1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-3134 June 30, 1995 PARK-OHIO INDUSTRIES, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> OHIO 34-6520107 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 TOWER EAST 44122 20600 CHAGRIN BOULEVARD (Zip Code) CLEVELAND, OHIO (Address of principal executive offices) Registrant's telephone number, including 216/991-9700 area code </TABLE> Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports): and (2) Has been subject to such filing requirements for the past 90 days. YES X NO ---------- ----------- Number of shares outstanding of registrant's Common Stock, par value $1.00 per share, as of July 31, 1995: 10,964,331 including 562,500 shares held in escrow. The Exhibit Index is located on page 13. 1
2 INDEX PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated condensed balance sheets - June 30, 1995 and December 31, 1994 Consolidated condensed statements of income - Six months and three months ended June 30, 1995 and 1994 Consolidated condensed statements of cash flows - Six months ended June 30, 1995 and 1994 Notes to consolidated condensed financial statements - June 30, 1995 Independent accountants' review report Item 2. Management's Discussion PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURE EXHIBIT INDEX 2
3 PART I FINANCIAL INFORMATION 3
4 CONSOLIDATED CONDENSED BALANCE SHEETS PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> (Unaudited) June 30 December 31 1995 1994 ----------- ----------- (In Thousands) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 2,141 $ 2,172 Accounts receivable, less allowances for doubtful accounts of $870,000 at June 30, 1995 and $394,000 at December 31, 1994 68,082 27,165 Inventories 69,507 25,651 Prepaid expenses 1,877 1,845 -------- -------- Total Current Assets 141,607 56,833 Property, Plant and Equipment 127,234 111,881 Less accumulated depreciation 64,778 61,246 -------- -------- 62,456 50,635 Excess Purchase Price Over Net Assets Acquired, net 54,313 16,727 Other Assets 25,864 10,420 -------- -------- $284,240 $134,615 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 37,228 $ 15,353 Accrued expenses 18,857 8,884 Current portion of long-term liabilities 2,590 2,469 -------- -------- Total Current Liabilities 58,675 26,706 Long-Term Liabilities, less current portion Long-term debt 83,197 9,513 Other postemployment benefits 30,982 27,800 Other 8,670 1,646 -------- -------- 122,849 38,959 Convertible Senior Subordinated Debentures 22,235 22,235 Shareholders' Equity Capital stock, par value $1 a share: Serial Preferred Stock -0- -0- Common Stock 10,402 8,192 Additional paid-in capital 49,183 26,189 Retained earnings 20,896 12,334 -------- -------- 80,481 46,715 -------- -------- $284,240 $134,615 ======== ======== </TABLE> Note: The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated condensed financial statements. 4
5 CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES (In Thousands - Except Per Share Data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 --------------------- ---------------------- 1995 1994 1995 1994 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $109,420 $49,394 $172,230 $101,682 Cost and expenses: Cost of products sold 93,395 40,818 145,723 83,568 Selling, general and administrative expenses 9,128 4,818 15,168 10,737 Interest expense 1,885 455 2,537 883 -------- ------- -------- -------- 104,408 46,091 163,428 95,188 -------- ------- -------- -------- Income before Federal Income Taxes 5,012 3,303 8,802 6,494 Federal income taxes 191 30 241 84 -------- ------- -------- -------- Net Income $ 4,821 $ 3,273 $ 8,561 $ 6,410 ======== ======= ======== ======== Net income per common share: $ .45 $ .39 $ .88 $ .79 ======== ======= ======== ======== Shares used in calculation 10,734 8,080 9,710 7,892 ======== ======= ======== ======== </TABLE> See notes to consolidated condensed financial statements. 5
6 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES (In Thousands) <TABLE> <CAPTION> Six Months Ended June 30 ---------------------- 1995 1994 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net income $ 8,561 $ 6,410 Adjustments to reconcile net income to net cash provided (used): Depreciation and amortization 4,726 2,819 Changes in noncurrent assets and liabilities (2,840) (1,191) Changes in operating assets and liabilities (15,610) (6,190) -------- -------- Net Cash Provided (Used) by Operations (5,163) 1,848 INVESTING ACTIVITIES Purchases of property, plant and equipment, net (6,446) (3,646) Cost of acquisitions, net of cash acquired (33,383) -0- -------- -------- Net Cash Used by Investing Activities (39,829) (3,646) FINANCING ACTIVITIES Proceeds from bank arrangements for acquisitions 33,383 -0- Proceeds from bank arrangements for operations 11,660 4,350 Proceeds from Convertible Senior Subordinated Debentures, net -0- 21,356 Payments on bank borrowings (82) (26,844) Issuance of common stock, net -0- 4,005 -------- -------- Net Cash Provided from Financing Activities 44,961 2,867 -------- -------- Increase (Decrease)in Cash and Cash Equivalents (31) 1,069 Cash and Cash Equivalents at Beginning of Year 2,172 133 -------- -------- Cash and Cash Equivalents at End of Period $ 2,141 $ 1,202 ======== ======== </TABLE> See notes to consolidated condensed financial statements. 6
7 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES June 30, 1995 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. 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, 1994. NOTE B - ACQUISITIONS On March 31, 1995, the Company acquired all of the shares of RB&W Corporation in exchange for 2,023,000 shares of the Company's common stock ($11.50 market value as of March 31, 1995) and cash of $30,968. The transaction has been accounted for as a purchase and, accordingly, the operations of RB&W have been included since that date. The following is the current value of the net assets acquired as of March 31, 1995: <TABLE> <CAPTION> (In thousands) <S> <C> Cash $ 510 Accounts receivable 29,551 Inventories 36,731 Property, plant and equipment 5,591 Excess purchase price over net assets acquired 35,200 Other assets 15,620 Notes payable (28,739) Trade accounts payable (21,524) Accrued expenses (8,398) Long-term liabilities (10,300) -------------- Total Cost of Acquisition $ 54,242 ============== </TABLE> The following unaudited pro forma results of operations assume the acquisition occurred on January 1, 1994. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. <TABLE> <CAPTION> Six Months Ended June 30 -------------------------------------- 1995 1994 -------------- -------------- (In Thousands - Except Per Share Data) <S> <C> <C> Net sales $ 219,262 $ 186,947 Gross profit 32,002 29,807 Net income 7,545 6,426 Net income per common share $ .70 $ .63 </TABLE> The Company purchased certain assets of two companies for a total cost during the period of $2,925. The operations of these businesses prior to the dates of acquisition were not material to the Company. NOTE C - INVENTORIES The components of inventory consist of the following: <TABLE> <CAPTION> June 30 December 31 1995 1994 -------------- -------------- (In thousands) <S> <C> <C> In process and finished goods $ 53,642 $ 14,496 Raw materials and supplies 15,865 11,155 -------------- -------------- $ 69,507 $ 25,651 ============== ============== </TABLE> 7
8 NOTE D - SHAREHOLDERS' EQUITY Capital stock consists of the following: Serial Preferred Stock: Authorized - 632,470 shares; none issued Common Stock: Authorized - 20,000,000 shares Issued and outstanding - 10,401,831 shares at June 30, 1995 and 8,191,810 at December 31, 1994. The increase in outstanding shares results from the issuance of 2,023,000 shares as discussed in Note B, and 187,500 shares relating to the earn-out provision in connection with the acquisition of General Aluminum Mfg. Company. NOTE E - NET INCOME PER COMMON SHARE Net income per common share is based on the average number of common shares outstanding and assumes the exercise of outstanding dilutive stock options and the issuance of certain additional shares subject to earn-out provisions. NOTE F - BANK ARRANGEMENTS On April 11, 1995, the Company entered into a new credit agreement with a group of banks under which it may borrow up to $100 million on an unsecured basis. The agreement, which replaced the Company's existing credit facility, consists of a $65 million revolving credit and a $35 million term loan payable over seven years. Interest is payable quarterly at the prime lending rate or at LIBOR plus a percentage which fluctuates based on specific financial ratios. 8
9 Independent Accountants' Review Report Board of Directors and Shareholders Park-Ohio Industries, Inc. We have reviewed the accompanying consolidated condensed balance sheet of Park-Ohio Industries, Inc. and subsidiaries as of June 30, 1995, and the related consolidated condensed statements of income for the three-month and six-month periods ended June 30, 1995 and 1994, and the consolidated condensed statements of cash flows for the six-month periods ended June 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Park-Ohio Industries, Inc. and subsidiaries as of December 31, 1994, 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 22, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ ERNST & YOUNG LLP Cleveland, Ohio July 24, 1995 9
10 MANAGEMENT'S DISCUSSION RESULTS OF OPERATIONS - --------------------- FIRST HALF 1995 VERSUS FIRST HALF 1994 - -------------------------------------- Effective March 31, 1995, the Company acquired all of the shares of RB&W Corporation (RB&W) in exchange for $31 million and 2.0 million of its common shares in a transaction valued at $54.2 million. The combination has been accounted for as a purchase and, accordingly, the operations of RB&W are included in the consolidated financial statements as of that date. The metal forming business of RB&W will be included with the transportation group and the distribution business will be included in a newly formed group, logistics. The Logistics Group distributes various products associated with the fastener industry, primarily components to original equipment manufacturers. Net sales increased by $70.5 million during the period of which $49.8 million pertained to RB&W whose results are included for the period April through June 1995. Of the sales increase applicable to RB&W, $37.7 million relate to the logistics group and $12.1 million relate to the transportation group. The remainder of the sales increase was attributable to the transportation group as well as the container products group. Net sales for the transportation group increased by $8.1 million primarily as a result of two other acquisitions that contributed $5.6 million in sales. In the container products group, net sales increased by $12.8 million, all of which were internally generated. Containers shipped for the period increased by 23% with average prices per container increasing by 23% largely offsetting increases in raw material costs. Gross profit rose to $26.5 million in the current period from $18.1 million in the first half of 1994. Of the $8.4 million increase in gross profits, RB&W accounted for 89% of the increase. Consolidated gross margins were 15% of sales in the first half of 1995 compared with 18% of sales during the prior period. The decline in gross margins was due, in part, to RB&W that historically has lower gross margins than the Company as a whole. In addition, margins in both the consumer and container products groups declined as a result of increased raw material costs that could not be adequately reflected in pricing and to product mix changes, particularly in the consumer products group. Selling, general and administrative costs increased by 41% in the period largely as a result of including RB&W in the consolidated results for the period. As a percentage of sales, consolidated selling, general and administrative costs accounted for 8.8% of the sales dollar in the current period as compared to 10.6% in the first half of 1994. Interest expense increased by $1.7 million in the first half of 1995 due to higher levels of debt outstanding during the period and to higher average interest rates. Average debt outstanding for the period increased from $27.2 million in 1994 to $73.2 million in 1995. The increase in borrowings was caused by the acquisition of RB&W, higher levels of revolving credit debt to support increased sales and to the convertible subordinated debentures issued in May, 1994, being outstanding for the entire current period. Interest rates averaged 7.31% versus 6.50% in the first half of 1994. Federal income taxes related primarily to the alternative minimum tax due as a result of utilizing available net operating loss carryforwards. At December 31, 1994, the Company had net operating loss carryforwards for tax purposes of $21.6 million available to offset future taxable income. Additionally, net operating loss carryforwards of $21.1 million pertaining to RB&W and $2.5 million related to General Aluminum Mfg. Company, a wholly owned subsidiary, are available to offset future taxable income subject to certain limitations. For financial reporting purposes, the Company has additional net operating loss carryforwards relating to deductible temporary differences, the most significant of which relates to other postretirement benefits. Federal income tax expense for the 1995 period has been reduced by $3.0 million ($2.2 million in 1994) due to the utilization of net operating loss carryforwards. SECOND QUARTER 1995 VERSUS SECOND QUARTER 1994 - ---------------------------------------------- Net sales increased by $60.0 million of which $49.8 million pertained to RB&W; $37.7 million relate to the logistics group and $12.1 million relate to the transportation group. The remainder of the sales increase was attributable to the transportation group as well as the container products group. Net sales for the transportation group increased by $5.2 million primarily as a result of two other acquisitions that contributed $4.1 million in net sales for the period. In the container products group, net sales increased by $5.2 million all of which was due to internal growth. Containers shipped for the period increased by 15% with average prices per container increasing by 24% offsetting increases in raw material costs. Gross profit rose to $16.0 million in the current period from $8.6 million in the second quarter of 1994. Of the $7.4 million increase in gross profits for the period, RB&W accounted for almost the entire increase. Consolidated gross margins were 15% of sales compared with 17% of sales during the second quarter of 1994. The decline in gross margin was due, in part, to RB&W that historically has lower gross margins than the Company as a whole. Margins in both the container and consumer products groups declined due to the inability to sufficiently pass along price increases which would have offset increased raw material costs. 10
11 The increase of 89% in selling, general and administrative costs is largely a result of including RB&W in the consolidated results. As a percentage of sales, consolidated selling, general and administrative costs accounted for 8.3% of the sales dollar in the current period as compared to 9.8% in the second quarter of 1994. Interest expense increased by $1.4 million in the second quarter of 1995 due to increased debt during the period and to higher average interest rates. Average debt outstanding for the period increased from $28.0 million in 1994 to $102.5 million in 1995. The increase in borrowings was caused by the acquisition of RB&W, increased borrowings under the Company's revolving credit arrangements to support increased sales and to the convertible subordinated debentures issued in May, 1994, being outstanding for the entire current period. Interest rates averaged 7.65% versus 6.48% in the corresponding period of the prior year. LIQUIDITY AND SOURCES OF CAPITAL On April 11, 1995, the Company entered into a Credit Agreement with three banks that replaced the Company's existing agreement with the same three banks. The new agreement provides $100 million in unsecured credit consists of a $65 million revolving credit facility to be used for general corporate purposes, including working capital and acquisitions, and a $35 million term facility which replaced RB&W's current lender. As of June 30, 1995, $80 million was outstanding under this facility. Current financial resources (working capital and available bank borrowing arrangements) and anticipated funds from operations are expected to be adequate to meet current cash requirements, including capital expenditures. The Company's recent growth has largely been fueled by acquisitions. In the event additional capital resources are needed for other opportunities in the near future, the Company believes adequate financing is either in place or would be available. During the period, the Company increased its borrowings under its working capital facility by $11.7 million which was used to fund operations by $5.2 million, primarily accounts receivable and inventories and to invest $6.5 million in machinery and equipment. During the period the Company completed the acquisition of RB&W by issuing 2.0 million of its common shares and paying $31.0 million for all the outstanding common stock of RB&W. The cash component of the acquisition was provided under the Company's $100 million credit facility. REVIEW BY INDEPENDENT ACCOUNTANTS The condensed consolidated financial statements at June 30, 1995, and for the three and six-month periods then ended have been reviewed, prior to filing, by Ernst & Young LLP, the Company's independent accountants, and their report is included herein. 11
12 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of shareholders was held on May 25, 1995. (c) The following matters were voted upon at the annual meeting of shareholders: Proposal to approve the Amended and Restated 1992 Stock Option Plan. 7,425,643 Affirmative votes 125,464 Negative votes 58,830 Abstentions 1,414,019 Non votes Proposal to ratify the appointment of Ernst & Young as independent auditors for the current year ending December 31, 1995. 8,998,511 Affirmative votes 7,860 Negative votes 17,585 Abstentions ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are included herein: (10)(a) Employment Agreement between Park-Ohio Industries, Inc. and John J. Murray dated effective January 1, 1995 (10)(b) Park-Ohio Industries, Inc. Amended and Restated 1992 Stock Option Plan (11) Computation of net income per common share (15) Letter re: unaudited financial information (27) Financial data schedule (Electronic Filing Only) On April 17, 1995, the Company filed a Form 8-K regarding the Company's acquisition of RB&W Corporation. See Note B to the Consolidated Condensed Financial Statements (unaudited) on page 7 and Management's discussion on page 10. 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 INDUSTRIES, INC. -------------------------------------------- (Registrant) By /s/ J.S. WALKER -------------------------------------------- Name: J.S. Walker Title: Vice President - Treasurer and Controller Dated August 14, 1995 -------------------------------------- 12
13 EXHIBIT INDEX QUARTERLY REPORT ON FORM 10-Q PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES FOR THE QUARTER ENDED JUNE 30, 1995 EXHIBIT (10)(a) Employment Agreement between Park-Ohio Industries, Inc. and John J. Murray dated effective January 1, 1995 (10)(b) Park-Ohio Industries, Inc. Amended and Restated 1992 Stock Option Plan 11 Computation of net income per common share 15 Letter re: unaudited financial information 27 Financial data schedule (Electronic filing only) 13