- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) <Table> <S> <C> [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____________ TO ____________ </Table> COMMISSION FILE NO. 0-3134 PARK-OHIO HOLDINGS CORP. (Exact name of registrant as specified in its charter) <Table> <S> <C> OHIO 34-1867219 - ----------------------------------------- ----------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23000 EUCLID AVENUE, CLEVELAND, OHIO 44117 - ----------------------------------------- ----------------------------------------- (Address of principal executive offices) (Zip Code) </Table> REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200 PARK-OHIO HOLDINGS CORP. IS A SUCCESSOR ISSUER TO PARK-OHIO INDUSTRIES, INC. Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) Has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12 b-2). YES [ ] NO [X] Number of shares outstanding of registrant's Common Stock, par value $1.00 per share, as of September 30, 2003: 10,501,186. The Exhibit Index is located on page 24. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES INDEX <Table> <S> <C> PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Consolidated balance sheets -- September 30, 2003 and December 31, 2002 Consolidated statements of operations -- Three months and nine months ended September 30, 2003 and 2002 Consolidated statement of shareholders' equity -- Nine months ended September 30, 2003 Consolidated statements of cash flows -- Nine months ended September 30, 2003 and 2002 Notes to consolidated financial statements -- September 30, 2003 Independent accountants' review report Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk Item 4 Controls and Procedures PART II OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders Item 6 Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX </Table> 2
PART I FINANCIAL INFORMATION 3
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <Table> <Caption> (UNAUDITED) SEPTEMBER 30 DECEMBER 31 2003 2002 ------------ ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents................................. $ 1,682 $ 8,812 Accounts receivable, less allowances for doubtful accounts of $3,748 at September 30, 2003 and $3,313 at December 31, 2002............................................... 106,783 101,477 Inventories............................................... 153,756 156,067 Other current assets...................................... 10,894 8,626 -------- -------- Total Current Assets.............................. 273,115 274,982 Property, Plant and Equipment............................... 237,825 227,426 Less accumulated depreciation............................. 127,402 114,302 -------- -------- 110,423 113,124 Other Assets Goodwill.................................................. 82,111 81,464 Net assets held for sale.................................. 10,193 19,205 Prepaid pension and other................................. 56,045 52,083 -------- -------- $531,887 $540,858 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Trade accounts payable.................................... $ 61,985 $ 74,868 Accrued expenses.......................................... 56,811 48,907 Current portion of long-term liabilities.................. 2,492 3,056 -------- -------- Total Current Liabilities......................... 121,288 126,831 Long-Term Liabilities, less current portion 9.25% Senior Subordinated Notes........................... 199,930 199,930 Revolving Credit maturing on July 31, 2007................ 104,500 114,000 Other long-term debt...................................... 10,169 9,886 Other postretirement benefits............................. 23,079 23,829 Other..................................................... 2,663 3,483 -------- -------- 340,341 351,128 Shareholders' Equity Capital stock, par value $1 per share: Serial Preferred Stock................................. -0- -0- Common Stock........................................... 11,227 11,210 Additional paid-in capital................................ 55,802 56,135 Retained earnings......................................... 18,049 12,828 Treasury stock, at cost................................... (8,864) (9,092) Accumulated other comprehensive (loss).................... (5,956) (8,096) Unearned compensation -- restricted stock awards.......... -0- (86) -------- -------- 70,258 62,899 -------- -------- $531,887 $540,858 ======== ======== </Table> Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, as restated for the Company's change in accounting for inventories at certain subsidiaries as discussed in Note B. However, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS -- EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Net sales.......................................... $146,830 $157,832 $461,596 $478,300 Cost of products sold.............................. 125,078 134,639 389,588 409,029 -------- -------- -------- -------- Gross profit..................................... 21,752 23,193 72,008 69,271 Selling, general and administrative expenses....... 15,008 14,496 45,707 43,450 Restructuring and impairment charges............... -0- 1,006 -0- 5,262 -------- -------- -------- -------- Operating income................................. 6,744 7,691 26,301 20,559 Interest expense................................... 6,512 7,024 19,964 20,663 -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of accounting change................... 232 667 6,337 (104) Income tax......................................... 144 909 1,116 610 -------- -------- -------- -------- Income (loss) before cumulative effect of accounting change............................. 88 (242) 5,221 (714) Cumulative effect of accounting change............. -0- -0- -0- (48,799) -------- -------- -------- -------- Net income (loss)................................ $ 88 $ (242) $ 5,221 $(49,513) ======== ======== ======== ======== Amounts per common share: Basic -- Income (loss) before cumulative effect of accounting change.................... $ .01 $ (.02) $ .50 $ (.07) -- Cumulative effect of accounting change..................................... -0- -0- -0- (4.68) -------- -------- -------- -------- -- Net income (loss)....................... $ .01 $ (.02) $ .50 $ (4.75) ======== ======== ======== ======== Diluted -- Income (loss) before cumulative effect of accounting change.................. $ .01 $ (.02) $ .48 $ (.07) -- Cumulative effect of accounting change................................... -0- -0- -0- (4.68) -------- -------- -------- -------- -- Net income (loss)..................... $ .01 $ (.02) $ .48 $ (4.75) ======== ======== ======== ======== Common shares used in the computation: Basic............................................ 10,501 10,434 10,500 10,434 ======== ======== ======== ======== Diluted.......................................... 11,016 10,434 10,937 10,434 ======== ======== ======== ======== </Table> See notes to consolidated financial statements. 5
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) <Table> <Caption> ACCUMULATED OTHER COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE UNEARNED STOCK CAPITAL EARNINGS STOCK (LOSS) COMPENSATION TOTAL ------- ------- -------- -------- ------------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> <C> Balance January 1, 2003, as previously stated........... $11,210 $56,135 $10,087 $(9,092) $(8,096) $(86) $60,158 Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (see Note B)................ 2,741 2,741 ------- ------- ------- ------- ------- ---- ------- Balance January 1, 2003, as restated.................... 11,210 56,135 12,828 (9,092) (8,096) (86) 62,899 Comprehensive income: Net income.................. 5,221 5,221 Foreign currency translation adjustment................ 2,140 2,140 ------- Comprehensive income........ 7,361 Amortization of restricted stock....................... 86 86 Exercise of stock options..... 17 (333) 228 (88) ------- ------- ------- ------- ------- ---- ------- Balance September 30, 2003.... $11,227 $55,802 $18,049 $(8,864) $(5,956) $-0- $70,258 ======= ======= ======= ======= ======= ==== ======= </Table> See notes to consolidated financial statements. 6
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <Table> <Caption> NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2003 2002 ---------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income (loss)......................................... $ 5,221 $(49,513) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting.............. -0- 48,799 Depreciation and amortization.......................... 12,061 12,720 Changes in operating assets and liabilities: Accounts receivable.................................... (5,306) (17,461) Inventories and other current assets................... 42 5,467 Accounts payable and accrued expenses.................. (4,980) 28,507 Other.................................................. (3,339) (10,875) --------- -------- Net Cash Provided by Operating Activities............ 3,699 17,644 INVESTING ACTIVITIES Purchases of property, plant and equipment, net........... (8,298) (10,195) Proceeds from sale of assets held for sale................ 7,340 2,486 Acquisitions.............................................. -0- (5,748) --------- -------- Net Cash Used by Investing Activities.................. (958) (13,457) FINANCING ACTIVITIES Proceeds from bank arrangements........................... 112,000 1,510 Repayment of old revolving credit agreement............... (112,000) -0- Payments on debt.......................................... (9,782) (2,604) Exercise of stock options................................. (89) -0- --------- -------- Net Cash Used by Financing Activities.................. (9,871) (1,094) --------- -------- (Decrease) Increase in Cash and Cash Equivalents............ (7,130) 3,093 Cash and Cash Equivalents at Beginning of Period............ 8,812 3,872 --------- -------- Cash and Cash Equivalents at End of Period.................. $ 1,682 $ 6,965 ========= ======== Taxes refunded.............................................. $ (881) $ (4,207) Interest paid............................................... 14,902 14,560 </Table> See notes to consolidated financial statements. 7
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 (AMOUNTS IN THOUSANDS -- EXCEPT PER SHARE DATA) NOTE A -- BASIS OF PRESENTATION The consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries ("the Company"). All significant intercompany transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Certain amounts have been reclassified to conform to current year presentation. NOTE B -- ACCOUNTING CHANGE As described in Note A to the consolidated financial statements for the year ended December 31, 2002, inventories are stated at the lower of cost or market value. The first-in, first-out (FIFO) method was used to determine cost for 85% of inventories and the last-in, first-out (LIFO) method was used to determine cost for the remaining 15% of inventories. Effective June 30, 2003, the Company changed the method of accounting for the 15% of its inventories utilizing the LIFO method to the FIFO method. The Company believes that this change is preferable for the following reasons: 1) the change conforms all of its inventories to one method of determining cost, which is the FIFO method; 2) the costs of the Company's inventories have remained fairly level during the past several years, which has substantially negated the benefits of the LIFO method (a better matching of current costs with current revenues in periods of rising costs); 3) the impact of utilizing the LIFO method has had an insignificant impact on the Company's consolidated net income (loss) during the past several years; and 4) the FIFO method results in the valuation of inventories at current costs on the consolidated balance sheet, which provides a more meaningful presentation for investors and financial institutions. As required under accounting principles generally accepted in the United States, the Company has restated the consolidated balance sheet as of December 31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7 million), and increase shareholders' equity ($2.7 million). Previously reported results of operations have not been restated because the impact of utilizing the LIFO method had an insignificant impact on the Company's reported amounts for consolidated net income (loss). NOTE C -- ACQUISITION AND DISPOSITIONS During the first quarter of 2003, the Company completed the sale of substantially all of the assets of Green Bearing ("Green") and St. Louis Screw and Bolt ("St. Louis Screw") for cash of approximately $7.3 million. No gain or loss was recorded on the sale. Green and St. Louis Screw were non-core businesses in the ILS Segment and Manufactured Products Segment, respectively, and had been identified as businesses the Company was selling as part of its restructuring activities during 2002 and 2001. 8
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) On September 10, 2002, the Company acquired substantially all of the assets of Ajax Magnethermic Corporation ("Ajax"), a manufacturer of induction heating and melting equipment. The purchase price of approximately $5.5 million and the results of operations of Ajax prior to its date of acquisition were not deemed significant as defined in Regulation S-X. On April 26, 2002, the Company completed the sale of substantially all of the assets of Castle Rubber Company ("Castle Rubber") for cash of approximately $2.5 million. Castle Rubber, a non-core business in the Manufactured Products Segment, had been identified as a business the Company was discontinuing as part of its restructuring activities during 2001. NOTE D -- INVENTORIES The components of inventory consist of the following: <Table> <Caption> SEPTEMBER 30 DECEMBER 31 2003 2002 ------------ ----------- <S> <C> <C> In process and finished goods............................... $133,903 $136,430 Raw materials and supplies.................................. 19,853 19,637 -------- -------- $153,756 $156,067 ======== ======== </Table> NOTE E -- ADOPTION OF FAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" Effective January 1, 2002, the Company adopted FAS 142, "Goodwill and Other Intangible Assets". Under this standard, goodwill is no longer amortized but is subject to an impairment test at least annually. The Company has selected October 1 as its annual testing date. The Company, with the assistance of an outside consultant, completed the transitional impairment review of goodwill during the fourth quarter of 2002 and recorded a non-cash charge for goodwill impairment which aggregated $48,799. In accordance with the provisions of FAS 142, the charge has been accounted for as a cumulative effect of a change in accounting principle, retroactive to January 1, 2002. NOTE F -- SHAREHOLDERS' EQUITY At September 30, 2003, capital stock consists of (i) Serial Preferred Stock, of which 632,470 shares were authorized and none were issued, and (ii) Common Stock, of which 40,000,000 shares were authorized and 10,501,186 shares were issued and outstanding. 9
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE G -- NET INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- ------------------ 2003 2002 2003 2002 -------- -------- ------- -------- <S> <C> <C> <C> <C> NUMERATOR Income (loss) before cumulative effect of accounting change............................ $ 88 $ (242) $ 5,221 $ (714) Cumulative effect of accounting change......... -0- -0- -0- (48,799) ------- ------- ------- -------- Net income (loss).............................. $ 88 $ (242) $ 5,221 $(49,513) ======= ======= ======= ======== DENOMINATOR Denominator for basic earnings per share-weighted average shares................ 10,501 10,434 10,500 10,434 Effect of diluted securities: Employee stock options (a)................... 515 -0- 437 -0- ------- ------- ------- -------- Denominator for diluted earnings per share -- weighted average shares and assumed conversions.................................. 11,016 10,434 10,937 10,434 ======= ======= ======= ======== Amounts per common share: Basic -- Income (loss) before cumulative effect of accounting change....... $ .01 $ (.02) $ .50 $ (.07) -- Cumulative effect of accounting change.............................. -0- -0- -0- (4.68) ------- ------- ------- -------- -- Net income (loss)................... $ .01 $ (.02) $ .50 $ (4.75) ======= ======= ======= ======== Diluted -- Income (loss) before cumulative effect of accounting change..... $ .01 $ (.02) $ .48 $ (.07) -- Cumulative effect of accounting change............................ -0- -0- -0- (4.68) ------- ------- ------- -------- -- Net income (loss)................. $ .01 $ (.02) $ .48 $ (4.75) ======= ======= ======= ======== </Table> - --------------- (a) The addition of 445 shares for both the three months and nine months ended September 30, 2002 would result in anti-dilution. NOTE H -- ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," ("FAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when a legal liability is incurred. FAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and requires a guarantor to recognize, at the inception of certain guarantees, a 10
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has adopted the provisions of FIN 45 relating to initial recognition and measurements of guarantor liabilities, which are effective for qualifying guarantees entered into or modified after December 31, 2002. The adoption did not have a material impact on the consolidated financial statements. On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment to FASB Statement No. 123" ("FAS 148"). FAS 148 amends the Accounting for Stock-Based Compensation to provide alternative methods of transition to FAS 123's fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provision of FAS 123 and Accounting Principles Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Statement is effective for fiscal years beginning after December 15, 2002. The Company has elected to continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plan, as permitted under FAS 123 and FAS 148. Accordingly, no compensation cost has been recognized for its stock option plan. However, the Company recognizes compensation expense resulting from fixed awards of restricted shares, which is measured at the date of grant and expensed over the vesting period. Had compensation cost for stock options granted been determined on the fair value method of FAS 123, the Company's net income (loss) and earnings (loss) per share would have been effected as follows: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ----------------- 2003 2002 2003 2002 ---- ----- ------ -------- <S> <C> <C> <C> <C> Net income (loss), as reported..................... $ 88 $(242) $5,221 $(49,513) Total stock-based employee compensation, net of tax.............................................. (98) (66) (234) (196) ---- ----- ------ -------- Pro forma net income (loss)........................ $(10) $(308) $4,987 $(49,709) ==== ===== ====== ======== Earnings (loss) per share: Basic, as reported................................. $.01 $(.02) $ .50 $ (4.75) Basic, pro forma................................... .00 (.03) .48 (4.76) Diluted, as reported............................... .01 (.02) .48 (4.75) Diluted, pro forma................................. .00 (.03) .46 (4.76) </Table> In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which clarifies the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," relating to consolidation of certain entities. First, FIN 46 will require identification of the Company's participation in variable interest entities ("VIEs"), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. The Company's adoption of FIN 46 had no effect on its financial position, results of operations and cash flows. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("FAS 149"). FAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133, "Accounting for Derivative Instruments and Hedging 11
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Activities." FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company's adoption of FAS 149 had no effect on its financial position, results of operations and cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. FAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted FAS 150 on June 1, 2003. The adoption of this statement had no effect on the Company's financial position, results of operations or cash flows. NOTE I -- SEGMENTS The Company operates through three segments: Integrated Logistics Solutions ("ILS"), Aluminum Products and Manufactured Products. ILS is a leading supply chain 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. 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. Intersegment sales are immaterial. 12
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Results by business segment were as follows: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales, including intersegment sales: ILS...................................... $ 89,436 $104,769 $278,312 $304,511 Aluminum products........................ 20,045 24,729 68,018 81,232 Manufactured products.................... 37,349 28,334 115,266 92,557 -------- -------- -------- -------- $146,830 $157,832 $461,596 $478,300 ======== ======== ======== ======== Income (loss) before income taxes and cumulative effect of accounting change: ILS...................................... $ 5,847 $ 7,676 $ 17,932 $ 18,042 Aluminum products........................ 1,901 1,367 8,701 5,118 Manufactured products.................... 563 (115) 4,309 1,053 -------- -------- -------- -------- 8,311 8,928 30,942 24,213 Corporate costs............................ (1,567) (1,237) (4,641) (3,654) Interest expense........................... (6,512) (7,024) (19,964) (20,663) -------- -------- -------- -------- $ 232 $ 667 $ 6,337 $ (104) ======== ======== ======== ======== </Table> <Table> <Caption> SEPTEMBER 30 DECEMBER 31 2003 2002 ------------ ----------- <S> <C> <C> Identifiable assets were as follows: ILS....................................................... $263,464 $273,442 Aluminum products......................................... 76,684 79,797 Manufactured products..................................... 151,229 151,880 General corporate......................................... 40,510 35,739 -------- -------- $531,887 $540,858 ======== ======== </Table> NOTE J -- COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) was as follows: <Table> <Caption> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------- ----------------- 2003 2002 2003 2002 ------ ----- ------ -------- <S> <C> <C> <C> <C> Net income (loss)................................ $ 88 $(242) $5,221 $(49,513) Foreign currency translation..................... (630) (697) 2,140 1,193 ------ ----- ------ -------- Total comprehensive income (loss)................ $ (542) $(939) $7,361 $(48,320) ====== ===== ====== ======== </Table> 13
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The components of accumulated comprehensive loss at September 30, 2003 and December 31, 2002 are as follows: <Table> <Caption> SEPTEMBER 30 DECEMBER 31 2003 2002 ------------ ----------- <S> <C> <C> Foreign currency translation adjustment..................... $ 401 $2,541 Minimum pension liability................................... 5,555 5,555 ------ ------ $5,956 $8,096 ====== ====== </Table> NOTE K -- RESTRUCTURING ACTIVITIES The Company responded to the economic downturn by reducing costs in a variety of ways, including restructuring businesses and selling non-core manufacturing assets. These activities, which included asset write-downs and other exit costs related to the shutdown of facilities, generated restructuring and asset impairment charges of $19.2 million and $28.5 million in 2002 and 2001, respectively (of which $5.6 million (490 employees) in 2002 and $6.9 million (525 employees) in 2001 related to severance and exit costs). For further details on the restructuring plan, see Note N to the audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. During the first quarter of 2003, the Company completed the sale of substantially all of the assets of Green and St. Louis Screw for cash of approximately $7.3 million. No gain or loss was recorded on these sales. Both of these businesses had been identified as businesses the Company was selling as part of its restructuring activities. The accrued liability balance for severance and exit costs and related cash payments consisted of: <Table> <S> <C> 2001 Severance and exit charges.................................. $ 6,883 Cash payments............................................... (2,731) ------- Balance at December 31, 2001................................ 4,152 2002 Severance and exit charges.................................. 5,599 Cash payments............................................... (5,706) ------- Balance at December 31, 2002................................ 4,045 2003 Cash payments............................................... (2,095) ------- Balance at September 30, 2003............................... $ 1,950 ======= </Table> As of September 30, 2003, all of the 525 employees identified in 2001 and all but 18 of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan consisted of hourly and salaried employees at various operating facilities due to either closure or consolidation. Net sales for the businesses that were included in net assets held for sale were $1,139 and $14,210 for the nine months ended September 30, 2003 and 2002, respectively. Operating income (loss) for these entities was $(8) and $(102) for the nine months ended September 30, 2003 and 2002, respectively. 14
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE L -- ACCRUED WARRANTY COSTS The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company's product warranty liability: <Table> <S> <C> Balance at January 1, 2003.................................. $ 3,068 Claims paid during the year............................... (2,138) Additional warranties issued during the year.............. 714 ------- Balance at September 30, 2003............................... $ 1,644 ======= </Table> NOTE M -- INCOME TAXES The effective income tax rate for the three-month period ended September 30, 2003 was 62%, compared to 136% for the corresponding period in 2002. The effective income tax rate for the nine-month period ended September 30, 2003 was 18%. Only foreign and state income taxes were provided for in 2003. The federal income tax provision was offset by the recognition of the benefit of net operating loss carryforwards for which valuation allowances had been provided for prior to 2003. At December 31, 2002, the Company had net operating loss carryforwards of approximately $25.6 million. Tax benefits related to these carryforwards were fully reserved in 2002, because the Company was in a three-year cumulative loss position. NOTE N -- DEBT RESTRUCTURING On July 30, 2003, the Company entered into a new, four-year revolving credit agreement with a group of banks under which it may borrow up to $165.0 million secured by substantially all the assets of the Company. On November 5, 2003, this credit agreement was amended to include the Company's subsidiaries in Canada and the United Kingdom. Proceeds from this credit agreement, as amended ("Credit Agreement"), which expires on July 30, 2007, were used to repay the existing borrowings under the old credit agreement. Amounts borrowed under the Credit Agreement may be borrowed at Park-Ohio's election at either (i) LIBOR plus 175 -- 250 basis points or (ii) the bank's prime lending rate. The interest rate is dependent on the Company's Debt Service Coverage Ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing capacity to the Company based on percentages of eligible accounts receivable, inventory and fixed assets. As of September 30, 2003, the Company had $104.5 million outstanding under the Credit Agreement. After giving effect to the amendment, as of September 30, 2003, the Credit Agreement provided approximately $40.0 million of unused borrowing capacity. 15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders Park-Ohio Holdings Corp. We have reviewed the accompanying consolidated balance sheet of Park-Ohio Holdings Corp. and subsidiaries as of September 30, 2003 and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, the consolidated statement of shareholders' equity for the nine-month period ended September 30, 2003 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based upon our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Park-Ohio Holdings Corp. and subsidiaries as of December 31, 2002 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 25, 2003, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph for a change in accounting for goodwill. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. As discussed in Note B to the consolidated financial statements, effective June 30, 2003, the Company changed its method of accounting for inventories at certain subsidiaries. /s/ Ernst & Young LLP Cleveland, Ohio November 12, 2003 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial information for the three-month and nine-month periods ended September 30, 2003 is not directly comparable to the financial information for the same periods in 2002 primarily due to restructuring and impairment charges, divestitures and acquisitions. Restructuring charges of $1.0 million and $5.3 million were recorded in the third quarter and the first nine months of 2002, respectively. The Company divested Castle Rubber in second quarter 2002, and Green and St. Louis Screw in first quarter 2003. The Company purchased the assets of Ajax in third quarter 2002. OVERVIEW The Company operates through three segments, ILS, Aluminum Products and Manufactured Products. ILS is a leading supply chain logistics provider of production components, principally to large OEM manufacturers. 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, heavy-duty truck, industrial equipment, aerospace and defense, electrical controls, HVAC, vehicle parts and accessories, appliances, 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 OEMs and end-users in the aerospace, automotive, steel, forging, railroad, truck, oil, food processing and consumer appliance industries. The Company's sales volumes and profitability declined during 2001, due to overall weakness in the manufacturing economy, and particularly to contraction in the heavy-duty truck and automotive industries. Despite these sales declines, the Company retained or gained market share in most major markets served. The Company responded to this downturn by reducing costs, increasing prices on targeted products, restructuring many of its businesses and selling non-core manufacturing assets. The Company continued and extended restructuring its businesses through 2001 and 2002, closing 20 supply chain logistics facilities, and closing or selling eight manufacturing plants in those two years. With regard to these actions, the Company recorded restructuring and impairment charges of $28.5 million in 2001 and $19.2 million in 2002. Management's actions were aimed to position the Company for increased profitability when the manufacturing economy stabilizes and returns to growth. The Company's actions resulted in increased operating income in 2002 compared to 2001, despite flat sales. Operating income rose to $16.2 million in 2002, after restructuring and impairment charges of $19.2 million, compared to an operating loss of $4.4 million in 2001, after restructuring and impairment charges of $28.5 million and goodwill amortization of $3.7 million. The Company's profitability improved again in the first nine months of 2003, on lower sales. Compared to the first nine months of 2002, operating income increased 28%, or $5.7 million, to $26.3 million, on a 3% sales decline. Operating income in the first nine months of 2002 was negatively impacted by $5.3 million in restructuring charges. During the first nine months of 2003, the Company continued to reduce costs and implement its restructuring plan, including consolidating two logistics facilities and selling two additional non- core manufacturing businesses. The Company sold substantially all the assets of St. Louis Screw on January 29, 2003 and Green on February 21, 2003 for cash totaling approximately $7.3 million. The Company sold substantially all the assets of Castle Rubber on April 26, 2002 for cash of approximately $2.5 million. The Company purchased substantially all the assets of Ajax on September 10, 2002 for cash of approximately $5.5 million. 17
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS 142, the Company reviewed its goodwill and other intangible assets and recorded a non-cash goodwill impairment charge of $48.8 million, which was recorded as the cumulative effect of a change in accounting principle effective January 1, 2002. Effective June 30, 2003, the Company changed its method of accounting for the 15% of its inventories utilizing the LIFO method to the FIFO method. As required by generally accepted accounting principles, the Company has restated its balance sheet as of December 31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7 million), and increase shareholders' equity ($2.7 million). Previously reported results of operations have not been restated because the impact of utilizing the LIFO method had an insignificant impact on the Company's reported amounts for consolidated net income (loss). RESULTS OF OPERATIONS Nine Months 2003 versus Nine Months 2002 Net sales decreased by $16.7 million, or 3%, from $478.3 million for the first nine months of 2002 to $461.6 million in 2003. ILS net sales declined 9%, or $26.2 million, of which $8.6 million related to the sale of Green and the early termination of the pharmaceutical sales contract. The remainder related to continued volume weakness in customer industries. Aluminum Products net sales were 16%, or $13.2 million lower, primarily due to the ending of $9.7 million of sales contracts, a significant portion of which related to the 2002 closure of the Tupelo plant. Manufactured Products net sales increased 25%, or $22.7 million, primarily due to increased sales in the induction business. Gross profit increased by $2.7 million, or 4%, to $72.0 million for the first nine months of 2003 from $69.3 million for the same period of 2002, and the Company's gross margin increased to approximately 15.6% for the first nine months of 2003 from 14.5% for the same period of 2002. ILS gross margin decreased, primarily due to reduced absorption of fixed overhead over a smaller sales base and the positive effect on the first nine months of 2002 of the early termination of a high margin pharmaceutical sales contract, partially offset by lower inventory costs, facility costs and other cost reductions. Aluminum Products gross margin increased significantly, primarily as a result of restructuring and cost reductions and higher margins on new contracts. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction business. Selling, general and administrative ("SG&A") expenses increased by 5%, or $2.2 million, to $45.7 million for the first nine months of 2003 from $43.5 million for the same period in 2002. Consolidated SG&A expenses as a percentage of net sales were 9.9% for the first nine months of 2003 as compared to 9.1% for the same period in 2002. SG&A expenses increased by $5.3 million due to the net effect of acquisitions and divestitures, partially offset by cost reductions in the ILS and Aluminum Products segments. SG&A expenses were also impacted by a $1.3 million reduction of net pension credits reflecting less favorable returns on pension plan assets. Interest expense decreased $.7 million from $20.7 million in the first nine months of 2002 to $20.0 million in the same period of 2003, due to reduced borrowings in 2003. During the first nine months of 2003, the Company averaged outstanding borrowings of $323.0 million as compared to $333.7 million for the corresponding period of the prior year. The $10.7 million decrease related primarily to lower average working capital levels during the first nine months and cash from the sale of non-core manufacturing assets. The average interest rate of 8.24% for the first nine months of 2003 was 2 basis points lower than the average rate of 8.26% for the same period in 2002. The effective income tax rate for the nine-month period ended September 30, 2003 was 18%. Only foreign and certain state income taxes were provided for in 2003. The federal income tax provision was offset by the recognition of the benefit of net operating loss carryforwards for which valuation allowances had been provided for prior to 2003. At December 31, 2002, the Company had net operating loss carryforwards of approximately $25.6 million. Tax benefits related to these carryforwards were fully reserved in 2002 because the Company was in a three-year cumulative loss position. For the first nine months of 2002, the Company 18
recorded a $.6 million income tax provision despite a loss before income tax of $.1 million, due to foreign taxes and a foreign tax rate difference in foreign subsidiaries, and a reduced tax benefit from the Company's foreign sales corporations. Third Quarter 2003 versus Third Quarter 2002 Net sales decreased by $11.0 million, or 7%, from $157.8 million in third quarter 2002 to $146.8 million in the same quarter 2003. ILS net sales declined 15%, or $15.3 million, of which $4.3 million related to the sale of Green and the early termination of the pharmaceutical sales contract. The remainder related to continued volume weakness in customer industries. Aluminum Products net sales declined 19%, or $4.7 million, due to a $1.4 million decrease relating to the ending of certain sales contracts, and downturns in volumes on certain parts. Manufactured Products net sales increased 32%, or $9.0 million, primarily due to increased sales in the induction business. Gross profit decreased by $1.4 million, or 6%, to $21.8 million for third quarter 2003 from $23.2 million for the same quarter 2002. However, the Company's gross margin increased to approximately 14.8% for third quarter 2003 from 14.7% for the same quarter 2002. ILS gross margin decreased, primarily due to reduced absorption of fixed overhead over a smaller sales base and the positive effect on the third quarter of 2002 of the early termination of a high margin pharmaceutical sales contract, partially offset by lower inventory costs, facility costs and other cost reductions. Aluminum Products gross margin increased, primarily as a result of restructuring and cost reductions and higher margins on new contracts. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction business. SG&A expenses increased by 3%, or $.5 million, to $15.0 million for third quarter 2003 from $14.5 million for the same quarter 2002. Consolidated SG&A expenses as a percentage of net sales were 10.2% for third quarter 2003 as compared to 9.2% for the same quarter 2002. SG&A expenses increased by $1.5 million due to the net effect of acquisitions and divestitures, partially offset by cost reductions in the ILS and Aluminum Products segments. SG&A expenses were also impacted by a $.5 million reduction of net pension credits reflecting less favorable returns on pension plan assets. Interest expense decreased $.5 million from $7.0 million in third quarter 2002 to $6.5 million in the same quarter 2003 primarily due to lower interest rates under the Company's new revolving credit agreement entered into in July 2003, and reduced borrowings in 2003. During third quarter 2003, the Company averaged outstanding borrowings of $320.2 million as compared to $331.7 million for the same quarter of the prior year. The $11.5 million decrease related primarily to lower average working capital levels during the quarter and cash from the sale of non-core manufacturing assets. The average interest rate of 8.13% for the current quarter was 34 basis points lower than the average rate of 8.47% for same quarter 2002. The effective income tax rate for third quarter 2003 was 62%. Only foreign and certain state income taxes were provided for in 2003. The federal income tax provision was offset by the recognition of the benefit of net operating loss carryforwards for which valuation allowances had been provided for prior to 2003. At December 31, 2002, the Company had net operating loss carryforwards of approximately $25.6 million. Tax benefits related to these carryforwards were fully reserved in 2002, because the Company was in a three-year cumulative loss position. The effective income tax rate for third quarter 2002 was over 100%, because of a $.4 million tax provision adjustment for the first two quarters of 2002 based on revised estimates of foreign taxes and a foreign tax rate difference in the Company's foreign subsidiaries, and a reduced tax benefit from the Company's foreign sales corporations. 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 bank credit arrangements and the sale of Senior Subordinated Notes. On July 30, 2003, the Company entered into a new, four-year revolving credit agreement with a group of banks under which it may borrow up to $165.0 million secured by substantially all the assets of the Company. On November 5, 2003, this credit agreement was amended to include the Company's subsidiaries in Canada and the United Kingdom. Proceeds 19
from this credit agreement, as amended ("Credit Agreement"), which expires on July 30, 2007, will be used for general corporate purposes. Amounts borrowed under the Credit Agreement may be borrowed at Park-Ohio's election at either (i) LIBOR plus 175 -- 250 basis points or (ii) the bank's prime lending rate. The interest rate is dependent on the Company's Debt Service Coverage ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing capacity to the Company based on percentages of eligible accounts receivable, inventory and fixed assets. As of September 30, 2003, the Company had $104.5 million outstanding under the Credit Agreement. After giving effect to the amendment, as of September 30, 2003, the Credit Agreement provided approximately $40.0 million of unused borrowing capacity. 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 borrowings under the Credit Agreement is based on the Company's ability to meet a Debt Service Ratio covenant, which could be materially impacted if negative economic trends continue. Failure to meet this financial covenant could materially impact the availability and interest rate of future borrowings. At September 30, 2003, the Company was in compliance with the Debt Service Ratio covenant under the Credit Agreement. The ratio of current assets to current liabilities was 2.25 at September 30, 2003 versus 2.17 at December 31, 2002. Working capital increased by $3.6 million to $151.8 million at September 30, 2003 from $148.2 million at December 31, 2002. During the first nine months of 2003, the Company provided $3.7 million from operating activities as compared to providing $17.6 million in the same period of 2002 due primarily to the change in working capital accounts. During the first nine months of 2003, the Company invested $8.3 million in capital expenditures and received $7.3 million from the sale of Green and St. Louis Screw. These activities, less a net pay-down of borrowings of $9.8 million, resulted in a decrease in cash of $7.1 million in the first nine months of 2003. 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 due 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-Q contains certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward- looking statements, including, without limitation, credit availability, levels and funding of capital expenditures and trends for the remainder of 2003. 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 and competitive factors, including pricing pressures and product innovation; raw material availability and pricing; changes in our relationships with customers and suppliers; the ability of the Company to successfully integrate recent and future acquisitions into its existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, foreign currency exchange 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 20
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 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. REVIEW BY INDEPENDENT ACCOUNTANTS The consolidated financial statements at September 30, 2003, and for the three-month and nine-month periods ended September 30, 2003 and 2002, have been reviewed, prior to filing, by Ernst & Young LLP, the Company's independent accountants, and their report is included herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk including changes in interest rates. The Company is subject to interest rate risk on its floating rate revolving credit facility, which consisted of borrowings of $104.5 million at September 30, 2003. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $.8 million during the nine months ended September 30, 2003. The Company's foreign subsidiaries generally conduct business in local currencies. During the first nine months of 2003, the Company recorded a favorable foreign currency translation adjustment of $2.1 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the United States dollar in relation to the Canadian dollar and the euro. 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. ITEM 4. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report, have concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and the Company's consolidated subsidiaries would be made known to them by others within those entities. There were no significant changes in the Company's internal control over financial reporting or in other factors that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 21
PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the third quarter of 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: (4) Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets, Inc. (15) Letter re: unaudited financial information (31.1) Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Principal Financial Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 (b) On July 31, 2003, the Company furnished a current Form 8-K Report under Item 12 announcing its financial results for its second quarter ended June 30, 2003. 22
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PARK-OHIO HOLDINGS CORP. ------------------------------------ (REGISTRANT) By /s/ RICHARD P. ELLIOTT ----------------------------------- Name: Richard P. Elliott Title: Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Dated November 12, 2003 --------------------------------- 23
EXHIBIT INDEX QUARTERLY REPORT ON FORM 10-Q PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES FOR THE QUARTER ENDED SEPTEMBER 30, 2003 <Table> <Caption> EXHIBIT - ------- <S> <C> (4) Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets, Inc. (15) Letter re: unaudited financial information (31.1) Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Principal Financial Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 </Table> 24