1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) <TABLE> <S> <C> [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998, 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: <TABLE> <S> <C> (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 [ ] </TABLE> Number of shares outstanding of registrant's Common Stock, par value $1.00 per share, as of November 10, 1998: 11,147,462 including 333,873 shares in treasury. The Exhibit Index is located on page 21. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES INDEX <TABLE> <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- September 30, 1998 and December 31, 1997 Consolidated statements of income -- Nine months and three months ended September 30, 1998 and 1997 Consolidated statements of shareholders' equity -- Nine months ended September 30, 1998 Consolidated statements of cash flows -- Nine months ended September 30, 1998 and 1997 Notes to consolidated financial statements -- September 30, 1998 Independent accountants' review report Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURE EXHIBIT INDEX </TABLE> 2
3 PART I FINANCIAL INFORMATION 3
4 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) SEPTEMBER 30 DECEMBER 31 1998 1997 ------------ ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current Assets Cash and cash equivalents................................. $ 3,771 $ 1,814 Accounts receivable, less allowances for doubtful accounts of $2,466 at September 30, 1998 and $2,060 at December 31, 1997............................................... 93,509 86,787 Inventories............................................... 148,165 129,512 Deferred tax assets....................................... 3,240 3,240 Other current assets...................................... 4,557 5,075 -------- -------- Total Current Assets.............................. 253,242 226,428 Property, Plant and Equipment............................... 155,412 132,864 Less accumulated depreciation............................. 68,693 59,795 -------- -------- 86,719 73,069 Other Assets Excess purchase price over net assets acquired, net of accumulated amortization of $7,245 at September 30, 1998 and $5,749 at December 31, 1997................... 73,455 68,996 Deferred taxes............................................ 12,960 12,960 Other..................................................... 30,316 31,656 -------- -------- $456,692 $413,109 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Trade accounts payable.................................... $ 47,048 $ 49,470 Accrued expenses.......................................... 40,000 28,291 Current portion of long-term liabilities.................. 2,026 2,223 -------- -------- Total Current Liabilities......................... 89,074 79,984 Long-Term Liabilities, less current portion Long-term debt............................................ 197,940 172,283 Other postretirement benefits............................. 26,695 27,537 Other..................................................... 3,769 4,295 -------- -------- 228,404 204,115 Shareholders' Equity Capital stock, par value $1 a share: Serial Preferred Stock................................. -0- -0- Common Stock........................................... 11,148 10,960 Additional paid-in capital................................ 55,757 53,476 Retained earnings......................................... 76,611 67,486 Treasury stock, at cost................................... (2,625) (2,087) Accumulated other comprehensive earnings (loss)........... (1,677) (825) -------- -------- 139,214 129,010 -------- -------- $456,692 $413,109 ======== ======== </TABLE> Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4
5 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (DOLLARS IN THOUSANDS -- EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Net sales....................................... $133,370 $114,325 $410,638 $311,916 Cost of products sold........................... 109,474 96,332 339,824 262,060 -------- -------- -------- -------- Gross profit.................................. 23,896 17,993 70,814 49,856 Selling, general and administrative expenses.... 14,547 11,512 42,077 31,613 -------- -------- -------- -------- Operating income.............................. 9,349 6,481 28,737 18,243 Other income.................................... -0- -0- -0- (320) Interest expense................................ 4,233 2,473 12,727 6,078 -------- -------- -------- -------- Income before income taxes.................... 5,116 4,008 16,010 12,485 Income taxes.................................... 2,200 1,482 6,885 4,682 -------- -------- -------- -------- Net income.................................... $ 2,916 $ 2,526 $ 9,125 $ 7,803 ======== ======== ======== ======== Net income per common share: Basic......................................... $ .27 $ .24 $ .83 $ .73 ======== ======== ======== ======== Diluted....................................... $ .26 $ .22 $ .81 $ .70 ======== ======== ======== ======== Common shares used in the computation: Basic......................................... 10,995 10,742 10,994 10,650 ======== ======== ======== ======== Diluted....................................... 11,176 12,200 11,230 12,132 ======== ======== ======== ======== </TABLE> See notes to consolidated financial statements. 5
6 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCK CAPITAL EARNINGS STOCK EARNINGS (LOSS) TOTAL ------- ---------- -------- -------- --------------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Balance January 1, 1998........... $10,960 $53,476 $67,486 $(2,087) $ (825) $129,010 -------- Net income........................ 9,125 9,125 Foreign currency translation adjustment...................... (852) (852) -------- Comprehensive income......... 8,273 -------- Issuance of General Aluminum Mfg. Company earnout shares.......... 188 2,306 2,494 Exercise of stock options......... (25) 278 253 Purchase of treasury stock........ (816) (816) ------- ------- ------- ------- ------- -------- Balance September 30, 1998........ $11,148 $55,757 $76,611 $(2,625) $(1,677) $139,214 ======= ======= ======= ======= ======= ======== </TABLE> See notes to consolidated financial statements. 6
7 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income................................................ $ 9,125 $ 7,803 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization.......................... 10,393 7,371 Other.................................................. -0- 680 ------- ------- 19,518 15,854 Changes in operating assets and liabilities excluding acquisitions of businesses: Accounts receivable.................................... (5,599) (10,013) Inventories and other current assets................... (15,930) (12,245) Accounts payable and accrued expenses.................. 6,990 4,528 Other.................................................. (1,106) (6,830) ------- ------- Net Cash Provided (Used) by Operating Activities....................................... 3,873 (8,706) INVESTING ACTIVITIES Purchases of property, plant and equipment, net........... (20,677) (9,244) Costs of acquisitions, net of cash acquired............... (6,036) (53,933) Purchase of investments................................... (101) (419) Other..................................................... -0- 551 ------- ------- Net Cash (Used) by Investing Activities........... (26,814) (63,045) FINANCING ACTIVITIES Proceeds from bank arrangements for acquisitions.......... 6,000 54,000 Proceeds from bank arrangements for operations............ 30,500 22,000 Payments on debt.......................................... (11,039) (5,096) Purchase of treasury stock................................ (816) (2,815) Issuance of common stock under stock option plan.......... 253 2,789 ------- ------- Net Cash Provided by Financing Activities.............. 24,898 70,878 ------- ------- Increase (Decrease) in Cash and Cash Equivalents....... 1,957 (873) Cash and Cash Equivalents at Beginning of Period....... 1,814 4,659 ------- ------- Cash and Cash Equivalents at End of Period............. $ 3,771 $ 3,786 ======= ======= </TABLE> See notes to consolidated financial statements. 7
8 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS- EXCEPT PER SHARE DATA) NOTE A -- BASIS OF PRESENTATION The consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries ("the Company"). All significant intercompany transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. NOTE B -- ACQUISITIONS AND DISPOSITION On August 1, 1997 the Company acquired substantially all of the shares of Arden Industrial Products, Inc. ("Arden") for approximately $44 million. The transaction has been accounted for as a purchase. Arden is a supplier of specialty and standard fasteners to the industrial market. Arden is included in the Company's Integrated Logistics Solutions segment. The following is the estimated value of the net assets of Arden as of August 1, 1997: <TABLE> <S> <C> Cash........................................................ $ 2,711 Accounts receivable......................................... 11,503 Inventories................................................. 17,764 Property, plant and equipment............................... 4,468 Excess purchase price over net assets acquired.............. 17,919 Other assets................................................ 5,258 Trade accounts payable...................................... (6,437) Accrued expenses............................................ (2,828) Long-term liabilities....................................... (6,358) ------- Total estimated cost of acquisition............... $44,000 ======= </TABLE> During the year ended December 31, 1997, the Company acquired four other businesses for an aggregate purchase price of approximately $18.6 million. Each of these transactions was accounted for as a purchase, resulting in excess purchase price over net assets acquired of approximately $8.6 million. The following unaudited pro forma results of operations assume the acquisitions of Arden and the other businesses occurred on January 1, 1997. These pro forma results have been prepared for comparative purposes only and do not 8
9 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated, or which may result in the future. <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------ <S> <C> Net sales................................................... $379,530 Gross profit................................................ 71,027 Net income.................................................. 8,961 Net income per common share -- diluted...................... .80 ======== </TABLE> During April 1998, the Company completed the acquisition of Direct Fasteners Limited ("Direct") located in Ontario, Canada. The transaction was accounted for as a purchase. Direct is a distributor of fasteners. The aggregate purchase price and the results of operations of Direct prior to the date of acquisition were not material to the Company. During September 1998, the Company completed the sale of the assets of Friendly and Safe Packaging Systems, Inc. to Kerr Group. The transaction had an immaterial effect on the consolidated results of operation and financial position of the Company. During October 1998, the Company acquired all of the shares of GIS Industries, Inc. ("Gateway"). The transaction will be accounted for as a purchase. Gateway is a distributor of fasteners and a manufacturer of fabricated metal products and fasteners. Gateway will be included in the Company's Integrated Logistics Solutions segment. The aggregate purchase price and the results of operations of Gateway prior to the date of acquisition were not material to the Company. NOTE C -- INVENTORIES The components of inventory consist of the following: <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1998 1997 ------------ ----------- <S> <C> <C> In process and finished goods............................. $117,082 $100,283 Raw materials and supplies................................ 31,083 29,229 -------- -------- $148,165 $129,512 ======== ======== </TABLE> NOTE D -- SHAREHOLDERS' EQUITY At September 30, 1998, 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 11,147,462 shares were issued and outstanding including 186,478 shares held in treasury. NOTE E -- LONG-TERM INCENTIVE PLAN In February, 1998 the Board of Directors of the Company approved the 1998 Long-Term Incentive Plan as a replacement for the Company's Amended and Restated 1992 Stock Option Plan. The Plan provides for the issuance of up to 550,000 shares of the Company's Common Stock and was approved by the shareholders. NOTE F -- CORPORATE REORGANIZATION At the 1998 Annual Meeting of Shareholders of Park-Ohio Industries, Inc. ("Park-Ohio") held on May 28, 1998, the shareholders of Park-Ohio approved an agreement of Merger ("Merger Agreement") dated February 20, 1998 by and among Park-Ohio, PKOH Holding Corp. ("Holdings") and PKOH Merger 9
10 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED Corp. ("Merger Corp.") providing for a reorganization of Park-Ohio into a holding company form of ownership with Holdings as its sole parent. On June 10, 1998, Holdings amended and restated its articles of incorporation to increase its authorized shares from 100 shares of common stock, $1.00 par value per share, to 40,000,000 shares of common stock and 632,470 shares of preferred stock, all $1.00 par value per share, and changed its name from PKOH Holding Corp. to Park-Ohio Holdings Corp. Effective as of the close of business on June 15, 1998, Merger Corp. was merged with and into Park-Ohio upon the terms and conditions of the Merger Agreement. At the effective time of the Merger, (i) all of the shares of Park-Ohio's common stock issued and outstanding immediately prior to the Merger were converted into an equal number of shares of Holdings' common stock (on a share-for-share basis), (ii) all of the shares of Merger Corp.'s common stock issued and outstanding immediately prior to the Merger were converted into 100 shares of Park-Ohio's common stock and (iii) all of the shares of Holdings' common stock issued and outstanding immediately prior to the Merger were canceled. Prior to the Merger, there was no public market for Holdings' common stock, and Park-Ohio's common stock was listed for trading on the NASDAQ National Market under the symbol "PKOH". Upon the opening of the market after the effective time of the Merger: (i) Holdings' common stock was registered under Section 12 (g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and was listed for trading on the NASDAQ National Market under the symbol "PKOH"; (ii) Park-Ohio common stock was simultaneously delisted from the NASDAQ National Market and ceased to be registered under Section 12 (g) of the Exchange Act; and (iii) Holdings assumed Park-Ohio's reporting obligations under the Exchange Act. NOTE G -- NET INCOME PER COMMON SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Earnings per share amounts for the three and nine-month periods ended September 30, 1997 have been restated to conform to the Statement 128 requirements which were adopted by the Company on December 31, 1997. 10
11 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED 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 -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> NUMERATOR Net income.............................................. $2,916 $2,526 $9,125 $7,803 Amortization of imputed goodwill associated with the earnout shares........................................ -0- (20) -0- (42) ------ ------ ------ ------ Numerator for basic earnings per share-net income available to common shareholders...................... 2,916 2,506 9,125 7,761 Effect of dilutive securities: Interest (net of income taxes) associated with convertible senior subordinated debentures......... -0- 237 -0- 728 ------ ------ ------ ------ Numerator for diluted earnings per share-net income after assumed conversions............................. $2,916 $2,743 $9,125 $8,489 ====== ====== ====== ====== DENOMINATOR Denominator for basic earnings per share-weighted average shares........................................ 10,995 10,742 10,994 10,650 Effect of dilutive securities: Effect of General Aluminum Mfg. Company earnout shares deemed to be issued................................ -0- 181 -0- 181 Employee stock options................................ 181 171 236 183 Convertible subordinated debentures................... -0- 1,106 -0- 1,118 ------ ------ ------ ------ Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions....... 11,176 12,200 11,230 12,132 ====== ====== ====== ====== Net income per common share-basic....................... $ .27 $ .24 $ .83 $ .73 ====== ====== ====== ====== Net income per common share-diluted..................... $ .26 $ .22 $ .81 $ .70 ====== ====== ====== ====== </TABLE> NOTE H -- ACCOUNTING PRONOUNCEMENTS The Company adopted FASB Statement No. 130 "Reporting Comprehensive Income", at the beginning of 1998. Statement 130 establishes standards for the reporting and display of comprehensive earnings and its components in financial statements; however, the adoption of this statement had no impact on the Company's net earnings. Statement 130 requires foreign currency translation adjustments, which prior to adoption were immaterial and included in accrued expenses, to be included in other comprehensive earnings. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Comprehensive income for the three and nine-month periods ended September 30, 1998 was $2,580 and $8,273, respectively. There were no material differences between net earnings and comprehensive earnings for the three and nine-month periods ended September 30, 1997. The FASB has issued two accounting pronouncements which the Company will adopt in the fourth quarter of 1998. FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" and FASB Statement No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits--an amendment of FASB Statements No. 87, 88 and 106" both expand or modify 11
12 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED disclosures and accordingly, will have no impact on the Company's financial position, results of operations or cash flows. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The SOP requires companies to capitalize qualifying computer software costs incurred during the application development stage. This statement will be applied prospectively and is effective for financial statements for fiscal years beginning after December 15, 1998. The impact of this new standard is not expected to have a significant effect on the Company's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Accounting for the Costs of Start-up Activities". The SOP requires that costs of start-up activities be expensed as incurred. The SOP is effective for fiscal years beginning after December 15, 1998. The Company expects to adopt the SOP in the first quarter of 1999. The impact of adoption of the SOP on the Company's financial position, results of operations or cash flows is expected to be immaterial. NOTE I -- RECLASSIFICATION Certain amounts in the prior period's financial statements have been reclassified to be consistent with the current period presentation. NOTE J -- FINANCING ARRANGEMENTS On November 2, 1998, Park-Ohio amended and restated its credit agreement with a group of banks under which it may borrow up to $150 million on an unsecured basis. Interest is payable at the prime lending rate less 1% to .3% or at Park-Ohio's election at LIBOR plus .9% to 1.7%. The interest rate is dependent on the aggregate amount borrowed under the agreement. 12
13 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, 1998, and the related consolidated statements of income for the three months and nine months ended September 30, 1998 and 1997, the consolidated statement of shareholders' equity for the nine months ended September 30, 1998 and the consolidated statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. 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 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 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Park-Ohio Holdings Corp. and subsidiaries as of December 31, 1997 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 16, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it is derived. /s/ Ernst & Young LLP Cleveland, Ohio October 21, 1998 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated financial statements of the Company include the accounts of Park-Ohio Holdings Corp. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information for the nine and three-month periods ended September 30, 1997 is not directly comparable on a period-to-period basis to the financial information for the nine and three-month periods ended September 30, 1998 due to the 1997 acquisitions ("1997 Acquisitions"). During 1997, the Company acquired five businesses for $62.6 million. The largest of the 1997 Acquisitions was Arden Industrial Products, Inc. ("Arden") which was acquired for $44 million as of August 1, 1997. Arden is a national supplier of specialty and standard fasteners to the industrial market. During October, 1998, the Company acquired all of the shares of GIS Industries, Inc. ("Gateway"). Gateway is a distributor of fasteners and a manufacturer of fabricated metal products and fasteners. All acquisitions are accounted for as purchases and consequently their results are included in the consolidated financial statements from their respective date of being acquired. OVERVIEW The Company operates diversified manufacturing ("Manufactured Products") and logistics ("Integrated Logistics Solutions" or "ILS") businesses that serve a wide variety of industrial markets. Manufactured Products designs and manufactures 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 automotive, railroad, truck and aerospace industries. ILS is a leading national supplier of fasteners (e.g., nuts, bolts and screws) and other industrial products to OEMs, other manufacturers and distributors. In connection with the supply of such industrial products, ILS provides a variety of value-added, cost-effective procurement solutions. The principal customers of ILS are in the transportation, industrial, electrical and lawn and garden equipment industries. The Company previously announced that it was planning to cause ILS to issue shares of common stock to the public. ILS is comprised of RB&W Corporation, Arden, Direct, and Gateway; the operating companies of the Company's Logistics division. It was anticipated that a registration statement would be filed in the third quarter of 1998 and that the offering would be completed during 1998. However, the market conditions were not conducive for initial public offerings during that time period and as a result, the Company has postponed the filing of a registration statement until the spring of 1999 and now expects that the offering will be completed during 1999. A registration statement relating to these securities has not been filed with the Securities and Exchange Commission. These securities may not be sold absent registration or an applicable exemption from registration. The offering will be made only by means of a prospectus. This disclosure shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. The statements herein regarding the filing of a registration statement, the timing of the offering and any other future aspects relating to the offering and other statements which are not historical facts are forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, market conditions (including the price and market for the common stock) and other factors detailed herein under the heading "Forward-Looking Statements." Between 1994 and 1997, the Company has grown significantly, both internally and through acquisitions. Over this period, the Company's net sales increased at a 50.4% compounded annual growth rate ("CAGR"), from $129.2 million to $441.1 million, and income from continuing operations on a fully taxed basis increased at a 40.2% CAGR from $4.1 million to $11.3 million. Recent growth has been primarily attributable to the Company's strategy of making selective acquisitions in order to complement internal growth. Historically, the Company has acquired underperforming businesses with potential for: (i) significant cost reductions through improved labor, supplier and customer relations and increased purchasing power and (ii) revenue enhancement due to better asset utilization and management practices, as well as increased access to capital. The Company's internal growth has been driven primarily by 14
15 the addition of ILS customers under total fastening service ("TFS") contracts and by the leveraging of existing customer relationships in the Manufactured Products segment. Between January 1, 1994 and September 30, 1998, the Company's continuing operations incurred $65.9 million of capital expenditures, the majority of which was used to expand and upgrade existing manufacturing facilities and enhance the Company's management information systems. RESULTS OF OPERATIONS NINE MONTHS 1998 VERSUS NINE MONTHS 1997 Net sales increased by $98.7 million, or 32%, from $311.9 million for the first nine months of 1997 to $410.6 million for the nine months ended September 30, 1998. Approximately 32% of this increase was attributable to internal growth and 68% was a result of the 1997 Acquisitions. Of the internal sales growth, approximately 71% was primarily attributable to ILS and the addition of TFS customers, and the remainder was due to increased orders from Manufactured Products' customers. The growth in net sales from the 1997 Acquisitions relates to ILS and primarily pertains to Arden which was acquired as of August 1, 1997. Gross profit increased by $20.9 million, or 42%, from $49.9 million for the first nine months of 1997 to $70.8 million for the first nine months of 1998. Of the increase, 58% relates to the 1997 Acquisitions, primarily Arden, and 42% was due to internal growth, primarily ILS. The Company's consolidated gross margin increased to 17.2% for the first nine months of 1998 from 16.0% for the first nine months of 1997. This increase in consolidated gross margin was due to increased margins in both the Manufactured Products and ILS segments. The increase in Manufactured Products was due to a change in revenue mix and to increased production thereby allocating fixed manufacturing overhead over a greater production base. The increase in margins in the ILS segment is a result of spreading operating costs over a growing revenue base resulting from the recent acquisitions in ILS and favorable raw material sourcing. Selling, general and administrative costs increased by 33% to $42.1 million for the first nine months of 1998 from $31.6 million for the first nine months of 1997. Approximately 62% of such increase was related to the 1997 Acquisitions while the remainder related to the increase in internally generated net sales. Consolidated selling, general and administrative expenses as a percentage of net sales was approximately 10% for both periods. Interest expense increased by $6.6 million from $6.1 million for the nine-month period ended September 30, 1997 to $12.7 million for the nine-month period ended September 30, 1998 due to higher average debt outstanding during the current period and to higher average interest rates in 1998 versus 1997. For the nine-month period ended September 30, 1998, the Company averaged outstanding borrowings of $196.7 million as compared to $108.1 million outstanding for the nine months ended September 30, 1997. Of the $88.6 million increase, approximately $66 million related to acquisitions completed during the latter part of 1997 and 1998 with the remainder primarily related to working capital increases to support the realized and anticipated growth in business and to capital expenditures to support growth in the business. The average borrowing rate of 8.6% for the nine months ended September 30, 1998 is 1.3% higher than the average rate of 7.3% for the nine months ended September 30, 1997 primarily because of the $150 million bond offering in the fall of 1997 which carries a coupon rate of 9.25% versus a 7.3% rate on the shorter term debt it replaced. The effective income tax rate at September 30, 1998 was 43% as compared to 38% at September 30, 1997. The increase is directly attributable to an increase in expenses recorded for financial reporting purposes, but not deductible for income tax purposes, primarily certain goodwill amortization. At December 31, 1997, subsidiaries of the Company had net operating loss carryforwards for tax purposes of approximately $9.4 million subject to certain limitations that expire between 2001 and 2007. THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997 Net sales increased by $19.1 million, or 17%, from $114.3 million for the third quarter of 1997 to $133.4 million for the quarter ended September 30, 1998. Approximately 53% of this increase was attributable to internal growth and 47% was a result of the 1997 Acquisitions. Of the internal sales growth, 56% was 15
16 attributable to ILS and the addition of TFS customers, and the remainder was due to increased orders from Manufactured Products' customers. The growth in net sales attributable to the 1997 Acquisitions applies to ILS and primarily pertains to Arden which was acquired as of August 1, 1997. Gross profit increased by $5.9 million, or 33%, from $18.0 million for the third quarter of 1997 to $23.9 million for the third quarter ended September 30, 1998. Of the increase, 29% relates to the 1997 Acquisitions, primarily Arden, and 71% was due to internal growth, evenly allocated between Manufactured Products and ILS. The Company's consolidated gross margin increased to 17.9% for the quarter ended September 30, 1998 from 15.7% for the quarter ended September 30, 1997 and was due to increased margins in both the Manufactured Products and ILS segments. The increase in Manufactured Products was due to a change in revenue mix and to increased production thereby allocating fixed manufacturing overhead over a greater production base. The increase in margins in the ILS segment is a result of spreading operating costs over a growing revenue base resulting from the recent acquisitions in ILS and to internal growth and favorable raw material sourcing. Selling, general and administrative costs increased by 26% to $14.5 million for the three months ended September 30, 1998 from $11.5 million for the three months ended September 30, 1997. Approximately 36% of such increase was related to the 1997 Acquisitions while the remainder related to the increase in internally generated net sales. Consolidated selling, general and administrative expenses as a percentage of net sales was 10.9% for the current period and 10.1% for the corresponding period of the prior year. Interest expense increased by $1.7 million from $2.5 million for the three-month period ended September 30, 1997 to $4.2 million for the three-month period ended September 30, 1998 due to higher average debt outstanding during the current period and to higher average interest rates in 1998 versus 1997. For the three-month period ended September 30, 1998, the Company averaged outstanding borrowings of $203.9 million as compared to $129.0 million outstanding for the three months ended September 30, 1997. The increase in average borrowings related to acquisitions in 1997 and 1998, to working capital increases to support the realized and anticipated growth in business and to capital expenditures to support growth in the business. The average borrowing rate of 8.3% for the three months ended September 30, 1998 is 80 basis points higher than the average rate of 7.5% for the three months ended September 30, 1997 primarily because of the $150 million bond offering in the fall of 1997 which carries a coupon rate of 9.25% versus a 7.3% rate on the shorter term debt it replaced. 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. On November 2, 1998, Park-Ohio amended and restated its credit agreement with a group of banks under which it may borrow up to $150 million on an unsecured basis. The New Credit Agreement expires on April 30, 2001 and the proceeds of which will be used for general corporate purposes. Amounts borrowed under the New Credit Agreement may be borrowed at Park-Ohio's election at either (i) the bank's prime lending rate less 100-30 basis points or (ii) LIBOR plus 90-170 basis points depending on the aggregate amount borrowed under the New Credit Agreement. As of October 31, 1998, $80.5 million was outstanding under the 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. Capital expenditures for 1998 are projected to be approximately $22.0 million which will be used to invest in the Company's current facilities for projected new business, for scheduled improvements and new equipment to expand existing products. The ratio of current assets to current liabilities was 2.84 at September 30, 1998 versus 2.83 at December 31, 1997. Working capital increased by $17.8 million to $164.2 million at September 30, 1998 from $146.4 million at December 31, 1997 largely as a result of increases necessary to support the scheduled internal growth of the Company. 16
17 During the first nine months of 1998, the Company generated $19.5 million from operations before changes in operating assets and liabilities. After giving effect to the use of $15.6 million in the operating accounts, the Company provided $3.9 million from operating activities. During the period, the Company invested $20.7 million in capital expenditures, used $6.0 for acquisitions and used $800 thousand to purchase common shares for the treasury. These activities were funded by a net increase in bank borrowings of $25.4 million offset by a $1.8 million increase in cash during the period. YEAR 2000 CONVERSION The Year 2000 ("Y2K") issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. During 1996, the Company developed a Y2K Task Force, which was established to monitor and track the Y2K compliance at its operating units. The Task Force developed a Y2K plan in order to minimize the risk to the Company's operating units and its customers. The plan to resolve the Y2K issues involves four phases: assessment, remediation, testing and implementation. To date, the Task Force has completed its assessment of its computer hardware and software applications, process control equipment, and other non-information technology equipment. After taking into consideration investments in new equipment and systems that have already been made, this assessment has determined that with only a few exceptions, the systems are Y2K compliant. The exceptions require upgrades of software programs or changes to existing programs. The remediation and testing phases are currently underway, and upgrades and software corrections are being completed. The target for completion of all phases is by the second quarter of 1999. Based upon the assessments and remediations completed to date, the Company does not expect that the Y2K issue will have a material effect on its business operations, consolidated financial condition, cash flows, or results of operations. In addition, the Task Force will review the Y2K compliance of its key suppliers, customers and service providers ("significant third parties") in an effort to reduce the potential adverse effect on its operations from non-compliance by such parties. This significant third party review has begun and is expected to be completed by June 30, 1999. Interfaces to external suppliers and customers are part of this assessment and validation process. As these significant third parties are reviewed, the Task Force intends to develop contingency plans, if necessary, for significant third parties that exhibit possible Y2K problems. If Y2K compliance is not achieved by these significant third parties, over which the Company has no control, it could, depending on duration, have a material adverse effect on the Company's operations. The Company will utilize both internal and external resources to remedy, test, and implement the software and operating equipment for Y2K modifications. The total cost to achieve Y2K compliance is estimated at $9 million. Approximately 75% of this cost represents new systems, which the Company may have initiated during the period, notwithstanding the Y2K issue. To date, the Company has incurred approximately $7.8 million for new systems and equipment, with the majority of these costs for the conversion/development of systems. The remaining $1.2 million will be funded through operating cash flows. The Company generally does not separately identify the direct costs of internal employees working on Y2K projects. SEASONALITY; VARIABILITY OF OPERATING RESULTS As a result of the significant growth in the Company's net sales and operating income in recent years, seasonal fluctuations have been substantially mitigated. The Company, however, performs scheduled plant maintenance in the third quarter to coincide with customer plant shut downs. 17
18 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 businesses in the Capital Equipment Group, included in the Manufactured Products segment, which typically ship a few large systems per year. In addition, the Company experiences seasonality in the Kay Home Products, Inc. ("Kay Home Products") operating unit of the Metal Forming Group included in the Manufactured Products segment. Kay Home Products' goods are primarily used by consumers in the spring and summer, and consequently its first two quarters of operating results are typically the strongest. FORWARD-LOOKING STATEMENTS This Form 10-Q contains certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Certain statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward- looking statements, including without limitation, discussion regarding the Company's anticipated levels and funding of capital expenditures and the Y2K conversion. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company, that 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 and quality; raw material availability and pricing; changes in the Company's 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 and tax rates; increasingly stringent domestic and foreign governmental regulations including those affecting the environment; inherent uncertainties involved in assessing the Company's potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims; dependence on the automotive industry; dependence on key management; dependence on information systems; and the ability of the Company, its vendors and customers to achieve Y2K compliance. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes 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 the Company that the Company's plans and objectives will be achieved. REVIEW BY INDEPENDENT ACCOUNTANTS The consolidated financial statements at September 30, 1998, and for the three-month and nine-month periods ended September 30, 1998 and 1997, have been reviewed, prior to filing, by Ernst & Young LLP, the Company's independent accountants, and their report is included herein. 18
19 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 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are included herein: (2) Agreement of Merger dated February 20, 1998 by and among Park-Ohio Industries, Inc., PKOH Merger Corp. and PKOH Holding Corp. (filed as appendix A to the Registration Statement on Form S-4 of Park-Ohio Industries, Inc., filed on February 26, 1998, SEC File No. 333-46931 and incorporated by reference and made a part hereof) (3) (i) Amended and Restated Articles of Incorporation of PKOH Holding Corp. (filed as appendix B to the Definitive Proxy Statement of Park-Ohio Industries, Inc. filed on April 24, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) (ii) Regulations of PKOH Holding Corp. (filed as appendix C to the Definitive Proxy Statement of Park-Ohio Industries, Inc. filed on April 24, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) (4) Amended and Restated Credit Agreement among Park-Ohio Industries, Inc., and various financial institutions dated November 2, 1998. (15) Letter re: unaudited financial information (27) Financial data schedule (Electronic filing only) The Company did not file any reports on Form 8-K during the three months ended September 30, 1998. 19
20 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/ J. S. WALKER ----------------------------------- Name: J. S. Walker Title: Vice President and Chief Financial Officer Dated November 13, 1998 --------------------------------- 20
21 EXHIBIT INDEX QUARTERLY REPORT ON FORM 10-Q PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES FOR THE QUARTER ENDED SEPTEMBER 30, 1998 <TABLE> <CAPTION> EXHIBIT - ------- <C> <S> (4) Amended and Restated Credit Agreement among Park-Ohio Industries, Inc. and various financial institutions dated November 2, 1998 (15) Letter re: unaudited financial information (27) Financial data schedule (Electronic filing only) </TABLE> 21