO INDUSTRY SEGMENT REPORTING AND GEOGRAPHIC AREAS
The information contained under the heading of "Note J--Industry Segments"
of notes to consolidated financial statements included herein, relating to net
sales, income before income taxes, identifiable assets and other information by
industry segment for the years ended December 31, 2001, 2000, and 1999 is
incorporated herein by reference.
RECENT DEVELOPMENTS
The information contained under the heading of "Note B--Acquisitions and
Dispositions" and "Note M--Restructuring and Impairment Charges" of notes to
consolidated financial statements included herein, is incorporated by reference.
ITEM 2. PROPERTIES
The Company's operations include numerous manufacturing and warehousing
facilities located in twenty-four states in the United States, and in Puerto
Rico, as well as in Belgium, Canada, England and Mexico. Approximately 94% of
the available square footage is located in the United States. Approximately 48%
of the available square footage is owned. In 2001, approximately 42% of the
available domestic square footage was used by the ILS segment; 42% was used by
the Manufactured Products segment and 16% by the Aluminum Products segment.
Approximately 49% of the available foreign square footage was used by the ILS
segment and 51% was used by the Manufactured Products segment. In the opinion of
management, Park-Ohio's facilities are generally well maintained and are
suitable and adequate for their intended uses.
6
The following table provides information relative to the principal
facilities of Park-Ohio and its subsidiaries.
RELATED INDUSTRY OWNED OR APPROXIMATE
SEGMENT LOCATION LEASED SQUARE FOOTAGE USE
---------------- -------- -------- -------------- ---
ILS SEGMENT Cleveland, OH Leased 41,000* ILS Corporate
Office
Dayton, OH Leased 155,480 Warehouse
Lawrence, PA Leased 116,000 Warehouse and
Manufacturing
St. Paul, MN Leased 74,425 Warehouse
Atlanta, GA Leased 56,000 Warehouse
Dallas, TX Leased 49,985 Warehouse
Nashville, TN Leased 44,900 Warehouse
Wallaceburg, Ontario, Canada Leased 43,200 Warehouse
Solon, OH Leased 42,563 Warehouse
Charlotte, NC Leased 39,800 Warehouse
Kent, OH Leased 225,000 Manufacturing
Mississauga, Ontario, Canada Leased 56,000 Manufacturing
Cleveland, OH Owned 50,000 Manufacturing
Delaware, OH Owned 45,000 Manufacturing
The ILS Segment has approximately forty other leased facilities, none of
which is deemed to be a principal facility of the Company.
ALUMINUM Conneaut, OH Leased 82,300 Manufacturing
PRODUCTS Conneaut, OH Leased 64,000 Manufacturing
SEGMENT Conneaut, OH Leased 45,700 Manufacturing
Conneaut, OH Owned 91,780 Manufacturing
Hudson, MI Owned 90,000 Manufacturing
Hudson, MI Owned 58,000 Manufacturing
Hudson, MI Owned 57,000 Manufacturing
Fremont, IN Owned 108,000 Manufacturing
Tupelo, MS Owned 110,000 Manufacturing
MANUFACTURED Cuyahoga Hts, OH Owned 427,000 Manufacturing
PRODUCTS Cleveland, OH Owned 391,000 Manufacturing
SEGMENT Le Roeulx, Belgium Owned 120,000 Manufacturing
Cleveland, OH Owned 116,000 Manufacturing
Wickliffe, OH Owned 110,000 Manufacturing
Boaz, AL Owned 100,000 Manufacturing
Geneva, OH Leased 80,000 Manufacturing
The Manufactured Products Segment has twelve other owned and leased
facilities, none of which is deemed to be a principal facility of the
Company.
* Includes 10,000 square feet used by Park-Ohio Corporate Office.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity or results of operations. You can find more information
about our legal proceedings under Management's Discussion and Analysis of
Financial Condition and Results of Operations.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers of the Company is as
follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Edward F. Crawford......................... 62 Chairman of the Board, Chief Executive Officer
and President
Matthew V. Crawford........................ 32 Senior Vice President and Director
Richard P. Elliott......................... 45 Vice President and Chief Financial Officer
Ronald J. Cozean........................... 38 Secretary and General Counsel
Patrick W. Fogarty......................... 41 Director of Corporate Development
Edward F. Crawford has been Chairman of the Board and Chief Executive
Officer of the Company since 1992.
Matthew V. Crawford has been Senior Vice President since 2001 and joined
the Company in 1995 as Assistant Secretary and Corporate Counsel. Mr. M.
Crawford became a director of the Company in August 1997 and has served as
President of The Crawford Group since 1991. Mr. E. Crawford is the father of Mr.
M. Crawford.
Richard P. Elliott has been Vice President and Chief Financial Officer
since joining the Company in May, 2000. Mr. Elliott held various positions,
including partner, at Ernst & Young LLP from January, 1986 to April, 2000.
Ronald J. Cozean has served as Secretary and General Counsel since joining
the Company in 1994.
Patrick W. Fogarty has been Director of Corporate Development since 1997
and joined the Company in 1995 as Director of Finance.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock, $1 par value, trades on The NASDAQ Stock
Market(R) under the symbol PKOH. The table presents its high and low sales
prices during the periods presented. No dividends were paid during the five
years ended December 31, 2001. There is no present intention to pay dividends.
QUARTERLY COMMON STOCK PRICE RANGES
2001 2000
------------------ -------------------
QUARTER HIGH LOW HIGH LOW
------- ------ ----- ------ ------
1st $ 6.88 $3.63 $11.25 $ 6.63
2nd 5.65 4.40 10.75 7.94
3rd 5.54 2.99 10.88 7.38
4th 3.90 1.65 8.75 3.75
The number of shareholders of record for the Company's common stock as of
March 26, 2002 was 1,117. The two largest shareholders of the Company were
Edward F. Crawford with 25.4% beneficial ownership and GAMCO Investors, Inc.
(Gabelli Funds) with 14.9% beneficial ownership of common stock of the Company.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Selected Income Statement Data(a):
Net sales.......................... $636,417 $754,674 $717,222 $551,793 $441,110
Cost of products sold(b)........... 550,397 625,205 591,439 455,167 368,734
-------- -------- -------- -------- --------
Gross profit..................... 86,020 129,469 125,783 96,626 72,376
Selling, general and administrative
expenses......................... 68,519 76,931 68,777 54,201 41,885
Amortization of goodwill........... 3,733 3,907 3,836 2,277 2,511
Restructuring and impairment
charges(b)....................... 18,163 -- -- -- --
-------- -------- -------- -------- --------
Operating income (loss)(b)....... (4,395) 48,631 53,170 40,148 27,980
Non-operating items, net(c)........ 1,850 10,118 -- -- (320)
Interest expense................... 31,108 30,812 24,752 17,488 9,101
-------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary charge...... (37,353) 7,701 28,418 22,660 19,199
Income taxes (benefit)............. (11,400) 7,183 12,164 9,726 7,903
-------- -------- -------- -------- --------
Income (loss) before
extraordinary charge.......... $(25,953) $ 518 $ 16,254 $ 12,934 $ 11,296
======== ======== ======== ======== ========
Income (loss) per common share
before extraordinary charge --
diluted.......................... $ (2.49) $ .05 $ 1.51 $ 1.16 $ 1.01
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Other Financial Data:
Net cash flows provided (used) by
operating activities................... $ 23,766 $ 24,025 $ (728) $ 3,627 $(10,039)
Net cash flows (used) by investing
activities............................. (7,872) (25,781) (88,521) (62,957) (77,217)
Net cash flows (used) provided by
financing activities................... (14,634) (1,499) 90,796 61,836 84,411
EBITDA, as defined(d).................... 43,979 68,679 71,868 52,901 38,345
Capital expenditures..................... 13,923 24,968 22,650 22,681 15,947
Selected Balance Sheet Data:
Cash and cash equivalents.............. $ 3,872 $ 2,612 $ 5,867 $ 4,320 $ 1,814
Working capital........................ 180,284 224,556 208,810 176,932 146,444
Total assets........................... 590,376 646,520 629,881 489,554 413,109
Total debt............................. 330,768 345,402 340,620 238,105 172,755
Shareholders' equity................... 124,967 152,126 154,685 141,187 129,010
9
(a) The selected consolidated financial data is not directly comparable on a
year-to-year basis due to acquisitions made throughout the five years ended
December 31, 2001 which include the following:
2000 -- IBM's plant automation software product lines and related
assets.
1999 -- The Metalloy Corporation, Columbia Nut and Bolt Corp.,
Industrial Fasteners Corporation, M.P. Colinet, St Louis Screw
and Bolt and PMC Industries.
1998 -- Direct Fasteners Limited and GIS Industries, Inc.
1997 -- Arden Industrial Products, Inc.
All of the acquisitions were accounted for as purchases. In addition, during
2001, the Company sold substantially all of the assets of Cleveland City
Forge and during 2000, the Company sold substantially all of the assets of
Kay Home Products.
(b) Operating income (loss) represents net sales less cost of products sold,
selling, general and administrative expenses, amortization of goodwill and
restructuring and impairment charges. In 2001, the Company incurred
restructuring and impairment charges of $28.5 million related primarily to
the consolidation of manufacturing plants and logistics warehouses and the
discontinuation of certain product lines. The write-down of inventory
related to discontinued product lines to fair value aggregated $10.3 million
and is included in cost of products sold.
(c) In 2000, non-operating items, net was comprised of (i) a loss of $15.3
million on the sale of substantially all of the assets of Kay Home Products
and (ii) a gain of $5.2 million resulting from interim payments from the
Company's insurance carrier related primarily to replacement of property,
plant and equipment destroyed in a fire at its Cicero Flexible Products
facility. In 2001, non-operating items, net was comprised of $1.9 million of
fire-related non-recurring business interruption costs, which were not
covered by insurance.
(d) EBITDA, as defined, reflects earnings before interest, income taxes,
depreciation, amortization, non-operating income and expense and
non-recurring items. Non-recurring items include restructuring and
impairment charges of $28.5 million in 2001 related to the consolidation of
manufacturing plants and logistics warehouses and the discontinuation of
certain product lines. EBITDA is not a measure of performance under
generally accepted accounting principles ("GAAP"). While EBITDA should not
be considered in isolation or as a substitute for net income, cash flows
from operating, investing and financing activities and other income or cash
flow statement data prepared in accordance with GAAP or as a measure of
profitability or liquidity, management understands that EBITDA is
customarily used as an indication of a company's ability to incur and
service debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of other measures of
liquidity and operations that are covered by the audited financial
statements. EBITDA as defined herein may not be comparable to other
similarly titled measures of other companies.
(e) No dividends were paid during the five years ended December 31, 2001.
ITEM 7. 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 historical financial
information is not directly comparable on a year-to-year basis, primarily due to
acquisitions in 1999, the divestiture of Kay Home Products in 2000, a fire at
one of the Company's rubber plants in 2000, and restructuring and impairment
charges taken in 2001.
10
OVERVIEW
The Company operates through three segments: Integrated Logistics Solutions
("ILS"), Aluminum Products and Manufactured Products. ILS is a leading logistics
provider of 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 services to major OEMs. The principal customers of ILS
are semiconductor equipment, technology, industrial equipment, aerospace and
defense, electrical controls, HVAC, heavy duty truck, vehicle parts and
accessories, appliances and motors, 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, oil and aerospace industries.
Between 1993 and 1999, the Company grew significantly, through both
internal growth and acquisitions. Over this period, the Company's net sales
increased at a 40% compounded annual growth, from $94.5 million to $717.2
million. Over the same period, income before income taxes increased from $3.9
million to $28.4 million.
Growth continued through the first half of 2000, but the Company's sales
volume and profitability dropped substantially in the second half. First half
2000 net sales totaled $410.9 million, but dropped 16% to $343.8 million in the
second half. This decline was primarily due to rapid contraction in the
heavy-duty truck industry (the Company's largest customer segment) starting in
the third quarter, and fourth quarter contraction in the automotive industry
(the Company's second largest customer segment).
The Company's sales volumes and profitability continued to decline during
2001, due to overall weakness in the manufacturing economy, and particularly to
continued contraction in the heavy-duty truck and automotive industries. Despite
these sales declines, the Company believes it has retained or gained market
share in most major markets served. In 2001, the Company incurred a net loss of
$26.0 million ($5.7 million excluding $20.3 million after-tax restructuring and
impairment charges and non-operating items).
The Company responded to this downturn by reducing costs, increasing
specific prices, restructuring businesses and selling non-core manufacturing
assets. Cost reductions included supplier price reductions, headcount reductions
due to layoffs and attrition of approximately 600 (15%) during 2001 and
operational efficiencies. Despite customer pricing pressures, the Company
negotiated significantly increased prices for several, particularly low-margin
product lines in the Aluminum Products and Manufactured Products segments. The
Company restructured many of its businesses, including planned closure of twenty
logistics warehouses and closure or sale of eight manufacturing plants (of which
eleven warehouses and three plants were closed as of December 31, 2001). With
regard to these actions, in 2001 the Company recorded restructuring and
impairment charges of $28.5 million before tax consisting of $6.9 million for
severance and exit costs, $10.3 million recorded in cost of products sold,
primarily to write down inventory of discontinued businesses and other product
lines to fair value, and $11.3 million for the impairment of property and
equipment and other long-term assets. The Company continued to work toward the
sale of non-core manufacturing assets, including the December, 2001 sale of
substantially all the assets of Cleveland City Forge for cash of $6.1 million,
which resulted in a pretax gain of approximately $.1 million. Management's
actions are intended to position the Company for profitability when the
manufacturing economy stabilizes and returns to growth.
In June 2000, the Company's Cicero Flexible Products plant was destroyed in
a fire. During 2000, the Company received interim insurance payments, primarily
reflecting the replacement cost of fixed assets, and recognized related net
gains of $5.2 million. In 2001, the Company expensed $1.9 million of
non-recurring business interruption costs which were not covered by insurance.
11
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized, but are reviewed for impairment
annually, or more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The Company is
required to adopt FAS 142 effective on January 1, 2002, and finish evaluating
potential impairment of existing goodwill by June 30, 2002. If goodwill is
determined to be impaired, the charge would be accounted for as a cumulative
effect adjustment as a result of a change in accounting principle.
RESULTS OF OPERATIONS
2001 versus 2000
Net sales declined by $118.3 million, or 16%, from $754.7 million in 2000
to $636.4 million in 2001. Sales declined 14%, or $105.5 million, excluding the
$12.8 million from the divestiture of Kay Home Products. ILS net sales declined
14%, or $65.3 million, due primarily to the shrinkage in heavy truck and other
customer industries. Aluminum Products net sales decreased 24%, or $26.5
million. This included a $12.5 million decrease relating to the ending of
certain sales contracts which were anticipated, and $3.7 million relating to the
Company's decision to discontinue production of low-volume products, while the
remainder, $10.3 million, resulted from reductions in production releases for
ongoing automotive contracts. Manufactured Products net sales declined 16%, or
$26.4 million, of which $12.8 million related to the sale of Kay Home Products,
while the remainder, $13.6 million, reflected reduced customer demand.
Excluding $10.3 million of restructuring and impairment charges included in
cost of products sold, primarily related to discontinued product lines, gross
profit declined by $33.1 million, or 26%, from 2000 and gross margin declined to
approximately 15.1% in 2001, from 17.2% in 2000, reflecting decreased margins in
all three segments. The decline in ILS gross margin related to reduced volumes
resulting in the absorption of fixed operational overheads over a smaller sales
base. For Aluminum Products, the decrease in gross margins related to the
absorption of fixed manufacturing overheads over a smaller production base. The
decrease in margins in the Manufactured Products segment resulted from decreased
production levels which absorbed fixed overhead costs over a smaller production
base, and from cost overruns on several large capital equipment systems.
Selling, general and administrative expenses ("SG&A") decreased by 11% or
$8.4 million, from $76.9 million in 2000 to $68.5 million for 2001. This
decrease was due to cost reductions in all three segments, plus $2.1 million
from the divestiture of Kay Home Products. During 2001, selling, general and
administrative expenses were negatively affected by a decrease in net pension
credits of $.8 million, reflecting less favorable investment returns on pension
plan assets. Consolidated SG&A expenses as a percentage of net sales were 10.8%
during 2001 as compared to 10.2% for 2000.
Interest expense increased by $.3 million from $30.8 million in 2000 to
$31.1 million in 2001 due to higher average debt outstanding, partially offset
by lower average interest rates during 2001. For the year ended December 31,
2001, the Company averaged outstanding borrowings of $353.8 million as compared
to $342.4 million for the prior year. The $11.4 million increase related
primarily to higher working capital levels in the first half of the year. The
average borrowing rate of 8.80% for the year ended December 31, 2001 was 20
basis points lower than the average rate of 9.00% for 2000, primarily due to
decreased rates on the Company's revolving credit facility.
The effective income tax rate for 2001 was 30%, compared to 41% in 2000,
before considering the tax effect of the divestiture of Kay Home Products. This
decrease resulted from the tax-rate impact of permanent tax items such as
goodwill amortization given the pretax loss during 2001, as compared to a
12
pretax profit in 2000. At December 31, 2001, subsidiaries of the Company had
$14.3 million of net operating loss carry forwards for federal tax purposes.
2000 versus 1999
Net sales increased by $37.5 million, or 5%, from $717.2 million in 1999 to
$754.7 million in 2000. Of this sales increase, $9.9 million represented
internal growth. Net sales grew $27.6 million from acquisitions made in the
second half of 1999 and in 2000 partially offset by the divestiture in 2000. For
ILS, net sales increased 9%, or $39.2 million, of which $16.1 million related to
internal growth and $23.1 million related to acquisitions made in July 1999 and
September 2000. For Manufactured Products, sales increased 10%, or $14.0
million, of which $9.5 million related to internal growth and $4.5 million
growth resulted from acquisitions net of divestiture. For Aluminum Products, net
sales decreased 12%, or $15.7 million, primarily due to the ending of certain
sales contracts at Metalloy, which was expected at the time of its purchase in
1999, partially offset by internal growth. During the second half of 2000, sales
volumes to heavy truck customers (primarily in the ILS segment) dropped
significantly while sales volumes to automotive customers (primarily in the
Aluminum Products segment) weakened in the fourth quarter.
Gross profit increased by $3.7 million, or 3%, from $125.8 million in 1999
to $129.5 million in 2000 and is primarily related to acquisitions made in 1999
and 2000. The Company's consolidated gross margin was approximately 17.2% in
2000 and 17.5% in 1999. Margin declined in 2000 partially due to the effects of
a strike at Park Drop Forge which was settled in December.
Selling, general and administrative costs increased by 12% to $76.9 million
for 2000 from $68.8 million for 1999. The increase was primarily related to
recent acquisitions. During 2000, selling, general and administrative expenses
benefited from an increase in net pension credits of $2.8 million, reflecting
favorable investment returns on pension plan assets. Consolidated selling,
general and administrative expenses as a percentage of net sales were 10.2%
during the current period and 9.6% for 1999.
Interest expense increased by $6.0 million from $24.8 million in 1999 to
$30.8 million in 2000 due to higher average debt outstanding and higher average
interest rates during 2000. For the year ended December 31, 2000, the Company
averaged outstanding borrowings of $342.4 million as compared to $294.6 million
for 1999. The $47.8 million increase related primarily to acquisitions completed
during the second half of 1999. The average borrowing rate of 9.00% for the year
ended December 31, 2000 is 60 basis points higher than the average rate of 8.40%
for 1999. This rate increase was due both to the $50 million 9.25% Senior
Subordinated Notes issued in June 1999, and to increased interest rates on the
Company's bank revolving credit facility.
Before considering the tax effect of the sale of Kay Home Products, the
effective income tax rate for 2000 was 41%, while for 1999 it was 43%. The
decrease in tax rate resulted from creating a foreign sales corporation and an
increase in research and experimental credits. The divestiture of Kay Home
Products generated a pre-tax loss of $15.3 million, but only reduced income
taxes by $2.1 million due to the exclusion of goodwill as a deduction for tax
purposes. At December 31, 2000, subsidiaries of the Company had $5.7 million of
net operating loss carry forwards for federal 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 and the sale of Senior Subordinated Notes. The Company is party to
a credit and security agreement dated December 21, 2000, as amended ("Credit
Agreement"), with a group of banks under which it may borrow up to $180 million
secured by substantially all the assets of the Company. The proceeds from the
Credit Agreement, which expires on December 31, 2003, 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 plus up to
50-150 basis points or (ii) LIBOR plus 275-350 basis points. The Company's
ability to select LIBOR-based interest and
13
the interest rate are dependent on the Company's ratio of senior funded
indebtedness to EBITDA, as defined in the credit agreement. As of December 31,
2001, the Company was limited to prime-based borrowings (5.75% at that date) and
$126.0 million was outstanding under the facility.
The Credit Agreement currently provides for a detailed borrowing base
formula to be developed in 2002. This borrowing base formula will provide
borrowing capacity to the Company based on negotiated percentages of eligible
accounts receivable, inventory and fixed assets. The minimum borrowing capacity
at the implementation date of the detailed borrowing base will be at least 10%
greater than borrowings on that date. Until the implementation date borrowings
are limited to $160 million.
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. The future availability of bank borrowings is
based on the Company's ability to meet various financial covenants, which could
be materially impacted if negative economic trends continue. Failure to meet
financial covenants could materially impact the availability and interest rate
of future borrowings. At December 31, 2001, the Company is in compliance with
all financial covenants under the Credit Agreement.
Capital expenditures for 2002 are projected to be approximately $9-$12
million which will fund the necessary additions and improvements to the
Company's facilities, equipment and information systems.
The ratio of current assets to current liabilities was 2.85 at December 31,
2001 versus 3.06 at December 31, 2000. Working capital decreased by $44.3
million to $180.3 million at December 31, 2001 from $224.6 million at December
31, 2000, in response to reduced sales volumes and concentrated management
efforts.
During 2001, the Company provided $23.8 million from operating activities
as compared to providing $24.0 million in 2000. During 2001, the Company also
invested $13.9 million in capital expenditures, used $14.7 million to pay down
debt, and provided $6.1 million from a divestiture. These activities resulted in
an increase in cash for the year of $1.3 million.
During 2000, the Company provided $24.0 million from operating activities
as compared to using $.7 million in 1999. During 2000, the Company also invested
$25.0 million in capital expenditures (including $7.0 million to replace a
portion of the equipment destroyed in the rubber plant fire), used $3.9 million
for acquisitions, provided $9.2 million from the divestiture of Kay Home
Products, used $6.1 million for fire related business interruption costs and
used $1.5 million for other purposes, primarily the purchase of treasury shares.
These activities resulted in a decrease in cash for the year of $3.3 million.
During 1999, the Company used $.7 million from operating activities,
invested $22.7 million in capital expenditures, used $65.4 million for
acquisitions and used $3.9 million for other purposes, primarily the purchase of
treasury shares. These activities were funded by issuing $49.5 million of 9.25%
Senior Subordinated Notes and a net increase of $44.8 million in bank
borrowings, which resulted in an increase in cash for the year of $1.6 million.
The following table summarizes our principal contractual obligations and
other commercial commitments over various future periods:
PAYMENTS DUE OR COMMITMENT EXPIRATION PER PERIOD
------------------------------------------------
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
-------- ---------------- --------- --------- -------------
Long-Term Debt.................. $330,768 $2,037 $127,037 $ 765 $200,929
Operating leases................ 30,027 9,680 12,012 5,510 2,825
Standby letters of credit....... 4,147 3,721 426 -0- -0-
14
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to make certain estimates and assumptions which affect amounts reported in the
Company's consolidated financial statements. Management has made their best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe that there
is great likelihood that materially different amounts would be reported under
different conditions or using different assumptions related to the accounting
policies described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The Company does not have off-balance-sheet arrangements, financings or
other relationships with unconsolidated entities or other persons, also known as
special purpose entities ("SPE's"). The Company currently uses no derivative
instruments.
Revenue Recognition: The Company recognizes more than 95% of its revenue
when title is transferred to unaffiliated customers, typically upon shipment.
The Company's remaining revenue, from long-term contracts, is recognized using
the percentage of completion method of accounting. The Company's revenue
recognition policies are in accordance with the SEC's Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition."
Allowance for Uncollectible Accounts Receivable: Accounts Receivable have
been reduced by an allowance for amounts that may become uncollectible in the
future. This estimated allowance is based primarily on management's evaluation
of the financial condition of the customer.
Allowance for Obsolete and Slow Moving Inventory: Inventories are stated
at the lower of cost or market value and have been reduced by an allowance for
obsolete and slow-moving inventories. The estimated allowance is based on
management's review of inventories on hand, compared to estimated future usage
and sales.
Impairment of Long-Lived Assets: Goodwill and other long-lived assets are
reviewed by management for impairment whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. During 2001,
the Company decided to exit certain under-performing product lines and to close
or consolidate certain operating facilities and, accordingly, recorded
restructuring and impairment charges as discussed above and in Note M to the
Consolidated Financial Statements.
Through December 31, 2001, the Company amortized goodwill primarily over
forty years using the straight-line method. The Company adopted Financial
Accounting Standard ("FAS") No. 142 "Goodwill and Other Intangible Assets" as of
January 1, 2002. The Company will therefore no longer amortize goodwill, but
will review goodwill for impairment annually, or more frequently if impairment
indicators arise. As required, the Company will finish evaluating potential
impairment of existing goodwill, using the criteria of FAS 142, by June 30,
2002. If goodwill is determined to be impaired, the charge would be accounted
for as a cumulative effect adjustment as a result of a change in accounting
principle.
Deferred Income Tax Assets and Liabilities: The Company accounts for
income taxes under the liability method, whereby deferred tax assets and
liabilities are determined based on temporary differences between the financial
reporting and the tax bases of assets and liabilities and are measured using the
currently enacted tax rates. In determining these amounts, management determined
the probability of realizing deferred tax assets, taking into consideration
factors including historical operating results, expectations of future earnings
and taxable income and the extended period of time over which the postretirement
benefits will be paid.
Pension and Other Postretirement Benefit Plans: The Company and its
subsidiaries have pension plans, principally noncontributory defined benefit or
noncontributory defined contribution plans and postretirement benefit plans,
covering substantially all employees. The measurement of liabilities related to
these plans is based on management's assumptions related to future events,
including interest
15
rates, return on pension plan assets, rate of compensation increases, and health
care cost trend rates. Pension plan asset performance in the future will
directly impact net income of the Company.
Other Matters: Transactions with related parties, primarily building
leases, are in the ordinary course of business, are conducted on an arm's-length
basis, and are not material to the Company's financial position, net income or
cash flows.
ENVIRONMENTAL
The Company has been identified as a potentially responsible party at
third-party sites under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or comparable state laws which provide
for strict and, under certain circumstances, joint and several liability. The
Company is participating in the cost of certain clean-up efforts at several of
these sites. However, the Company's share of such costs has not been material
and based on available information, management of the Company does not expect
the Company's exposure at any of these locations to have a material adverse
effect on its results of operations, liquidity or financial condition.
The Company has been named as one of many defendants in asbestos-related
personal injury lawsuits. The Company's cost of defending such lawsuits has not
been material to date and based upon available information, management of the
Company does not expect the Company's future costs for asbestos-related lawsuits
to have a material adverse effect on its results of operations, liquidity or
financial condition. The Company cautions however that inherent in management's
estimates of the Company's exposure are expected trends in claims severity,
frequency and other factors which may materially vary as claims are filed and
settled or otherwise resolved.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
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 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-K 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 amounts of restructuring charges, credit availability,
levels and funding of capital expenditures and trends for 2002. Forward-looking
statements are necessarily subject to risks, uncertainties and other factors,
many of which are outside our control, which could cause actual results to
differ materially from such statements. These uncertainties and other factors
include such things as: general business conditions, competitive factors,
including pricing pressures and product innovation; raw material availability
and pricing; changes in the 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, tax rates and adverse impacts to us, our suppliers and
customers from acts of terrorism or hostilities; our ability to meet various
covenants, including financial covenants, contained in our credit agreement and
the indenture governing the Senior Subordinated Notes; increasingly stringent
domestic and foreign governmental regulations including those affecting the
environment; inherent uncertainties involved in assessing our potential
liability for
16
environmental remediation-related activities; the outcome of pending and future
litigation and other claims; dependence on the automotive and heavy truck
industries; 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.
ITEM 7A. 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 $126.0 million at December 31,
2001. A 100 basis point increase in the interest rate would have resulted in an
increase in interest expense of approximately $1.3 million for the year ended
December 31, 2001.
The Company's foreign subsidiaries generally conduct business in local
currencies. During 2001, the Company recorded an unfavorable foreign currency
translation adjustment of $1.4 million related to net assets located outside the
United States. This foreign currency translation adjustment resulted primarily
from the strengthening of the United States dollar in relation to the Canadian
dollar, Mexican peso, Belgian franc and British pound. Our foreign operations
are also subject to other customary risks of operating in a global environment,
such as unstable political situations, the effect of local laws and taxes,
tariff increases and regulations and requirements for export licenses, the
potential imposition of trade or foreign exchange restrictions and
transportation delays.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 19
Consolidated Balance Sheets -- December 31, 2001 and 2000... 20
Consolidated Statements of Operations -- Years Ended
December 31, 2001, 2000 and 1999.......................... 21
Consolidated Statements of Shareholders' Equity -- Years
Ended December 31, 2001, 2000 and 1999.................... 22
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2001, 2000 and 1999.......................... 23
Notes to Consolidated Financial Statements.................. 24
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited) -- Years Ended
December 31, 2001 and 2000................................ 37
18
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Park-Ohio Holdings Corp.
We have audited the accompanying consolidated balance sheets of Park-Ohio
Holdings Corp. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Park-Ohio
Holdings Corp. and subsidiaries at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
Cleveland, Ohio /s/ Ernst & Young LLP
March 1, 2002
19
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,872 $ 2,612
Accounts receivable, less allowances for doubtful accounts
of $2,680 in 2001 and $3,292 in 2000.................... 99,241 117,318
Inventories............................................... 151,463 189,023
Other current assets...................................... 23,108 24,379
-------- --------
Total Current Assets............................... 277,684 333,332
Property, Plant and Equipment
Land and land improvements................................ 5,670 5,993
Buildings................................................. 27,020 35,026
Machinery and equipment................................... 181,790 193,444
-------- --------
214,480 234,463
Less accumulated depreciation............................. 105,155 101,757
-------- --------
109,325 132,706
Other Assets
Goodwill, net of accumulated amortization of $16,016 in
2001 and $12,283 in 2000................................ 130,263 133,612
Net assets held for sale.................................. 22,733 -0-
Prepaid pension and other................................. 50,371 46,870
-------- --------
$590,376 $646,520
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 65,131 $ 76,041
Accrued expenses.......................................... 28,482 28,831
Current portion of long-term liabilities.................. 3,787 3,904
-------- --------
Total Current Liabilities.......................... 97,400 108,776
Long-Term Liabilities, less current portion
Long-term debt............................................ 328,731 343,248
Other postretirement benefits............................. 24,001 24,487
Other..................................................... 15,277 17,883
-------- --------
368,009 385,618
Shareholders' Equity
Capital stock, par value $1 a share
Serial preferred stock:
Authorized -- 632,470 shares; Issued and
outstanding -- none.................................. -0- -0-
Common stock:
Authorized -- 40,000,000 shares; Issued -- 11,209,862
shares in 2001 and 2000.............................. 11,210 11,210
Additional paid-in capital................................ 56,135 56,135
Retained earnings......................................... 71,239 97,192
Treasury stock, at cost, 713,671 shares in 2001 and
2000.................................................... (9,092) (9,092)
Accumulated other comprehensive (loss).................... (4,252) (2,858)
Unearned compensation -- restricted stock awards.......... (273) (461)
-------- --------
124,967 152,126
-------- --------
$590,376 $646,520
======== ========
See notes to consolidated financial statements.
20
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales................................................. $636,417 $754,674 $717,222
Cost of products sold..................................... 550,397 625,205 591,439
-------- -------- --------
Gross profit............................................ 86,020 129,469 125,783
Selling, general and administrative expenses.............. 68,519 76,931 68,777
Amortization of goodwill.................................. 3,733 3,907 3,836
Restructuring and impairment charges...................... 18,163 -0- -0-
-------- -------- --------
Operating income (loss)................................. (4,395) 48,631 53,170
Non-operating items, net.................................. 1,850 10,118 -0-
Interest expense.......................................... 31,108 30,812 24,752
-------- -------- --------
Income (loss) before income taxes.................... (37,353) 7,701 28,418
Income taxes (benefit).................................... (11,400) 7,183 12,164
-------- -------- --------
Net income (loss)............................... $(25,953) $ 518 $ 16,254
======== ======== ========
Net income (loss) per common share:
Basic................................................... $ (2.49) $ .05 $ 1.52
======== ======== ========
Diluted................................................. $ (2.49) $ .05 $ 1.51
======== ======== ========
See notes to consolidated financial statements.
21
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED TREASURY INCOME UNEARNED
STOCK CAPITAL EARNINGS STOCK (LOSS) COMPENSATION TOTAL
------- ---------- -------- -------- ------------- ------------ --------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1999.... $11,148 $55,755 $80,420 $(4,554) $(1,582) $ -0- $141,187
Comprehensive income:
Net income.................. 16,254 16,254
Foreign currency translation
adjustment................ 730 730
--------
Comprehensive income........ 16,984
Exercise of stock options..... (71) 330 259
Purchase of treasury stock.... (3,745) (3,745)
------- ------- -------- ------- ------- ----- --------
Balance at December 31, 1999.. 11,148 55,684 96,674 (7,969) (852) -0- 154,685
Issuance of restricted
stock....................... 62 500 (562)
Amortization of restricted
stock....................... 101 101
Comprehensive income (loss):
Net income.................. 518 518
Foreign currency translation
adjustment................ (2,006) (2,006)
--------
Comprehensive loss.......... (1,488)
Exercise of stock options..... (49) 172 123
Purchase of treasury stock.... (1,295) (1,295)
------- ------- -------- ------- ------- ----- --------
Balance at December 31, 2000.. 11,210 56,135 97,192 (9,092) (2,858) (461) 152,126
Amortization of restricted
stock....................... 188 188
Comprehensive loss:
Net loss.................... (25,953) (25,953)
Foreign currency translation
adjustment................ (1,394) (1,394)
--------
Comprehensive loss.......... (27,347)
------- ------- -------- ------- ------- ----- --------
Balance at December 31, 2001.. $11,210 $56,135 $71,239 $(9,092) $(4,252) $(273) $124,967
======= ======= ======== ======= ======= ===== ========
See notes to consolidated financial statements.
22
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)........................................ $(25,953) $ 518 $ 16,254
Adjustments to reconcile net income (loss) to net cash
provided (used) by operations:
Gain from fire insurance............................ -0- (5,200) -0-
Loss on the sale of Kay Home Products............... -0- 15,318 -0-
Depreciation and amortization....................... 19,911 20,048 18,698
Restructuring and impairment charges................ 16,362 -0- -0-
Deferred income taxes............................... (6,473) 6,217 6,904
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable................................. 16,257 (7,121) (5,127)
Inventories......................................... 34,327 3,775 (32,726)
Accounts payable and accrued expenses............... (24,048) (7,701) (2,427)
Other............................................... (6,617) (1,829) (2,304)
-------- -------- --------
Net Cash Provided (Used) by Operating Activities.... 23,766 24,025 (728)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net.......... (13,923) (24,968) (22,650)
Costs of acquisitions, net of cash acquired.............. -0- (3,890) (65,426)
Proceeds from the sale of business units................. 6,051 9,177 -0-
Other, net............................................... -0- (6,100) (445)
-------- -------- --------
Net Cash (Used) by Investing Activities............. (7,872) (25,781) (88,521)
FINANCING ACTIVITIES
Proceeds from bank arrangements.......................... 19,000 23,000 101,500
Payments on long-term debt............................... (33,634) (23,327) (56,726)
Issuance of 9.25% senior subordinated notes, net of
deferred financing costs.............................. -0- -0- 49,508
Issuance of common stock under stock option plan......... -0- 123 259
Purchase of treasury stock............................... -0- (1,295) (3,745)
-------- -------- --------
Net Cash (Used) Provided by Financing Activities.... (14,634) (1,499) 90,796
Increase (Decrease) in Cash and Cash Equivalents.... 1,260 (3,255) 1,547
Cash and Cash Equivalents at Beginning of Year...... 2,612 5,867 4,320
-------- -------- --------
Cash and Cash Equivalents at End of Year............ $ 3,872 $ 2,612 $ 5,867
======== ======== ========
Taxes paid (refunded).................................... $ (3,346) $ 3,261 $ 6,892
Interest paid............................................ 28,554 30,194 23,646
See notes to consolidated financial statements.
23
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (principally the
first-in, first-out method for 85% of its inventories and last-in, first-out for
the remainder) or market value. If the first-in, first-out method of inventory
accounting had been used exclusively by the Company, inventories would have been
approximately $4,421 and $4,956 higher than reported at December 31, 2001 and
2000, respectively.
Major Classes of Inventories
DECEMBER 31
-------------------
2001 2000
-------- --------
In-process and finished goods........................... $137,021 $164,833
Raw materials and supplies.............................. 14,442 24,190
-------- --------
$151,463 $189,023
======== ========
Property, Plant and Equipment: Property, plant and equipment are carried
at cost. Major additions and associated interest costs are capitalized and
betterments are charged to accumulated depreciation; expenditures for repairs
and maintenance are charged to operations. Depreciation of fixed assets is
computed principally by the straight-line method based on the estimated useful
lives of the assets.
Goodwill: Goodwill is amortized primarily over forty years using the
straight-line method. Management periodically evaluates goodwill and other
long-lived assets for possible impairment through undiscounted cash flow
analyses as required by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of".
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized, but are reviewed for impairment
annually, or more frequently if impairment indicators arise. The Company is
required to adopt FAS 142 effective January 1, 2002, and finish evaluating
potential impairment of existing goodwill by June 30, 2002. If goodwill is
determined to be impaired, the charge would be accounted for as a cumulative
effect adjustment as a result of a change in accounting principle.
Pensions and Other Postretirement Benefits: The Company and its
subsidiaries have pension plans, principally noncontributory defined benefit or
noncontributory defined contribution plans, covering substantially all
employees. In addition, the Company has two unfunded postretirement benefit
plans. For the defined benefit plans, benefits are based on the employee's years
of service and the
24
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's policy is to fund that amount recommended by its independent
actuaries. For the defined contribution plans, the costs charged to operations
and the amount funded are based upon a percentage of the covered employees'
compensation.
Stock-Based Compensation: The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options equals the fair market
value of the underlying stock on the date of grant, no compensation expense is
recognized. Compensation expense resulting from fixed awards of restricted
shares is measured at the date of grant and expensed over the vesting period.
Income Taxes: The Company accounts for income taxes under the liability
method whereby deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and the tax bases of
assets and liabilities and are measured using the current enacted tax rates.
Revenue Recognition: The Company recognizes revenue, other than from
long-term contracts, when title is transferred to the customer, typically upon
shipment. Revenue from long-term contracts (less than 5% of consolidated
revenue) is accounted for under the percentage of completion method, and
recognized on the basis of the percentage each contract's cost to date bears to
the total estimated contract cost. Revenue earned on contracts in process in
excess of billings is classified in other current assets in the accompanying
balance sheet. The Company's revenue recognition policies are in accordance with
the SEC's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition."
Concentration of Credit Risk: The Company sells its products to customers
in diversified industries. The Company performs ongoing credit evaluations of
its customers' financial condition but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. Write-offs of accounts receivable have
historically been low. As of December 31, 2001 the Company had uncollateralized
receivables with seven customers in the automotive and truck industry, each with
several locations, aggregating $32,864 which represents approximately 33% of the
Company's trade accounts receivable. During 2001, sales to these customers
amounted to approximately $182,200 which represents 29% of the Company's net
sales.
Environmental: The Company accrues environmental costs related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Costs which extend the life of the related
property or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability when environmental assessments
and/or remedial efforts are probable and can be reasonably estimated. The
estimated liability of the Company is not discounted or reduced for possible
recoveries from insurance carriers.
Foreign Currency Translation: The functional currency for all subsidiaries
outside the United States is the local currency. Financial statements for these
subsidiaries are translated into United States dollars at year-end exchange
rates as to assets and liabilities and weighted-average exchange rates as to
revenues and expenses. The resulting translation adjustments are recorded in
shareholders' equity and represent the entire balance in accumulated other
comprehensive loss.
Impact of Other Recently Issued Accounting Pronouncements: The Company
adopted Financial Accounting Standards Board Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended, on January 1, 2001.
Because the Company does not currently use derivatives, adoption of the new
Statement did not impact results of operations or the financial position of the
Company.
25
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("FAS 141"). FAS 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method, which is consistent with the
Company's treatment of prior business combinations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"), which supersedes FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Although
retaining many of the fundamental impairment recognition and measurement
provisions of FAS 121, the new rules supersede the provisions of APB Opinion 30
with regard to reporting the effects of a disposal of a segment of a business.
Under FAS 144, more dispositions will qualify for discontinued operations
treatment. The Company does not expect that adoption of this standard on January
1, 2002 will have a material impact on the Company's financial position, results
of operations or cash flows.
Reclassification: Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year presentation.
NOTE B -- ACQUISITIONS AND DISPOSITIONS
On December 21, 2001 the Company completed the sale of substantially all of
the assets of Cleveland City Forge for cash of approximately $6.1 million and
recorded a gain of approximately $.1 million. Cleveland City Forge was a
non-core business in the Manufactured Products Segment, producing clevises and
turnbuckles for the construction industry.
On September 30, 2000, the Company acquired IBM's plant automation software
product lines and related assets for cash of approximately $3.9 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, which is included in non-operating items,
net in the consolidated statement of income. Kay Home Products was a non-core
business producing and distributing barbecue grills, tray tables, screen houses
and plant stands.
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 & Bolt Co. ("St. Louis Screw") and PMC
Industries ("PMC") for cash of approximately $65.4 million. Metalloy is a full
service aluminum casting and machining company. Columbia and Industrial are
logistics providers of Class C 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.
26
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE C -- ACCRUED EXPENSES
Accrued expenses include the following:
DECEMBER 31
-----------------
2001 2000
------- -------
Self-insured liabilities.................................. $ 3,219 $ 3,267
Warranty and installation accruals........................ 1,908 2,662
Accrued payroll and payroll-related items................. 5,177 3,065
State and local taxes..................................... 949 1,730
Advance billings.......................................... 2,372 883
Acquisition liabilities................................... 269 1,694
Interest payable.......................................... 3,212 1,882
Severance and exit costs.................................. 4,152 -0-
Sundry.................................................... 7,224 13,648
------- -------
Totals............................................... $28,482 $28,831
======= =======
NOTE D -- FINANCING ARRANGEMENTS
Long-term debt consists of the following:
DECEMBER 31
-------------------
2001 2000
-------- --------
9.25% Senior Subordinated Notes due 2007................ $199,930 $199,930
Revolving credit maturing on December 31, 2003.......... 126,000 138,500
Other................................................... 4,838 6,972
-------- --------
330,768 345,402
Less current maturities................................. 2,037 2,154
-------- --------
Total............................................ $328,731 $343,248
======== ========
Maturities of long-term debt during each of the five years following
December 31, 2001 are approximately $2,037 in 2002, $126,639 in 2003, $398 in
2004, $387 in 2005 and $378 in 2006.
The Company is a party to a credit and security agreement dated December
31, 2000, as amended ("Credit Agreement"), with a group of banks, under which it
may borrow or issue standby letters of credit or commercial letters of credit up
to $180 million. The Credit Agreement currently provides for a detailed
borrowing base formula to be developed in 2002. This borrowing base formula will
provide borrowing capacity to the Company based on negotiated percentages of
eligible accounts receivable, inventory and fixed assets. The minimum borrowing
capacity at the implementation date of the detailed borrowing base will be at
least 10% greater than borrowings on that date. Until the implementation date
borrowings are limited to $160 million. Interest is payable quarterly at either
the bank's prime lending rate plus .5%-1.5% (5.75% at December 31, 2001) or at
Park-Ohio's election at LIBOR plus 2.75%-3.50% (5.19% at December 31, 2001). The
Company's ability to elect LIBOR-based interest as well as the overall interest
rate are dependent on the Company's ratio of senior funded indebtedness to pro
forma earnings before interest, taxes, depreciation and amortization ("EBITDA"),
as defined in the Credit Agreement, and adjusted every quarter. As of December
31, 2001, the Company was limited to prime-based borrowings. Up to $7.0 million
in standby letters of credit and commercial letters of credit may be issued
under the Credit Agreement. In addition to the bank's customary letter of credit
fees, a 3/4% fee is assessed on
27
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
standby letters of credit on an annual basis. As of December 31, 2001, in
addition to amounts borrowed under the Credit Agreement, there is $4.1 million
outstanding primarily for standby letters of credit. A fee of .25% to .50% is
imposed by the bank on the unused portion of available borrowings. The Credit
Agreement expires on December 31, 2003 and borrowings are secured by
substantially all of the Company's assets.
Provisions of the Senior Subordinated Notes and the revolving credit
agreement contain restrictions on the Company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments,
investments, loans and guarantees and to sell or otherwise dispose of a
substantial portion of assets or to merge or consolidate with an unaffiliated
entity. The agreement also requires maintenance of specific financial ratios.
The weighted average interest rate on all debt was 7.69% at December 31,
2001.
The fair market value of the Senior Subordinated Notes based on published
market prices was approximately $122,957 and $150,947 at December 31, 2001 and
2000, respectively. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable, and borrowings under the credit agreement
approximate fair value at December 31, 2001 and 2000.
NOTE E -- INCOME TAXES
Significant components of the Company's net deferred tax assets and
liabilities are as follows:
DECEMBER 31
----------------
2001 2000
------ -------
Deferred tax assets:
Postretirement benefit obligation......................... $8,600 $ 9,000
Inventory................................................. 7,100 5,800
Net operating loss and tax credit carryforwards........... 4,900 2,000
Other -- net.............................................. 5,500 4,400
------ -------
Total deferred tax assets............................ 26,100 21,200
Deferred tax liabilities:
Tax over book depreciation................................ 11,100 13,200
Pension................................................... 11,600 9,500
------ -------
Total deferred tax liabilities....................... 22,700 22,700
------ -------
Net deferred tax assets (liabilities)....................... $3,400 $(1,500)
====== =======
28
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Income taxes consisted of the following:
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
-------- ------ -------
Current (refundable):
Federal............................................ $ (5,828) $ 106 $ 3,007
State.............................................. 369 774 1,246
Foreign............................................ 532 86 1,007
-------- ------ -------
(4,927) 966 5,260
Deferred:
Federal............................................ (6,135) 5,025 6,029
State.............................................. (338) 1,192 875
-------- ------ -------
(6,473) 6,217 6,904
-------- ------ -------
Income taxes............................................ $(11,400) $7,183 $12,164
======== ====== =======
The reasons for the difference between income taxes and the amount computed
by applying the statutory Federal income tax rate to income before income taxes
are as follows:
YEAR ENDED DECEMBER 31
---------------------------
2001 2000 1999
-------- ------ -------
Computed statutory amount............................... $(12,700) $2,617 $ 9,662
Effect of state income taxes payable.................... 20 1,304 1,400
Goodwill................................................ 668 715 751
Non deductible goodwill write off upon sale of Kay Home
Products.............................................. -0- 3,513 -0-
Other, net.............................................. 612 (966) 351
-------- ------ -------
Income taxes............................................ $(11,400) $7,183 $12,164
======== ====== =======
At December 31, 2001, subsidiaries of the Company have net operating loss
carryforwards for income tax purposes of approximately $14.3 million subject to
certain limitations, which expire in 2002 to 2021.
NOTE F -- STOCK PLAN
Under the provisions of the 1998 Long-Term Incentive Plan, as amended
("1998 Plan"), which is administered by the Compensation Committee, incentive
stock options, non-statutory stock options, stock appreciation rights ("SARs"),
restricted shares, performance shares or stock awards may be awarded to all
employees of the Company and its subsidiaries. Stock options will be exercisable
in whole or in installments as may be determined provided that no options will
be exercisable more than ten years from date of grant. The exercise price will
be the fair market value at the date of grant. The aggregate number of shares of
the Company's stock which may be awarded under the 1998 Plan is 1,650,000, all
of which may be incentive stock options. No more than 500,000 shares shall be
the subject of awards to any individual participant in any one calendar year.
During 2000, 62,400 restricted shares were awarded under the 1998 Plan.
During 2001 the Company completed a program ("the Option Offer Program")
whereby all outstanding options to purchase shares of Company common stock held
by Company employees and directors were tendered to the Company. Existing
options tendered to the Company were cancelled
29
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and, in return, participants were entitled to new options on a one for one basis
at least six months and one day after the tendered options were cancelled. On
November 30, 2001 the Company met its obligation with the issuance of new
options (880,500) with an exercise price equal to the fair market value at the
date of grant.
Had compensation cost for stock options granted been determined based on
the fair value method of FASB Statement No. 123, the Company's net income (loss)
and diluted earnings (loss) per share would have been reduced (increased) by
$(311) ($(.03) per share) in 2001, $1,008 ($.10 per share) in 2000, and $1,077
($.10 per share) in 1999. The effects on 2001, 2000 and 1999 net earnings may
not be representative of the effect on future years net earnings amounts as the
compensation cost on each year's grant is recognized over the vesting period.
Fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2001, 2000 and
1999, respectively: risk-free interest rates of 4.00%, 5.83% and 6.25%; zero
dividend yield; expected volatility of 48%, 42% and 38% and expected option
lives of 6 years.
The following table reflects activity under all stock plans from January 1,
1999 through December 31, 2001, and the weighted average exercise prices:
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
---------- -------------
Outstanding,
January 1, 1999.......................................... 1,035,850 $13.88
Granted.................................................. 124,000 10.66
Exercised................................................ (24,000) 10.81
Forfeited................................................ (4,000) 18.25
Outstanding,
December 31, 1999........................................ 1,131,850 13.57
Granted.................................................. 12,000 9.78
Exercised................................................ (13,500) 9.13
Forfeited................................................ (40,850) 13.08
Outstanding,
December 31, 2000........................................ 1,089,500 13.61
Granted.................................................. 1,220,700 1.91
Cancelled under option offer program..................... (1,083,500) 13.61
Forfeited................................................ (6,000) 14.40
----------
Outstanding,
December 31, 2001........................................ 1,220,700 $ 1.91
==========
The following table summarizes information about options outstanding as of
December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
2001 LIFE PRICE 2001 PRICE
------------ ----------- -------- ------------ --------
1,220,700 9.92 $1.91 848,826 $1.91
30
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
NOTE H -- PENSIONS AND POSTRETIREMENT BENEFITS
The following tables set forth the change in benefit obligation, plan
assets, funded status and amounts recognized in the consolidated balance sheet
for the defined benefit pension and postretirement benefit plans as of December
31, 2001 and 2000:
POSTRETIREMENT
PENSION BENEFITS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ $ 50,707 $ 46,820 $ 21,009 $ 19,720
Service cost....................................... 590 503 179 157
Amendments and other............................... 220 846 -0- -0-
Acquisitions....................................... -0- 2,218 -0- -0-
Interest cost...................................... 3,506 3,529 1,663 1,539
Plan participants' contributions................... -0- -0- 108 108
Actuarial losses (gains)........................... (125) 1,135 2,773 1,793
Benefits paid...................................... (4,334) (4,344) (2,329) (2,308)
-------- -------- -------- --------
Benefit obligation at end of year.................. $ 50,564 $ 50,707 $ 23,403 $ 21,009
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..... $107,903 $106,570 $ -0- $ -0-
Actual return on plan assets....................... (3,071) 1,869 -0- -0-
Acquisitions....................................... -0- 3,808 -0- -0-
Company contributions.............................. -0- -0- 2,221 2,200
Plan participants' contributions................... -0- -0- 108 108
Benefits paid...................................... (4,334) (4,344) (2,329) (2,308)
-------- -------- -------- --------
Fair value of plan assets at end of year........... $100,498 $107,903 $ -0- $ -0-
======== ======== ======== ========
Funded (underfunded) status of the plan............ $ 49,934 $ 57,196 $(23,403) $(21,009)
Unrecognized net transition obligation............. (860) (944) -0- -0-
Unrecognized net actuarial gain.................... (15,175) (28,654) (1,862) (4,663)
Unrecognized prior service cost.................... 1,974 1,982 (486) (565)
-------- -------- -------- --------
Prepaid (accrued) benefit cost..................... $ 35,873 $ 29,580 $(25,751) $(26,237)
======== ======== ======== ========
31
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following tables summarize the assumptions used by the consulting
actuary and the related cost information.
POSTRETIREMENT
PENSION BENEFITS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate...................................... 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets..................... 8.25% 8.25% N/A N/A
Rate of compensation increase...................... 2.50% 2.50% N/A N/A
For measurement purposes, a 6.0% percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2001. The rate was
assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter.
PENSION BENEFITS OTHER BENEFITS
--------------------------- ------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service costs.......................... $ 590 $ 503 $ 561 $ 179 $ 157 $ 150
Interest costs......................... 3,506 3,529 3,387 1,663 1,539 1,449
Expected return on plan assets......... (8,658) (8,599) (7,062) -0- -0- -0-
Transition obligation.................. (56) 23 63 -0- -0- -0-
Amortization of prior service cost..... 363 367 229 (79) (79) (79)
Recognized net actuarial gain.......... (1,720) (2,574) (1,132) (28) (243) (255)
------- ------- ------- ------ ------ ------
Benefit (income) costs................. $(5,975) $(6,751) $(3,954) $1,735 $1,374 $1,265
======= ======= ======= ====== ====== ======
The Company has two non-pension postretirement benefit plans. Health care
benefits are provided on both a contributory and noncontributory basis. The life
insurance plan is primarily noncontributory.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT POINT
INCREASE DECREASE
------------ ------------
Effect on total of service and interest cost components in
2001.................................................... $ 150 $ 128
Effect on post retirement benefit obligation as of
December 31, 2001....................................... $1,505 $1,322
The total contribution charged to pension expense for the Company's defined
contribution plans was $1,382 in 2001, $1,418 in 2000 and $1,158 in 1999.
NOTE I -- LEASES
Rental expense for 2001, 2000 and 1999 was $12,638, $12,816 and $11,814,
respectively. Future minimum lease commitments during each of the five years
following December 31, 2001 are as follows: $9,680 in 2002, $7,427 in 2003,
$4,585 in 2004, $3,525 in 2005, $1,985 in 2006 and $2,825 thereafter.
32
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE J -- INDUSTRY SEGMENTS
The Company operates through three segments: Integrated Logistics Solutions
("ILS"), Aluminum Products and Manufactured Products. ILS is a leading logistics
provider of production components to large, multinational manufacturing
companies, other manufacturers and distributors. In connection with the supply
of such production components, ILS provides a variety of value-added,
cost-effective supply chain management services. The principal customers of ILS
are in the semiconductor equipment, technology, industrial equipment, aerospace
and defense, electrical controls, HVAC, heavy-duty truck, vehicle parts and
accessories, appliances and motors, and lawn and garden equipment industries.
Aluminum Products manufactures cast aluminum components for automotive,
agricultural equipment, heavy-duty truck and construction equipment. 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 original equipment manufacturers and
end-users in the aerospace, automotive, railroad, truck and oil industries.
The Company's sales are made through its own sales organization,
distributors and representatives. Intersegment sales are immaterial and
eliminated in consolidation and are not included in the figures presented.
Intersegment sales are accounted for at values based on market prices. Income
allocated to segments excludes certain corporate expenses and interest expense.
Identifiable assets by industry segment include assets directly identified with
those operations.
Corporate assets generally consist of cash and cash equivalents, deferred
tax assets, property and equipment, and other assets.
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
Net sales:
ILS....................................................... $416,962 $482,274 $443,078
Aluminum products......................................... 84,846 111,370 127,148
Manufactured products..................................... 134,609 161,030 146,996
-------- -------- --------
$636,417 $754,674 $717,222
======== ======== ========
Income (loss) before income taxes and amortization of
goodwill:
ILS....................................................... $ 22,944 $ 42,118 $ 39,217
Aluminum products......................................... (2,327) 4,947 10,925
Manufactured products..................................... (14,287) 12,586 11,214
-------- -------- --------
$ 6,330 $ 59,651 $ 61,356
======== ======== ========
Amortization of goodwill:
ILS....................................................... $ 2,702 $ 2,506 $ 2,336
Aluminum products......................................... 745 739 739
Manufactured products..................................... 286 662 761
-------- -------- --------
$ 3,733 $ 3,907 $ 3,836
======== ======== ========
33
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEAR ENDED DECEMBER 31
------------------------------
2001 2000 1999
-------- -------- --------
Income (loss) before income taxes:
ILS....................................................... $ 20,242 $ 39,612 $ 36,881
Aluminum products......................................... (3,072) 4,208 10,186
Manufactured products..................................... (14,573) 11,924 10,453
-------- -------- --------
2,597 55,744 57,520
Corporate costs........................................... (6,992) (7,113) (4,350)
Interest expense.......................................... (31,108) (30,812) (24,752)
Non-operating items, net.................................. (1,850) (10,118) -0-
-------- -------- --------
$(37,353) $ 7,701 $ 28,418
======== ======== ========
Identifiable assets:
ILS....................................................... $312,288 $349,444 $343,522
Aluminum products......................................... 95,021 99,208 97,717
Manufactured products..................................... 139,045 164,524 170,267
General corporate......................................... 44,022 33,344 18,375
-------- -------- --------
$590,376 $646,520 $629,881
======== ======== ========
Depreciation and amortization expense:
ILS....................................................... $ 8,441 $ 8,096 $ 7,710
Aluminum products......................................... 5,532 5,145 4,929
Manufactured products..................................... 5,632 6,379 5,864
General corporate......................................... 306 428 195
-------- -------- --------
$ 19,911 $ 20,048 $ 18,698
======== ======== ========
Capital expenditures:
ILS....................................................... $ 1,972 $ 3,126 $ 6,046
Aluminum products......................................... 3,160 7,302 4,963
Manufactured products..................................... 8,352 14,190 8,904
General corporate......................................... 439 350 2,737
-------- -------- --------
$ 13,923 $ 24,968 $ 22,650
======== ======== ========
For the years ended December 31, 2001 and 1999, sales to no single customer
were greater than 10% of consolidated net sales. For the year ended December 31,
2000, all three segments of the Company had sales to Ford Motor Company which
aggregated $73,039 and represented approximately 10% of consolidated net sales.
In 2001, approximately 88% of the Company's net sales were within the
United States, none of the net sales to any foreign country represented more
than 7% of the Company's total sales and approximately 91% of the Company's
assets are maintained in the United States.
34
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31
----------------------------
2001 2000 1999
-------- ------- -------
NUMERATOR
Net income (loss)........................................... $(25,953) $ 518 $16,254
======== ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted average
shares.................................................... 10,434 10,492 10,685
Effect of dilutive securities:
Employee stock options.................................... (a) 35 86
-------- ------- -------
Denominator for diluted earnings per share-weighted-average
shares and assumed conversions............................ 10,434 10,527 10,771
Net income (loss) per common share -- basic................. $ (2.49) $ .05 $ 1.52
======== ======= =======
Net income (loss) per common share -- diluted............... $ (2.49) $ .05 $ 1.51
======== ======= =======
(a) The addition of 41 shares in 2001 would result in anti-dilution.
NOTE L -- NON-OPERATING ITEMS, NET
In June 2000, the Company's Cicero Flexible Products plant was destroyed in
a fire. For the year ended December 31, 2000, the Company received a partial
settlement from its insurance carrier primarily reflecting the replacement cost
of fixed assets, and recognized a net gain of $5.2 million. During 2001, the
Company expensed $1.9 million of non-recurring business interruption costs,
which were not covered by insurance. In June 2000, the Company completed the
sale of substantially all of the assets of Kay Home Products and recorded a
pretax loss of approximately $15.3 million.
NOTE M -- RESTRUCTURING AND IMPAIRMENT CHARGES
During 2001, the Company recorded restructuring and asset impairment
charges aggregating $28.5 million primarily related to management decisions, as
approved by the board of directors on December 20, 2001, to exit certain
under-performing product lines and to close or consolidate certain operating
facilities beginning in January 2002. The Company's actions included 1)
discontinuing the businesses of Ajax Manufacturing and Castle Rubber, 2) closure
of the Cicero Flexible Products' manufacturing facility and the discontinuance
of certain product lines, 3) inventory write-downs and other restructuring
actions at St. Louis Screw & Bolt and Tocco, 4) closure of 20 Integrated
Logistics' branch warehouses (of which 11 were closed as of December 31, 2001)
and two ILS manufacturing plants, 5) closure of an Aluminum Products' machining
facility, and 6) write-down of certain Corporate assets to current value. The
Company expects that the restructuring actions will be substantially completed
during 2002.
The charges are composed of 1) $11.3 million for the impairment of property
and equipment and other long-term assets, 2) $10.3 million to cost of goods sold
primarily to write-down inventory of
35
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
discontinued businesses and product lines to current market value, and 3) $6.9
million for severance (325 employees) and exit costs. Below is a summary of
these charges by segment:
COST OF
PRODUCTS ASSET RESTRUCTURING
SOLD IMPAIRMENT & SEVERANCE TOTAL
---------- ---------- ------------- -------
Manufactured Products......................... $ 8,599 $10,080 $2,030 $20,709
ILS........................................... 1,700 600 4,070 6,370
Aluminum Products............................. -- -- 783 783
Corporate..................................... -- 600 -- 600
------- ------- ------ -------
$10,299 $11,280 $6,883 $28,462
======= ======= ====== =======
At December 31, 2001, the Company accrued $4,152 for unpaid severance and
exit costs and recorded assets held for sale at their estimated current value of
$9,749 for inventory and $12,984 for property, equipment and other long-term
assets. Net sales for Ajax Manufacturing and Castle Rubber were $13,413 in 2001,
$16,298 in 2000 and $12,851 in 1999. Operating income (loss), excluding the
restructuring and impairment charges for these entities were $(1,179) in 2001,
$669 in 2000 and $136 in 1999.
36
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.......................................... $169,411 $164,162 $156,183 $146,661
Gross profit....................................... 27,632 25,445 24,105 8,838
Net income (loss).................................. $ 299 $ (1,533) $ (2,700) $(22,019)
======== ======== ======== ========
Diluted earnings (loss) per share.................. $ .03 $ (.15) $ (.26) $ (2.11)
======== ======== ======== ========
QUARTER ENDED
-----------------------------------------
2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.......................................... $206,360 $204,539 $170,923 $172,852
Gross profit....................................... 36,277 37,293 27,706 28,193
Net income (loss).................................. $ 4,560 $ (8,267) $ 4,798 $ (573)
======== ======== ======== ========
Diluted earnings (loss) per share.................. $ .43 $ (.79) $ .46 $ (.05)
======== ======== ======== ========
NOTE 1 -- On June 30, 2000, the Company sold substantially all of the assets of
Kay Home Products for cash and recorded an after-tax loss of $13.2
million.
NOTE 2 -- The Company recorded interim payments from its insurance carrier
related primarily to replacement of property, plant and equipment
destroyed at its Cicero Flexible Products facility which resulted in a
pretax gain of $4.7 million recorded in the quarter ended September
30, 2000 and $.5 million recorded in the quarter ended December 31,
2000. In 2001, the Company expensed $1.0 million in the quarter ended
March 31, 2001 and $.9 million in the quarter ended June 30, 2001 of
fire-related non-recurring business interruption costs, which were not
covered by insurance.
NOTE 3 -- In the quarter ended December 31, 2001, the Company recorded primarily
non-cash charges for restructuring and impairment aggregating $27.5
million ($18.4 million after tax, or $1.76 per share). Restructuring
actions including consolidation of manufacturing plants and logistics
warehouses and discontinuation of product lines. Of these charges,
$10.3 million related to discontinued product lines are included in
cost of products sold. During the first three quarters of 2001, the
Company recorded $1.0 million of restructuring and impairment charges.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in nor disagreements with Park-Ohio's independent
auditors on accounting and financial disclosure matters within the two-year
period ended December 31, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. Information relating
to executive officers is contained under Part I of this Annual Report on Form
10-K.
37
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained under the
headings "Certain Matters Pertaining to the Board of Directors" and "Executive
Compensation" in the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference from the material contained under the caption "Principal Shareholders"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference from the material contained under the caption "Certain Transactions"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
PAGE
----
Report of Ernst & Young, LLP, Independent Auditors.......... 19
Financial Statements........................................
Consolidated balance sheets -- December 31, 2001 and
2000................................................... 20
Consolidated statements of operations -- years ended
December 31, 2001, 2000 and 1999....................... 21
Consolidated statements of shareholders' equity -- years
ended December 31, 2001, 2000 and 1999................. 22
Consolidated statements of cash flows -- years ended
December 31, 2001, 2000 and 1999....................... 23
Notes to consolidated financial statements................ 24
Selected quarterly financial data (unaudited) -- years ended
December 31, 2001 and 2000................................ 37
(2) Financial Statement Schedules
All Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and, therefore, have been
omitted.
(3) Exhibits:
The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index
immediately preceding such exhibits, incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 2001:
On December 14, 2001, the Company filed a report on Form 8-K which indicated
that on November 14, 2001, Park-Ohio Industries had entered into a Third
Amendment to its Credit and Security Agreement.
38
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PARK-OHIO HOLDINGS CORP.
(Registrant)
By: /s/ RICHARD P. ELLIOTT
------------------------------------
Richard P. Elliott, Vice President
and Chief Financial Officer
Date: March 28, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
* Chairman, Chief Executive Officer and
--------------------------------------------- President (Principal Executive Officer)
Edward F. Crawford and Director
* Vice President -- and Chief Financial
--------------------------------------------- Officer (Principal Financial and
Richard P. Elliott Accounting Officer)
* Senior Vice President and Director
---------------------------------------------
Matthew V. Crawford
* Director
---------------------------------------------
Kevin R. Greene
* Director March 28, 2002
---------------------------------------------
Lewis E. Hatch, Jr.
* Director
---------------------------------------------
Thomas E. McGinty
* Director
---------------------------------------------
Lawrence O. Selhorst
* Director
---------------------------------------------
Ronna Romney
* Director
---------------------------------------------
James W. Wert
* The undersigned, pursuant to a Power of Attorney executed by each of the
Directors and officers identified above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this report on behalf of each of the persons noted above, in the capacities
indicated.
March 28, 2002
By: /s/ RONALD J. COZEAN
------------------------------------
Ronald J. Cozean, Attorney-in-Fact
39
ANNUAL REPORT ON FORM 10-K
PARK-OHIO HOLDINGS CORP.
FOR THE YEAR ENDED DECEMBER 31, 2001
EXHIBIT INDEX
EXHIBIT
-------
3.1 Amended and Restated Articles of Incorporation of Park-Ohio
Holdings Corp. (filed as Exhibit 3.1 to the Form 10-K of
Park-Ohio Holdings Corp. for the year ended December 31,
1998, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
3.2 Code of Regulations of Park-Ohio Holdings Corp. (filed as
Exhibit 3.2 to the Form 10-K of Park-Ohio Holdings Corp. for
the year ended December 31, 1998, SEC File No. 000-03134 and
incorporated by reference and made a part hereof)
4.1 Indenture, dated June 3, 1999 by and among Park-Ohio
Industries, Inc. and Norwest Bank Minnesota, N.A., as
trustee (filed as Exhibit 4.2 of the Company's Registration
Statement on Form S-4, filed on July 23, 1999, SEC File No.
333-83117 and incorporated by reference and made a part
hereof)
4.2 Credit and Security Agreement among Park-Ohio Industries,
Inc., and various financial institutions dated December 22,
2000 (filed as Exhibit 4.2 to the Form 10-K of Park-Ohio
Holdings Corp. for the year ended December 31, 2000, SEC
File No. 000-03134 and incorporated by reference and made a
part hereof)
4.3 First amendment, dated March 12, 2001, to the Credit and
Security Agreement among Park-Ohio Industries, Inc. and
various financial institutions (filed as Exhibit 4.2 to the
Form 10-K of Park-Ohio Holdings Corp. for the year ended
December 31, 2000, SEC File No. 000-03134 and incorporated
by reference and made a part hereof)
4.4 Second amendment, dated June 30, 2001, to the Credit and
Security Agreement among Park-Ohio Industries, Inc. and
various financial institutions (filed as Exhibit 4 to the
Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended
June 30, 2001, SEC File No. 000-03134 and incorporated by
reference and made a part hereof)
4.5 Third amendment, dated November 14, 2001, to the Credit and
Security Agreement among Park-Ohio Industries, Inc. and
various financial institutions (filed as Exhibit 4 to the
Form 8-K of Park-Ohio Holdings Corp. dated December 14,
2001, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
4.6 Fourth amendment, dated as of December 31, 2001, to the
Credit and Security Agreement among Park-Ohio Industries,
Inc. and various financial institutions
10.1 Form of Indemnification Agreement entered into between
Park-Ohio Holdings Corp. and each of its directors and
certain officers (filed as Exhibit 10.1 to the Form 10-K of
Park-Ohio Holdings Corp. for the year ended December 31,
1998, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
10.2* Amended and Restated 1998 Long-Term Incentive Plan (filed as
Appendix A to the Definitive Proxy Statement of Park-Ohio
Holdings Corp., filed on April 23, 2001, SEC File No.
000-03134 and incorporated by reference and made a part
hereof)
12.1 Computation of Ratios
21.1 List of Subsidiaries of Park-Ohio Holdings Corp.
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney
---------------
* Reflects management contract or other compensatory arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Report.
40