UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-43005-01
Park-Ohio Industries, Inc.
(Exact name of registrant as specified in its charter)
Ohio | 34-6520107 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
6065 Parkland Boulevard, Cleveland, Ohio | 44124 | |
(Address of principal executive offices) | (Zip Code) |
440/947-2000
(Registrants telephone number, including area code)
Pursuant to a corporate reorganization effective June 15, 1998,
Park-Ohio Industries, Inc. became a wholly-owned subsidiary of Park-Ohio Holdings Corp.
The registrant meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form in reduced disclosure format.
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 ¨ No x |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
All of the outstanding capital stock of the registrant is held by Park-Ohio Holdings Corp. As of October 31, 2012, 100 shares of the registrants common stock, $1 par value, were outstanding.
The Exhibit Index is located on page 28.
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
2
ITEM 1. | Financial Statements |
PARK-OHIO INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, 2012 |
December 31, 2011 |
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(Dollars in thousands) | ||||||||
ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 36.339 | $ | 61,297 | ||||
Accounts receivable, less allowances for doubtful accounts of $3,078 at September 30, 2012 and $5,483 at December 31, 2011 |
172,949 | 139,750 | ||||||
Inventories, net |
223,922 | 202,039 | ||||||
Deferred tax assets |
22,244 | 20,561 | ||||||
Unbilled contract revenue |
9,541 | 18,778 | ||||||
Other current assets |
20,131 | 10,309 | ||||||
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Total Current Assets |
485,126 | 452,734 | ||||||
Property, plant and equipment: |
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Land and land improvements |
5,629 | 3,604 | ||||||
Buildings |
58,675 | 50,620 | ||||||
Machinery and equipment |
242,810 | 206,809 | ||||||
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307,114 | 261,033 | |||||||
Less accumulated depreciation |
207,875 | 198,007 | ||||||
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99,239 | 63,026 | |||||||
Other assets: |
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Goodwill and other intangible assets |
97,550 | 20,187 | ||||||
Other |
62,429 | 61,452 | ||||||
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$ | 744,344 | $ | 597,399 | |||||
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities: |
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Trade accounts payable |
$ | 120,352 | $ | 99,562 | ||||
Payables to affiliates |
1,845 | 1,569 | ||||||
Accrued expenses |
94,908 | 73,298 | ||||||
Current portion of long-term debt |
4,230 | 1,415 | ||||||
Current portion of other postretirement benefits |
2,002 | 2,002 | ||||||
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Total Current Liabilities |
223,337 | 177,846 | ||||||
Long-term liabilities, less current portion: |
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Senior Notes |
250,000 | 250,000 | ||||||
Credit facility |
125,929 | 93,000 | ||||||
Other long-term debt |
2,821 | 3,165 | ||||||
Deferred tax liability |
29,728 | 1,392 | ||||||
Other postretirement benefits and other long-term liabilities |
26,774 | 24,285 | ||||||
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435,252 | 371,842 | |||||||
Shareholders equity |
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Common stock, par value $1 a share |
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Additional paid-in capital |
73,066 | 59,867 | ||||||
Retained earnings (deficit) |
19,110 | (3,721 | ) | |||||
Accumulated other comprehensive (loss) |
(6,421 | ) | (8,435 | ) | ||||
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85,755 | 47,711 | |||||||
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$ | 744,344 | $ | 597,399 | |||||
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Note: | The balance sheet at December 31, 2011 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 accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
3
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net sales |
$ | 286,462 | $ | 243,544 | $ | 858,335 | $ | 731,980 | ||||||||
Cost of products sold |
232,532 | 201,670 | 699,576 | 602,942 | ||||||||||||
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Gross profit |
53,930 | 41,874 | 158,759 | 129,038 | ||||||||||||
Selling, general and administrative expenses |
31,264 | 26,247 | 89,387 | 80,590 | ||||||||||||
Restructuring and asset impairment charge |
| 5,359 | | 5,359 | ||||||||||||
Settlement of litigation |
| | 13,000 | | ||||||||||||
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Operating income |
22,666 | 10,268 | 56,372 | 43,089 | ||||||||||||
Interest expense |
6,523 | 6,218 | 19,805 | 26,331 | ||||||||||||
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Income before income taxes |
16,143 | 4,050 | 36,567 | 16,758 | ||||||||||||
Income taxes |
5,449 | 1,178 | 12,236 | 6,068 | ||||||||||||
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Net income |
$ | 10,694 | $ | 2,872 | $ | 24,331 | $ | 10,690 | ||||||||
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See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income |
$ | 10,694 | $ | 2,872 | $ | 24,331 | $ | 10,690 | ||||||||
Other comprehensive income: |
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Foreign currency translation gain (loss) |
2,473 | (3,191 | ) | 803 | 245 | |||||||||||
Pension and postretirement benefit adjustments |
404 | 136 | 1,211 | 349 | ||||||||||||
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Total other comprehensive income (loss) |
2,877 | (3,055 | ) | 2,014 | 594 | |||||||||||
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Comprehensive income (loss), net of tax |
$ | 13,571 | $ | (183 | ) | $ | 26,345 | $ | 11,284 | |||||||
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See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (UNAUDITED)
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive (Loss) |
Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at January 1, 2012 |
$ | | $ | 59,867 | $ | (3,721 | ) | $ | (8,435 | ) | $ | 47,711 | ||||||||
Other comprehensive income |
| | 24,331 | 2,014 | 26,345 | |||||||||||||||
Share-based compensation expense |
| 2,168 | | | 2,168 | |||||||||||||||
Income tax effect of share-based compensation exercises and vesting |
| 1,031 | | | 1,031 | |||||||||||||||
Dividend paid to parent |
| | (1,500 | ) | | (1,500 | ) | |||||||||||||
Capital contribution from parent |
| 10,000 | | | 10,000 | |||||||||||||||
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Balance at September 30, 2012 |
$ | | $ | 73,066 | $ | 19,110 | $ | (6,421 | ) | $ | 85,755 | |||||||||
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See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, |
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2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
OPERATING ACTIVITIES |
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Net income |
$ | 24,331 | $ | 10,690 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
12,848 | 11,833 | ||||||
Debt extinguishment costs |
305 | 7,335 | ||||||
Restructuring and asset impairment charge |
| 5,359 | ||||||
Gain on sale of property |
(250 | ) | | |||||
Share-based compensation |
2,168 | 1,525 | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(2,280 | ) | (18,255 | ) | ||||
Inventories and other current assets |
(7,799 | ) | (22,926 | ) | ||||
Accounts payable and accrued expenses |
9,869 | 37,501 | ||||||
Other |
4,852 | (14,722 | ) | |||||
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Net Cash Provided by Operating Activities |
44,044 | 18,340 | ||||||
INVESTING ACTIVITIES |
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Purchases of property, plant and equipment, net |
(16,890 | ) | (8,316 | ) | ||||
Proceeds from sale of property |
400 | | ||||||
Acquisitions, net of cash acquired |
(96,570 | ) | | |||||
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Net Cash Used by Investing Activities |
(113,060 | ) | (8,316 | ) | ||||
FINANCING ACTIVITIES |
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Proceeds from (payments on) term loans and other debt |
25,687 | (36,052 | ) | |||||
Proceeds from (payments on) revolving credit facility, net |
9,715 | 1,000 | ||||||
Dividend paid to parent |
(1,500 | ) | | |||||
Issuance of 8.125% senior notes due 2021, net of deferred financing costs |
| 244,970 | ||||||
Redemption of 8.375% senior subordinated notes due 2014 |
| (189,555 | ) | |||||
Bank debt issue costs |
(875 | ) | (1,080 | ) | ||||
Distribution of capital to shareholder |
| (750 | ) | |||||
Income tax effect of share-based compensation exercises and vesting |
1,031 | | ||||||
Capital contribution from parent |
10,000 | | ||||||
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Net Cash Provided by Financing Activities |
44,058 | 18,533 | ||||||
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(Decrease) Increase in Cash and Cash Equivalents |
(24,958 | ) | 28,557 | |||||
Cash and Cash Equivalents at Beginning of Period |
61,297 | 35,075 | ||||||
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Cash and Cash Equivalents at End of Period |
$ | 36,339 | $ | 63,632 | ||||
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Taxes paid |
$ | 4,834 | $ | 2,466 | ||||
Interest paid (includes $5,720 of senior subordinated debt redemption costs in 2011) |
12,694 | 10,449 |
See accompanying notes to these condensed consolidated financial statements. The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
7
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Dollar amounts in thousands)
NOTE A Basis of Presentation
The condensed consolidated financial statements include the accounts of Park-Ohio Industries, Inc. and its subsidiaries (collectively, we or the Company). All significant intercompany transactions have been eliminated in consolidation. Park-Ohio Industries, Inc. is a wholly-owned subsidiary of Park-Ohio Holdings Corp. (Holdings). Certain amounts in the prior years financial statements have been reclassified to conform to the current year presentation.
The accompanying unaudited condensed 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
NOTE B Recent Accounting Pronouncements
Accounting Pronouncements Adopted in the Nine Months Ended September 30, 2012
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 amends existing guidance by allowing only two options for presenting components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement on other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 , with early adoption permitted. In December 2011, the FASB issued ASU No. 2011-12, deferring its requirements that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. Entities continue to be required to present amounts reclassified out of accumulated other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. The requirement to present reclassification adjustments in interim periods was also deferred. However, entities are required to report a total for comprehensive income in condensed financial statements of interim periods in a single continuous statement or in two consecutive statements. The FASB is reconsidering the presentation requirements for reclassification adjustments. The Company adopted ASU No. 2011-5 in the first quarter of 2012 and elected to present the components of net income and comprehensive income in two separate but consecutive statements.
NOTE C Segments
On March 23, 2012, the Company completed the acquisition of Fluid Routing Solutions Holding Corp. (FRS), a leading manufacturer of automotive and industrial rubber and thermoplastic hose products and fuel filler and hydraulic fluid assemblies for the automotive and industrial industries. FRS will expand the Companys sales of assembled components.
During the second quarter of 2012, as a result of the FRS acquisition, the Company realigned its segments in order to better align its business with the underlying markets and customers that the Company serves. In so doing, we combined Aluminum Products, Rubber Products (previously included in the former Manufactured Products segment), and Delo Screw Products (previously included in the Supply Technologies segment) along with FRS to form the Assembly Components segment. The former Manufactured Products segment will now be referred to as Engineered Products. The results of operations of FRS from the date of the acquisition through September 30, 2012 are included in the Assembly Components segment. The business segment results for the prior year have been reclassified to reflect these changes. Following is a description of each of our three reportable segments.
Supply Technologies provides our customers with Total Supply Management services for a broad range of high-volume, specialty production components. Total Supply Management manages the efficiencies of every aspect of supplying production parts and materials to our customers manufacturing floor, from strategic planning to program implementation, and includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. Assembly Components manufactures cast aluminum components, automotive and industrial rubber and thermoplastic products, fuel filler and hydraulic assemblies for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries. Assembly Components also provides value-added services such as design and engineering, machining and assembly. Engineered 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.
8
The Company primarily evaluates performance and allocates resources based on segment operating income as well as projected future performance. Segment operating income is defined as revenues less expenses identifiable to the product lines included within each segment. Segment operating income reconciles to consolidated income before income taxes by deducting corporate costs and other income or expense items that are not attributed to the segments and net interest expense.
Results by business segment were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net sales: |
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Supply Technologies |
$ | 117,384 | $ | 123,186 | $ | 381,541 | $ | 368,509 | ||||||||
Assembly Components |
84,426 | 38,131 | 220,474 | 126,142 | ||||||||||||
Engineered Products |
84,652 | 82,227 | 256,320 | 237,329 | ||||||||||||
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$ | 286,462 | $ | 243,544 | $ | 858,335 | $ | 731,980 | |||||||||
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Segment operating income: |
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Supply Technologies |
$ | 7,632 | $ | 7,896 | $ | 27,204 | $ | 24,493 | ||||||||
Assembly Components |
6,013 | (1,039 | ) | 14,393 | 3,017 | |||||||||||
Engineered Products |
14,187 | 13,584 | 42,667 | 34,480 | ||||||||||||
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27,832 | 20,441 | 84,264 | 61,990 | |||||||||||||
Corporate costs |
(5,166 | ) | (4,814 | ) | (14,892 | ) | (13,542 | ) | ||||||||
Settlement of litigation |
| | (13,000 | ) | | |||||||||||
Restructuring and asset impairment charge |
| (5,359 | ) | | (5,359 | ) | ||||||||||
Interest expense |
(6,523 | ) | (6,218 | ) | (19,805 | ) | (26,331 | ) | ||||||||
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Income before income taxes |
$ | 16,143 | $ | 4,050 | $ | 36,567 | $ | 16,758 | ||||||||
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September 30, | December 31, | |||||||
2012 | 2011 | |||||||
Identifiable assets: |
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Supply Technologies |
$ | 222,265 | $ | 225,346 | ||||
Assembly Components |
235,907 | 72,232 | ||||||
Engineered Products |
204,407 | 195,834 | ||||||
General corporate |
81,765 | 103,987 | ||||||
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$ | 744,344 | $ | 597,399 | |||||
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NOTE D Inventories
The components of inventory consist of the following:
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
Finished goods |
$ | 117,229 | $ | 122,010 | ||||
Work in process |
28,784 | 20,660 | ||||||
Raw materials and supplies |
77,909 | 59,369 | ||||||
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$ | 223,922 | $ | 202,039 | |||||
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NOTE E Stock-Based Compensation
Holdings grants share-based compensation awards to the Companys employees. In accordance with ASC 718, Compensation - Stock Compensation such costs have been allocated to the Company. Total stock-based compensation expense recorded in the first nine months of 2012 and 2011 was $2,168 and $1,525, respectively. Total stock compensation expense recorded in the third quarter of 2012 and 2011 was $807 and $605, respectively. There were no stock options awards during the first nine months of 2012 and 2011. There were 88 shares of Holdings restricted stock awarded during the three months ended September 30, 2012 at prices ranging from $19.38 to $19.45 per share. There were 258 shares of restricted stock awarded during the nine months ended September 30, 2012 at prices ranging from $18.82 to $21.59 per share. There were 140 shares of Holdings restricted stock awarded during the nine months ended September 30, 2011 at a price of $20.90 per share all of which were awarded during the three month period ended June 30, 2011. As of September 30, 2012, there was $6,588 of unrecognized compensation cost related to non-vested stock-based compensation, which cost is expected to be recognized over a weighted average period of 2.3 years.
9
NOTE F Pension Plans and Other Postretirement Benefits
The components of net periodic benefit (gain) cost recognized during interim periods were as follows:
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||
Three Months Ended September 30, |
Nine
Months Ended September 30, |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||
Service costs |
$ | 542 | $ | 604 | $ | 1,626 | $ | 1,317 | $ | 15 | $ | 12 | $ | 45 | $ | 36 | ||||||||||||||||
Interest costs |
565 | 596 | 1,695 | 1,787 | 201 | 228 | 603 | 683 | ||||||||||||||||||||||||
Expected return on plan assets |
(2,059 | ) | (2,239 | ) | (6,177 | ) | (6,707 | ) | | | | | ||||||||||||||||||||
Transition obligation |
(10 | ) | (10 | ) | (30 | ) | (30 | ) | | | | | ||||||||||||||||||||
Amortization of prior service cost |
11 | 11 | 33 | 33 | (24 | ) | (24 | ) | (72 | ) | (72 | ) | ||||||||||||||||||||
Recognized net actuarial loss |
241 | | 723 | | 186 | 129 | 557 | 388 | ||||||||||||||||||||||||
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Net periodic benefit (gains) costs |
$ | (710 | ) | $ | (1,038 | ) | $ | (2,130 | ) | $ | (3,600 | ) | $ | 378 | $ | 345 | $ | 1,133 | $ | 1,035 | ||||||||||||
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NOTE G Comprehensive Loss
The components of accumulated comprehensive loss at September 30, 2012 and December 31, 2011 were as follows:
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
Foreign currency translation adjustment |
$ | 5,625 | $ | 4,822 | ||||
Pension and postretirement benefit adjustments, net of tax |
(12,046 | ) | (13,257 | ) | ||||
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$ | (6,421 | ) | $ | (8,435 | ) | |||
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The pension and postretirement benefit liability amounts are net of deferred taxes of $5,571 at September 30, 2012 and December 31, 2011. No income taxes are provided on foreign currency translation adjustments as foreign earnings are considered permanently invested.
NOTE H 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 Companys product warranty liability:
2012 | 2011 | |||||||
Balance at January 1 |
$ | 4,208 | $ | 4,046 | ||||
Claims paid during the year |
(1,453 | ) | (3,260 | ) | ||||
Additional warranties issued during the first nine months |
1,771 | 3,265 | ||||||
Acquired warranty liabilities |
3,317 | | ||||||
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Balance at September 30 |
$ | 7,843 | $ | 4,051 | ||||
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NOTE I Income Taxes
The Companys tax provision for interim periods is determined using an estimate of its annual effective income tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the Company updates the estimated annual effective income tax rate, and if the estimated income tax rate changes, a cumulative adjustment is made.
The effective tax rate for the first nine months of 2012 and 2011 was 33.5% and 36.2%, respectively. The 2012 annual effective income tax rate is estimated to be approximately 33.7% and is lower than the 35.0% United States federal statutory rate primarily due to anticipated income in jurisdictions outside of the United States where the effective income tax rate is lower than in the United States.
10
NOTE J Fair Value Measurements
The Company measures financial assets and liabilities at fair value in three levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 1 Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The fair value of the 8.125% senior notes due 2021 is estimated based on a third-partys bid price, which was determined to be a Level 1 input. The fair value approximated $259,000 at September 30, 2012 and $247,500 at December 31, 2011 compared to a $250,000 carrying value. The fair value of the Companys term loan and revolving credit portion of the Credit Agreement, as defined in Note K below, approximated its carrying amount as of September 30, 2012 and December 31, 2011.
NOTE K Financing Arrangements
The Company is a party to a credit and security agreement, dated November 5, 2003, as amended (the Credit Agreement), with a group of banks, under which it may borrow or issue standby letters of credit or commercial letters of credit. On March 23, 2012, the Credit Agreement was amended and restated to, among other things, increase the revolving loan commitment from $200,000 to $220,000, and provide a term loan for $25,000 that is secured by certain real estate and machinery and equipment. Amounts borrowed under the revolving credit facility may be borrowed at either (i) LIBOR plus 1.75% to 2.75% or (ii) the banks prime lending rate minus .25% to 1.00%, at the Companys election. The LIBOR-based interest rate is dependent on the Companys debt service coverage ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing availability to the Company based on percentages of eligible accounts receivable and inventory. The interest rate on the revolving credit facility was 2% at September 30, 2012. Interest on the term loan is at either (i) LIBOR plus 2.75% or (ii) the banks prime lending rate plus .25%, at the Companys election. The term loan is amortized based on a seven-year schedule with the balance due at maturity (April 7, 2016). The interest rate on the term loan was 3.13% at September 30, 2012.
Long-term debt consists of the following:
September 30, 2012 |
December 31, 2011 |
|||||||
8.125% senior notes due 2021 |
$ | 250,000 | $ | 250,000 | ||||
Revolving credit |
106,286 | 93,000 | ||||||
Term loan |
23,214 | | ||||||
Other |
3,480 | 4,580 | ||||||
|
|
|
|
|||||
382,980 | 347,580 | |||||||
Less current maturities |
4,230 | 1,415 | ||||||
|
|
|
|
|||||
Total |
$ | 378,750 | $ | 346,165 | ||||
|
|
|
|
NOTE L Accounts Receivable
During the first nine months of 2012 and 2011, the Company sold approximately $62,393 and $43,087, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity and recorded a loss in the amount of $260 and $190, respectively, in the condensed consolidated statements of operations. These losses represented implicit interest on the transactions.
NOTE M Acquisition
On March 23, 2012, the Company completed the acquisition of FRS, a leading manufacturer of automotive and industrial rubber and thermoplastic hose products and fuel filler and hydraulic fluid assemblies, in an all cash transaction valued at $98,772. FRS products include fuel filler, hydraulic, and thermoplastic assemblies and several forms of manufactured rubber and thermoplastic hose, including bulk and formed fuel, power steering, transmission oil cooling, hydraulic and thermoplastic hose. FRS sells to automotive and industrial customers throughout North America, Europe and Asia. FRS has five production facilities located in Florida, Michigan, Ohio, Tennessee and the Czech Republic. FRS is included in the Companys Assembly Components segment and
11
had revenues of $107,482 and net income of $7,397 for the period from the date acquired through September 30, 2012. The Company funded the acquisition with cash of $40,000, a $25,000 seven-year amortizing term loan provided by the Credit Agreement and secured by certain real estate and machinery and equipment of the Company and $33,772 of borrowings under the revolving credit facility provided by the Credit Agreement. The acquisition was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total estimated purchase price is allocated to FRS net tangible assets and intangible assets acquired and liabilities assumed based on their estimated fair values as of March 23, 2012, the effective date of the acquisition. Based on managements valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions, the preliminary purchase price is allocated as follows:
Cash and cash equivalents |
$ | 2,202 | ||
Accounts receivable |
30,920 | |||
Inventories |
12,355 | |||
Prepaid expenses and other current assets |
3,998 | |||
Property, plant and equipment |
30,258 | |||
Customer relationships |
29,400 | |||
Trademarks and trade name |
11,500 | |||
Other assets |
212 | |||
Accounts payable |
(17,207 | ) | ||
Accrued expenses |
(15,599 | ) | ||
Deferred tax liability |
(26,952 | ) | ||
Other long-term liabilities |
(776 | ) | ||
Goodwill |
38,461 | |||
|
|
|||
Total purchase price |
$ | 98,772 | ||
|
|
There were $1,139 of direct transaction costs included in selling, general and administrative expenses during the first nine months of 2012.
During the third quarter of 2012, the Company made adjustments to its preliminary purchase price allocation for FRS resulting in a net decrease to goodwill of $9. The adjustments made primarily relate to the working capital adjustment and valuation of property, plant and equipment and the associated impact of deferred taxes.
The following unaudited pro forma information is provided to present a summary of the combined results of the Companys operations with FRS as if the acquisition had occurred on January 1, 2011. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of what the results would have been had the acquisition been completed at the date indicated above.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Pro forma revenues |
$ | 286,462 | $ | 288,509 | $ | 909,204 | $ | 869,762 | ||||||||
Pro forma net income |
$ | 10,694 | $ | 6,021 | $ | 20,672 | $ | 17,012 |
NOTE N Commitments, Contingencies and Litigation Settlement
The Company is subject to various pending and threatened legal proceedings arising in the ordinary course of business. Although the Company cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, the Company records provisions when it considers the liability probable and reasonably estimable. Our provisions are based on historical experience and legal advice, reviewed quarterly and adjusted according to developments. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments about potential actions by third parties, such as regulators, courts, and state and federal legislatures. Changes in the amounts of our loss provisions, which can be material, affect our financial condition. Due to the inherent uncertainties in the process undertaken to estimate potential losses, we are unable to estimate an additional range of loss in excess of our accruals. While it is reasonably possible that such excess liabilities, if they were to occur, could be material to operating results in any given quarter or year of their recognition, we do not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on our long-term results of operations, liquidity or consolidated financial position.
Our subsidiaries are involved in a number of contractual and warranty related disputes. At this time, we cannot reasonably determine the timing and amount of any such loss. We believe that appropriate liabilities for these contingencies have been recorded; however, actual results may differ materially from our estimates.
12
One of our subsidiaries, Ajax Tocco Magnethermic (ATM), which is included in the Engineered Products segment, was a party to a binding arbitration proceeding pending in South Africa with its customer Evraz Highveld Steel and Vanadium (Evraz). The arbitration involved a dispute over the design and installation of a melting furnace. Evraz sought binding arbitration in September 2011 for breach of contract and sought compensatory damages in the amount of $37,000, as well as fees and expenses related to the arbitration. ATM counterclaimed in the arbitration, alleging breach of contract for non-payment of $2,700 as well as fees and expenses related to the arbitration. The arbitration was scheduled to commence in June 2012. Prior to the start of the arbitration, after complete evaluation of Evrazs evidence, consideration of the jurisdiction of the matter, the uncertainty of a specific outcome and other pertinent facts noted in preparation for the arbitration, we entered into a settlement agreement with Evraz pursuant to which we agreed to settle all claims subject to the arbitration proceeding by paying Evraz $13,000 in cash, which payment was made in June 2012. The $2,700 amount receivable from Evraz had been previously reserved and was written off in conjunction with the settlement.
NOTE O Goodwill and Other Intangible Assets
The change in goodwill and other intangibles assets reflected on the balance sheet from December 31, 2011 to September 30, 2012 was the result of an increase of $38,429 related to the acquisition of FRS and foreign currency translation. Information regarding other intangible assets as of September 30, 2012 and December 31, 2011 follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Acquisition Costs |
Accumulated Amortization |
Net | Acquisition Costs |
Accumulated Amortization |
Net | |||||||||||||||||||
Non-contractual customer relationships |
$ | 41,070 | $ | 5,052 | $ | 36,018 | $ | 11,670 | $ | 3,320 | $ | 8,350 | ||||||||||||
Other |
3,420 | 1,280 | 2,140 | 3,420 | 1,046 | 2,374 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 44,490 | $ | 6,332 | $ | 38,158 | $ | 15,090 | $ | 4,366 | $ | 10,724 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Indefinite-lived tradenames |
11,500 | | ||||||||||||||||||||||
Goodwill |
47,892 | 9,463 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total |
$ | 97,550 | $ | 20,187 | ||||||||||||||||||||
|
|
|
|
Amortization expense for the first nine months of 2012 was $1,966 and is estimated to be $2,569 in 2012, $3,046 in 2013 and $2,999 for each of the three subsequent years thereafter. The weighted-average amortization period for the acquired intangible assets was approximately 13.6 years.
NOTE P Supplemental Guarantor Information
Each of the material domestic direct and indirect wholly-owned subsidiaries of the Company (the Guarantor Subsidiaries) has fully and unconditionally guaranteed, on a joint and several basis, to pay principal, premium, and interest with respect to the 8.125% senior notes due 2021. Each of the Guarantor Subsidiaries is 100% owned as defined by Rule 3-10(h)(1) of Regulation S-X.
The following supplemental condensed consolidating financial statements present condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011, condensed consolidating statements of income for the three months and nine months ended September 30, 2012 and 2011, condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2011 and reclassification and elimination entries necessary to consolidate the Parent and all of its subsidiaries. The Parent reflected in the accompanying supplemental guarantor information is Park-Ohio Industries, Inc.
13
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2012
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Reclassifications/ Eliminations |
Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 1,214 | $ | 35,125 | $ | | $ | 36,339 | ||||||||||
Accounts receivable, net |
| 135,608 | 37,341 | | 172,949 | |||||||||||||||
Inventories |
| 179,012 | 44,910 | | 223,922 | |||||||||||||||
Other current assets |
382 | 22,889 | 6,401 | | 29,672 | |||||||||||||||
Deferred tax assets |
4,311 | 16,585 | 1,348 | | 22,244 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Current Assets |
4,693 | 355,308 | 125,125 | | 485,126 | |||||||||||||||
Investment in subsidiaries |
346,174 | 107,514 | | (453,688 | ) | | ||||||||||||||
Intercompany advances |
177,530 | 30,871 | 88,939 | (297,340 | ) | | ||||||||||||||
Property, Plant and Equipment, net |
5,070 | 88,973 | 5,196 | | 99,239 | |||||||||||||||
Other Assets: |
||||||||||||||||||||
Goodwill and other intangible assets |
| 94,775 | 2,775 | | 97,550 | |||||||||||||||
Other |
61,043 | | 1,386 | | 62,429 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Other Assets |
61,043 | 94,775 | 4,161 | | 159,979 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 594,510 | $ | 677,441 | $ | 223,421 | $ | (751,028 | ) | $ | 744,344 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Current Liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 1,740 | $ | 101,851 | $ | 16,761 | $ | | $ | 120,352 | ||||||||||
Payable to affiliates |
1,845 | | | | 1,845 | |||||||||||||||
Accrued expenses |
15,149 | 55,743 | 24,016 | | 94,908 | |||||||||||||||
Current portion of long-term liabilities |
2,002 | 4,230 | | | 6,232 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Current Liabilities |
20,736 | 161,824 | 40,777 | | 223,337 | |||||||||||||||
Long-Term Liabilities, less current portion |
250,000 | | | | 250,000 | |||||||||||||||
Revolving credit |
125,929 | | | | 125,929 | |||||||||||||||
Other long-term debt |
| 2,821 | | | 2,821 | |||||||||||||||
Deferred tax liability |
1,646 | 26,751 | 1,331 | | 29,728 | |||||||||||||||
Other postretirement benefits and other long-term liabilities |
24,046 | 2,224 | 504 | | 26,774 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Long-Term Liabilities |
401,621 | 31,796 | 1,835 | | 435,252 | |||||||||||||||
Intercompany advances |
86,398 | 137,647 | 73,295 | (297,340 | ) | | ||||||||||||||
Shareholders Equity |
85,755 | 346,174 | 107,514 | (453,688 | ) | 85,755 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Shareholders Equity |
$ | 594,510 | $ | 677,441 | $ | 223,421 | $ | (751,028 | ) | $ | 744,344 | |||||||||
|
|
|
|
|
|
|
|
|
|
14
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Reclassifications/ Eliminations |
Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 109 | $ | 61,188 | $ | | $ | 61,297 | ||||||||||
Accounts receivable, net |
| 106,414 | 33,336 | | 139,750 | |||||||||||||||
Inventories |
| 164,857 | 37,182 | | 202,039 | |||||||||||||||
Other current assets |
1,013 | 21,440 | 6,634 | | 29,087 | |||||||||||||||
Deferred tax assets |
4,311 | 14,902 | 1,348 | | 20,561 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Current Assets |
5,324 | 307,722 | 139,688 | | 452,734 | |||||||||||||||
Investment in subsidiaries |
290,106 | 96,781 | | (386,887 | ) | | ||||||||||||||
Intercompany advances |
75,519 | 7,249 | 48,966 | (131,734 | ) | | ||||||||||||||
Property, Plant and Equipment, net |
7,201 | 50,914 | 4,911 | | 63,026 | |||||||||||||||
Other Assets: |
||||||||||||||||||||
Goodwill and other intangible assets |
| 17,632 | 2,555 | | 20,187 | |||||||||||||||
Other |
55,437 | 4,538 | 1,477 | | 61,452 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Other Assets |
55,437 | 22,170 | 4,032 | | 81,639 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 433,587 | $ | 484,836 | $ | 197,597 | $ | (518,621 | ) | $ | 597,399 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Current Liabilities: |
||||||||||||||||||||
Trade accounts payable |
$ | 6,774 | $ | 75,604 | $ | 17,184 | $ | | $ | 99,562 | ||||||||||
Payable to affiliates |
| | 1,569 | | 1,569 | |||||||||||||||
Accrued expenses |
8,750 | 45,914 | 18,634 | | 73,298 | |||||||||||||||
Current portion of long-term liabilities |
| 3,417 | | | 3,417 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Current Liabilities |
15,524 | 124,935 | 37,387 | | 177,846 | |||||||||||||||
Long-Term Liabilities, less current portion 8.125% Senior notes due 2021 |
250,000 | | | | 250,000 | |||||||||||||||
Revolving credit |
93,000 | | | | 93,000 | |||||||||||||||
Other long-term debt |
(180 | ) | 3,345 | | | 3,165 | ||||||||||||||
Deferred tax liability |
2,853 | (1,282 | ) | (179 | ) | | 1,392 | |||||||||||||
Other postretirement benefits and other long-term liabilities |
23,768 | (62 | ) | 579 | | 24,285 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Long-Term Liabilities |
369,441 | 2,001 | 400 | | 371,842 | |||||||||||||||
Intercompany advances |
911 | 67,794 | 63,029 | (131,734 | ) | | ||||||||||||||
Shareholders Equity |
47,711 | 290,106 | 96,781 | (386,887 | ) | 47,711 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Shareholders Equity |
$ | 433,587 | $ | 484,836 | $ | 197,597 | $ | (518,621 | ) | $ | 597,399 | |||||||||
|
|
|
|
|
|
|
|
|
|
15
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2012
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales |
$ | | $ | 732,957 | $ | 125,378 | $ | | $ | 858,335 | ||||||||||
Cost of sales |
| 608,302 | 91,274 | | 699,576 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
| 124,655 | 34,104 | | 158,759 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling, general and administrative expenses |
11,255 | 58,313 | 19,819 | | 89,387 | |||||||||||||||
Settlement of litigation |
| 13,000 | | | 13,000 | |||||||||||||||
Income (loss) from subsidiaries |
57,667 | 10,617 | | (68,284 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
46,412 | 63,959 | 14,285 | (68,284 | ) | 56,372 | ||||||||||||||
Interest expense |
19,334 | 193 | 278 | | 19,805 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
27,078 | 63,766 | 14,007 | (68,284 | ) | 36,567 | ||||||||||||||
Income taxes |
2,747 | 6,099 | 3,390 | | 12,236 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 24,331 | $ | 57,667 | $ | 10,617 | $ | (68,284 | ) | $ | 24,331 | |||||||||
|
|
|
|
|
|
|
|
|
|
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2011
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales |
$ | | $ | 602,732 | $ | 129,248 | $ | | $ | 731,980 | ||||||||||
Cost of sales |
| 503,343 | 99,599 | | 602,942 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
| 99,389 | 29,649 | | 129,038 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling, general and administrative expenses |
10,143 | 51,196 | 19,251 | | 80,590 | |||||||||||||||
Restructuring and asset impairment charge |
| 5,148 | 211 | | 5,359 | |||||||||||||||
Income (loss) from subsidiaries |
47,030 | 14,671 | | (61,701 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
36,887 | 57,716 | 10,187 | (61,701 | ) | 43,089 | ||||||||||||||
Gain on bond redemption |
| | (12,656 | ) | 12,656 | | ||||||||||||||
Interest expense |
26,197 | (245 | ) | 379 | | 26,331 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
10,690 | 57,961 | 22,464 | (74,357 | ) | 16,758 | ||||||||||||||
Income taxes |
| 375 | 7,793 | (2,100 | ) | 6,068 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 10,690 | $ | 57,586 | $ | 14,671 | $ | (72,257 | ) | $ | 10,690 | |||||||||
|
|
|
|
|
|
|
|
|
|
16
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2012
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales |
$ | | $ | 245,025 | $ | 41,437 | $ | | $ | 286,462 | ||||||||||
Cost of sales |
| 202,656 | 29,876 | | 232,532 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
| 42,369 | 11,561 | | 53,930 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling, general and administrative expenses |
5,673 | 18,295 | 7,296 | | 31,264 | |||||||||||||||
Income (loss) from subsidiaries |
24,223 | 3,328 | | (27,551 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
18,550 | 27,402 | 4,265 | (27,551 | ) | 22,666 | ||||||||||||||
Interest expense |
6,367 | 65 | 91 | | 6,523 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
12,183 | 27,337 | 4,174 | (27,551 | ) | 16,143 | ||||||||||||||
Income taxes |
1,489 | 3,114 | 846 | | 5,449 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 10,694 | $ | 24,223 | $ | 3,328 | $ | (27,551 | ) | $ | 10,694 | |||||||||
|
|
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2011
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net sales |
$ | | $ | 197,886 | $ | 45,658 | $ | | $ | 243,544 | ||||||||||
Cost of sales |
| 166,135 | 35,535 | | 201,670 | |||||||||||||||
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Gross profit |
| 31,751 | 10,123 | | 41,874 | |||||||||||||||
Operating expenses: |
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Selling, general and administrative expenses |
3,357 | 16,752 | 6,138 | | 26,247 | |||||||||||||||
Restructuring and asset impairment charge |
| 5,148 | 211 | | 5,359 | |||||||||||||||
Income (loss) from subsidiaries |
12,325 | 2,636 | | (14,961 | ) | | ||||||||||||||
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Operating income |
8,968 | 12,487 | 3,774 | (14,961 | ) | 10,268 | ||||||||||||||
Interest expense |
6,096 | 37 | 85 | | 6,218 | |||||||||||||||
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Income (loss) before income taxes |
2,872 | 12,450 | 3,689 | (14,961 | ) | 4,050 | ||||||||||||||
Income taxes |
| 125 | 1,053 | | 1,178 | |||||||||||||||
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Net income (loss) |
$ | 2,872 | $ | 12,325 | $ | 2,636 | $ | (14,961 | ) | $ | 2,872 | |||||||||
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17
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2012
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash (used) provided by operations |
$ | (33,319 | ) | $ | 70,076 | $ | 6,029 | $ | 1,258 | $ | 44,044 | |||||||||
Cash flows from investing activities: |
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Acquisition, net of cash acquired |
| (96,570 | ) | | | (96,570 | ) | |||||||||||||
Proceeds from sale of property |
| 400 | | | 400 | |||||||||||||||
Purchases of property, plant and equipment, net |
1,226 | (17,184 | ) | (932 | ) | | (16,890 | ) | ||||||||||||
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Net cash provided (used) in investing activities |
1,226 | (113,354 | ) | (932 | ) | | (113,060 | ) | ||||||||||||
Cash flows from financing activities: |
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Dividends paid to parent |
(1,500 | ) | | | | (1,500 | ) | |||||||||||||
Capital contribution from parent |
10,000 | | | | 10,000 | |||||||||||||||
Intercompany account change |
(12,098 | ) | 44,516 | (31,160 | ) | (1,258 | ) | | ||||||||||||
Income tax effect of share-based compensation exercises and vesting |
1,031 | | | | 1,031 | |||||||||||||||
Debt issue costs |
(875 | ) | | | | (875 | ) | |||||||||||||
Proceeds from revolving credit and long term debt |
35,535 | (133 | ) | | | 35,402 | ||||||||||||||
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Net cash provided (used) by financing activities |
32,093 | 44,383 | (31,160 | ) | (1,258 | ) | 44,058 | |||||||||||||
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Increase (decrease) in cash and cash equivalents |
| 1,105 | (26,063 | ) | | (24,958 | ) | |||||||||||||
Cash and cash equivalents at beginning of period |
| 109 | 61,188 | | 61,297 | |||||||||||||||
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Cash and cash equivalents at end of period |
$ | | $ | 1,214 | $ | 35,125 | $ | | $ | 36,339 | ||||||||||
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PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2011
Parent | Combined Guarantor Subsidiaries |
Combined Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash (used) provided by operations |
$ | (20,646 | ) | $ | 36,753 | $ | (592 | ) | $ | 2,825 | $ | 18,340 | ||||||||
Cash flows from investing activities: |
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Purchases of property, plant and equipment, net |
(99 | ) | (7,883 | ) | (334 | ) | | (8,316 | ) | |||||||||||
Proceeds from bond redemption |
| | 26,165 | (26,165 | ) | | ||||||||||||||
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Net cash (used) provided in investing activities |
(99 | ) | (7,883 | ) | 25,831 | (26,165 | ) | (8,316 | ) | |||||||||||
Cash flows from financing activities: |
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Bank debt issue costs |
(1,080 | ) | | | | (1,080 | ) | |||||||||||||
Intercompany account change |
26,400 | (28,832 | ) | 5,257 | (2,825 | ) | | |||||||||||||
Issuance of 8.125% senior notes net of deferred financing costs |
244,970 | | | | 244,970 | |||||||||||||||
Redemption of 8.375% senior subordinated notes due 2014 |
(215,720 | ) | | | 26,165 | (189,555 | ) | |||||||||||||
Distribution of capital to shareholder |
(750 | ) | | | | (750 | ) | |||||||||||||
Proceeds from revolving credit facility |
1,000 | | | | 1,000 | |||||||||||||||
Payments on term loans and other debt |
(34,785 | ) | (38 | ) | (1,229 | ) | | (36,052 | ) | |||||||||||
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Net cash provided by financing activities |
20,035 | (28,870 | ) | 4,028 | 23,340 | 18,533 | ||||||||||||||
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Increase (decrease) in cash and cash equivalents |
(710 | ) | | 29,267 | | 28,557 | ||||||||||||||
Cash and cash equivalents at beginning of period |
1,339 | | 33,736 | | 35,075 | |||||||||||||||
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Cash and cash equivalents at end of period |
$ | 629 | $ | | $ | 63,003 | $ | | $ | 63,632 | ||||||||||
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18
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Our condensed consolidated financial statements include the accounts of Park-Ohio Industries, Inc. and its subsidiaries (collectively, we or the Company). All significant intercompany transactions have been eliminated in consolidation. Park-Ohio Industries, Inc. is a wholly-owned subsidiary of Park-Ohio Holdings Corp.
Executive Overview
We are an industrial Total Supply Management and diversified manufacturing business, operating in three segments: Supply Technologies, Assembly Components and Engineered Products.
Our Supply Technologies business provides our customers with Total Supply Management, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers manufacturing floor, from strategic planning to program implementation. Total Supply Management includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, and appliance industries.
Assembly Components manufactures industrial hose and injection molded rubber components, and fuel filler and hydraulic assemblies. In addition, Assembly Components casts and machines aluminum engine, transmission, brake, suspension and other components such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, agricultural, construction, heavy-duty truck and marine original equipment manufacturers (OEMs), primarily on a sole-source basis. Assembly Components also provides value-added services such as design and engineering and assembly.
Engineered Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products including induction heating and melting systems, pipe threading systems, industrial oven systems, and forged and machined products. Engineered Products also produces and provides services and spare parts for the equipment it manufactures. The principal customers of Engineered Products are OEMs, sub-assemblers and end users in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, heavy-duty truck, construction equipment, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense industries.
Sales, segment operating income and other relevant financial data for these three segments are provided in Note C to the condensed consolidated financial statements, included elsewhere herein.
On March 23, 2012, we completed the acquisition of Fluid Routing Solutions Holding Corp. (FRS), a leading manufacturer of automotive and industrial rubber and thermoplastic hose products and fuel filler and hydraulic fluid assemblies, in an all cash transaction valued at $98.8 million. FRS products include fuel filler, hydraulic, and thermoplastic assemblies and several forms of manufactured hose, including bulk and formed fuel, power steering, transmission oil cooling, hydraulic and thermoplastic hose. FRS sells to automotive and industrial customers throughout North America, Europe and Asia. FRS has five production facilities located in Florida, Michigan, Ohio, Tennessee and the Czech Republic. FRS is included in the Assembly Components segment.
In connection with the acquisition of FRS, we amended and restated our existing credit and security agreement, dated November 5, 2003, as amended (the Credit Agreement), to, among other things, increase the revolving loan commitment from $200 million to $220 million and provide a seven-year amortizing term loan for $25 million that is secured by certain real estate and machinery and equipment. We funded the acquisition with cash of $40 million, the $25 million term loan provided by the Credit Agreement and $33.9 million of borrowings under the revolving credit facility provided by the Credit Agreement.
During the second quarter of 2012, we agreed to settle the Evraz Highveld Steel and Vanadium (Evraz) arbitration proceeding for the sum of $13.0 million in cash, which payment was made in June 2012.
19
Results of Operations
Third Quarter 2012 Compared with Third Quarter 2011
Net Sales by Segment:
Three Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Supply Technologies |
$ | 117.4 | $ | 123.2 | $ | (5.8 | ) | (5 | )% | |||||||
Assembly Components |
84.4 | 38.1 | 46.3 | 122 | % | |||||||||||
Engineered Products |
84.7 | 82.2 | 2.5 | 3 | % | |||||||||||
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Consolidated Net Sales |
$ | 286.5 | $ | 243.5 | $ | 43.0 | 18 | % | ||||||||
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Net sales increased $43.0 million to $286.5 million in the third quarter of 2012, compared to $243.5 million in the same period in 2011, as we experienced volume increases in our Assembly Components and Engineered Products segments offset by a decline in our Supply Technologies segment. Supply Technologies sales decreased 5% primarily due to volume declines in the consumer electronics, HVAC, agriculture and construction, lawn and garden, medial, appliance and instrument industries partially offset by increases in the heavy-duty truck, power sports, electrical, lawn and garden, industrial and computer and office equipment industries. Assembly Components sales increased 122% primarily due to incremental sales of $52.0 million resulting from the acquisition of FRS partially offset by lower sales in the aluminum products business unit. Engineered Products sales increased 3% primarily due to the increased sales in the capital equipment and forged and machine business units.
Cost of Products Sold & Gross Profit:
Three Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Consolidated cost of products sold |
$ | 232.5 | $ | 201.7 | $ | 30.8 | 15 | % | ||||||||
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Consolidated gross profit |
$ | 53.9 | $ | 41.8 | $ | 12.1 | 29 | % | ||||||||
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Gross Margin |
18.8 | % | 17.2 | % |
Cost of products sold increased $30.8 million to $232.5 million in the third quarter of 2012, compared to $201.7 million in the same period in 2011, while gross margin decreased to 18.8% in the third quarter of 2012 compared to 17.2% in the same period in 2011. The increase in cost of products sold was due primarily to the inclusion of FRS results in 2012. Gross margin increased primarily due to product mix and improved operating efficiencies.
Selling, General & Administrative (SG&A) Expenses:
Three Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Consolidated SG&A expenses |
$ | 31.3 | $ | 26.2 | $ | 5.1 | 19 | % | ||||||||
SG&A as a percentage of net sales |
10.9 | % | 10.8 | % |
Consolidated SG&A expenses increased 19% in the third quarter of 2012 compared to the same period in 2011, representing a 10 basis point increase in SG&A expenses as a percent of sales. SG&A expenses increased in the third quarter of 2012 compared to the same period in 2011 primarily due to the acquisition of FRS and to increases in payroll and payroll related items and lower pension income.
20
Interest Expense:
Three Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Interest expense |
$ | 6.5 | $ | 6.2 | $ | .3 | 5 | % | ||||||||
Average outstanding borrowings |
$ | 390.3 | $ | 347.8 | $ | 42.5 | 12 | % | ||||||||
Average borrowing rate |
6.66 | % | 7.13 | % | (47 | ) | basis points |
Interest expense increased $.3 million in the third quarter of 2012 compared to the same period of 2011. Average borrowings in the third quarter of 2012 were higher when compared to the same period in 2011 primarily due to additional borrowings to fund the acquisition of FRS. The lower average borrowing rate in the third quarter of 2012 was due primarily to the interest rate mix of our revolving credit facility and the 8.125% senior notes due 2021 (Senior Notes) when compared to the interest rate mix in the same period in 2011.
Income Tax:
The provision for income taxes was $5.4 million in the third quarter of 2012, a 33.8% effective income tax rate, compared to income taxes of $1.2 million provided in the corresponding period of 2011, a 29.1% effective income tax rate. Included in the income tax provision for 2011 was $2.1 million associated with the retirement of 8.375% senior subordinated notes due 2014 (Senior Subordinated Notes) that were held by a foreign affiliate.
Net Income:
Net income increased $7.8 million to $10.7 million in the third quarter of 2012, compared to $2.9 million in the same period of 2011, which included a restructuring and asset impairment charge of $5.4 million.
Nine Months 2012 Compared with Nine Months 2011
Net Sales by Segment:
Nine Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Supply Technologies |
$ | 381.5 | $ | 368.5 | $ | 13.0 | 4 | % | ||||||||
Assembly Components |
220.5 | 126.2 | 94.3 | 75 | % | |||||||||||
Engineered Products |
256.3 | 237.3 | 19.0 | 8 | % | |||||||||||
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Consolidated Net Sales |
$ | 858.3 | $ | 732.0 | $ | 126.3 | 17 | % | ||||||||
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Net sales increased $126.3 million to $858.3 million in the first nine months of 2012, compared to $732.0 million in the same period in 2011, as we experienced volume increases in each of our segments. Supply Technologies sales increased 4% primarily due to volume increases in the heavy-duty truck, power sports, computer office equipment and lawn and garden industries offset primarily by declines in the consumer electronics, semi-conductor, appliance, HVAC and instruments industries. Assembly Components sales increased 75% primarily from sales of $107.5 million resulting from the acquisition of FRS, partially offset by lower sales in the aluminum business unit. Engineered Products sales increased 8% primarily due to increased volume in the capital equipment and forged and machine business units.
21
Cost of Products Sold & Gross Profit:
Nine Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Consolidated cost of products sold |
$ | 699.6 | $ | 603.0 | $ | 96.6 | 16 | % | ||||||||
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Consolidated gross profit |
$ | 158.8 | $ | 129.0 | $ | 29.8 | 23 | % | ||||||||
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Gross Margin |
18.5 | % | 17.6 | % |
Cost of products sold increased $96.6 million to $699.6 million in the first nine months of 2012, compared to $603.0 million in the same period in 2011, while gross margin increased to 18.5% in the first nine months of 2012 compared to 17.6% in the same period in 2011. The increase in cost of products sold was due primarily to the inclusion of FRS results in 2012. Gross margin increased in each segment resulting primarily from favorable product mix and improved operating efficiencies.
SG&A Expenses:
Nine Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Consolidated SG&A expenses |
$ | 89.4 | $ | 80.6 | $ | 8.8 | 11 | % | ||||||||
SG&A as a percentage of net sales |
10.4 | % | 11.0 | % |
Consolidated SG&A expenses increased 11% in the first nine months of 2012 compared to the same period in 2011. However, we generated a 60 basis point decrease in SG&A expenses as a percent of sales. SG&A expenses increased in the first nine months of 2012 compared to the same period in 2011 primarily due to $5.2 million of incremental expense associated with FRS, increases in payroll and payroll related expenses, a reduction in pension income of $1.5 million, FRS acquisition expenses of $1.1 million and $1.0 million of legal expenses associated with the litigation settlement.
Interest Expense:
Nine Months Ended September 30, |
Percent Change |
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2012 | 2011 | Change | ||||||||||||||
(Dollars in millions) | ||||||||||||||||
Interest expense |
$ | 19.8 | $ | 26.3 | $ | (6.5 | ) | (25 | )% | |||||||
Debt extinguishment costs included in interest expense |
$ | .3 | $ | 7.3 | (7.0 | ) | (96 | )% | ||||||||
Average outstanding borrowings |
$ | 378.2 | $ | 332.6 | $ | 45.6 | 14 | % | ||||||||
Average borrowing rate |
6.98 | % | 6.90 | % | 8 | basis points |
Interest expense decreased $6.5 million in the first nine months of 2012 compared to the same period of 2011, primarily due to higher debt extinguishment costs in 2011 as a result of the refinancing of our Senior Subordinated Notes and amendment of the Credit Agreement. Average borrowings in the first nine months of 2012 were higher when compared to the same period in 2011 due to our sale of $250 million in aggregate principal amount of the Senior Notes, offset by the purchase of all of our outstanding Senior Subordinated Notes, additional borrowings to fund the acquisition of FRS and the litigation settlement. The higher average borrowing rate in the first nine months of 2012 was due primarily to the interest rate mix of our revolving credit facility and the Senior Notes when compared to the mix in the same period in 2011.
Income Tax:
The provision for income taxes was $12.2 million in the first nine months of 2012, a 33.5% effective income tax rate, compared to income taxes of $6.1 million provided in the corresponding period of 2011, a 36.2% effective income tax rate. We estimate that the effective tax rate for full-year 2012 will be approximately 33.7%.
22
Net Income:
Net income increased $13.6 million to $24.3 million for the first nine months of 2012, compared to $10.7 million for the first nine months of 2011. Net income in the first nine months of 2012 includes the impact of a $13.0 million pre-tax litigation settlement charge. The first nine months of 2011 included debt extinguishment costs of $7.3 million resulting from the refinancing of our Senior Subordinated Notes and the amendment of the Credit Agreement and income taxes of $2.1 million resulting from the retirement of $26.2 million of our Senior Subordinated Notes that were held by a foreign affiliate. Also, during the third quarter of 2011, we recorded a restructuring and asset impairment charge of $5.4 million.
Seasonality; Variability of Operating Results
The timing of orders placed by our customers has varied with, among other factors, orders for customers finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident at the capital equipment business unit, included in the Engineered Products segment, which typically ships a few large systems per year.
Critical Accounting Policies
Our critical accounting policies are described in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2011 contained in our 2011 Annual Report on Form 10-K. There were no new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements discussed in the notes to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Condensed Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Forward-Looking Statements
This Quarterly Report on 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. The words believes, anticipates, plans, expects, intends, estimates and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the following: our substantial indebtedness; continuation of the current negative global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; raw material availability and pricing; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate FRS and achieve the expected results of the acquisition; our ability to retain FRSs relationship with customers and suppliers; our ability to successfully integrate recent and future acquisitions into existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including the uncertainties related to the current global financial crisis; 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 the agreements governing our indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; 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 and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which could be lower due to the effects of the current financial crisis; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; and the other factors we describe under Item 1A. Risk Factors included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. 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, except as required by law. 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.
23
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
We are exposed to market risk, including changes in interest rates. We are subject to interest rate risk on borrowings under the floating rate revolving credit facility and term loan provided by our Credit Agreement, which consisted of borrowings of $120.3 million at September 30, 2012. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.0 million during the three-month period ended September 30, 2012.
Our foreign subsidiaries generally conduct business in local currencies. During the third quarter of 2012, we recorded a favorable foreign currency translation adjustment of $2.5 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the U.S. dollar. 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.
The Company periodically enters into forward contracts on foreign currencies, primarily the euro and the British pound sterling, purely for the purpose of hedging exposure to changes in the value of accounts receivable in those currencies against the U.S. dollar. The Company currently uses no other derivative instruments. At September 30, 2012, there were no such currency hedge contracts outstanding.
Item 4. | Controls and Procedures |
Under the supervision of and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report.
Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting that occurred during the third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
OTHER INFORMATION
Item 1. | Legal Proceedings |
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
In addition to the routine lawsuits and asserted claims noted above, we were a party to the lawsuits and legal proceedings described below at September 30, 2012.
We were a co-defendant in approximately 280 cases asserting claims on behalf of approximately 700 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages.
In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are only seven asbestos cases, involving 25 plaintiffs, that plead specified damages. In each of the seven cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In three cases, the plaintiff has alleged compensatory damages in the amount of $3.0 million for four separate causes of action and $1.0 million for another cause of action and punitive damages in the amount of $10.0 million. In the fourth case, the plaintiff has alleged against each named defendant compensatory and punitive damages, each in the amount of $10.0 million, for seven separate causes of action. In the fifth case, the plaintiff has alleged compensatory damages in the amount of $20.0 million for three separate causes of action and $5.0 million for another cause of action and punitive damages in the amount of $20.0 million. In the remaining two cases, the plaintiffs have each alleged against each named defendant compensatory and punitive damages, each in the amount of $50.0 million, for four separate causes of action.
Historically, we have been dismissed from asbestos cases on the basis that the plaintiff incorrectly sued one of our subsidiaries or because the plaintiff failed to identify any asbestos-containing product manufactured or sold by us or our subsidiaries. We intend to vigorously defend these asbestos cases, and believe we will continue to be successful in being dismissed from such cases. However, it is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, and although our results of operations and cash flows for a particular period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters will not have a material adverse effect on our financial condition, liquidity or results of operations. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all or that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiffs injury, if any.
25
Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
Item 1A. | Risk Factors |
There have been no material changes in the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Item 6. | Exhibits |
The following exhibits are included herein:
31.1 | Principal Executive Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Principal Financial Officers 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 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK-OHIO INDUSTRIES, INC. | ||
(Registrant) | ||
By: | /s/ W. Scott Emerick | |
Name: | W. Scott Emerick | |
Title: | Vice President and Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
Date: November 14, 2012
27
QUARTERLY REPORT ON FORM 10-Q
PARK-OHIO INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2012
Exhibit |
||
31.1 | Principal Executive Officers Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Principal Financial Officers 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 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
28
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICERS CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward F. Crawford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Park-Ohio Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
By: | /s/ Edward F. Crawford | |
Name: | Edward F. Crawford | |
Title: | Chairman and Chief Executive Officer |
Dated: November 14, 2012
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICERS CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, W. Scott Emerick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Park-Ohio Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
By: | /s/ W. Scott Emerick | |
Name: | W. Scott Emerick | |
Title: | Vice President and Chief Financial Officer |
Dated: November 14, 2012
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Park-Ohio Industries, Inc. (the Company) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officers knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
By: | /s/ Edward F. Crawford | |
Name: | Edward F. Crawford | |
Title: | Chairman and Chief Executive Officer | |
By: | /s/ W. Scott Emerick | |
Name: | W. Scott Emerick | |
Title: | Vice President and Chief Financial Officer |
Date: November 14, 2012
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
Pension Plans and Other Postretirement Benefits (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Pension Benefits [Member]
|
||||
Components of net periodic benefit cost | ||||
Service costs | $ 542 | $ 604 | $ 1,626 | $ 1,317 |
Interest costs | 565 | 596 | 1,695 | 1,787 |
Expected return on plan assets | (2,059) | (2,239) | (6,177) | (6,707) |
Transition obligation | (10) | (10) | (30) | (30) |
Amortization of prior service cost | 11 | 11 | 33 | 33 |
Recognized net actuarial loss | 241 | 723 | ||
Net periodic benefit (gains) costs | (710) | (1,038) | (2,130) | (3,600) |
Postretirement Benefits [Member]
|
||||
Components of net periodic benefit cost | ||||
Service costs | 15 | 12 | 45 | 36 |
Interest costs | 201 | 228 | 603 | 683 |
Expected return on plan assets | ||||
Transition obligation | ||||
Amortization of prior service cost | (24) | (24) | (72) | (72) |
Recognized net actuarial loss | 186 | 129 | 557 | 388 |
Net periodic benefit (gains) costs | $ 378 | $ 345 | $ 1,133 | $ 1,035 |
Acquisition (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 23, 2012
|
---|---|
Allocation of purchase price | |
Cash and cash equivalents | $ 2,202 |
Accounts receivable | 30,920 |
Inventories | 12,355 |
Prepaid expenses and other current assets | 3,998 |
Property, plant and equipment | 30,258 |
Customer relationships | 29,400 |
Trademarks and trade name | 11,500 |
Other assets | 212 |
Accounts payable | (17,207) |
Accrued expenses | (15,599) |
Deferred tax liability | (26,952) |
Other long-term liabilities | (776) |
Goodwill | 38,461 |
Total purchase price | $ 98,772 |
Goodwill and Other Intangible Assets (Tables)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
|
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Goodwill and Other Intangible Assets [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Details of other intangible assets |
|
Supplemental Guarantor Information (Details Textual)
|
9 Months Ended | |
---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Supplemental Guarantor Information (Textual) [Abstract] | ||
Senior notes, interest rate | 8.125% | |
Guarantor Subsidiaries [Member]
|
||
Supplemental Guarantor Information (Textual) [Abstract] | ||
Guarantor Subsidiaries | “100% owned” as defined by Rule 3-10(h)(1) of Regulation S-X | |
8.125% senior notes due 2021 [Member]
|
||
Supplemental Guarantor Information (Textual) [Abstract] | ||
Senior notes, interest rate | 8.125% | 8.125% |
Maturity year of senior notes | 2021 | |
8.375% senior subordinated notes due 2014 [Member]
|
||
Supplemental Guarantor Information (Textual) [Abstract] | ||
Senior notes, interest rate | 8.375% |
Recent Accounting Pronouncements (Policies)
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Recent Accounting Pronouncements [Abstract] | |
Accounting Pronouncements Adopted |
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 amends existing guidance by allowing only two options for presenting components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement on other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 , with early adoption permitted. In December 2011, the FASB issued ASU No. 2011-12, deferring its requirements that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. Entities continue to be required to present amounts reclassified out of accumulated other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. The requirement to present reclassification adjustments in interim periods was also deferred. However, entities are required to report a total for comprehensive income in condensed financial statements of interim periods in a single continuous statement or in two consecutive statements. The FASB is reconsidering the presentation requirements for reclassification adjustments. The Company adopted ASU No. 2011-5 in the first quarter of 2012 and elected to present the components of net income and comprehensive income in two separate but consecutive statements. |
Presentation of Comprehensive Income |
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 amends existing guidance by allowing only two options for presenting components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement on other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 |
Acquisition (Details Textual) (USD $)
In Thousands, unless otherwise specified |
1 Months Ended | 3 Months Ended | 9 Months Ended |
---|---|---|---|
Mar. 23, 2012
Country
|
Sep. 30, 2012
|
Sep. 30, 2012
|
|
Acquisition (Additional Textual) [Abstract] | |||
Transaction cash | $ 98,772 | ||
Revenues attributable to acquisition | 107,482 | ||
Net income attributable to acquisition | 7,397 | ||
Cash paid | 40,000 | ||
Amortization term loan, period | 7 years | ||
Transaction cost of business acquisition | 1,139 | ||
Number of production facilities | 5 | ||
Net decrease in goodwill | 9 | ||
Secured Debt [Member]
|
|||
Acquisition (Textual) [Abstract] | |||
Revolving credit facility to fund purchase price | 25,000 | ||
Revolving credit [Member]
|
|||
Acquisition (Textual) [Abstract] | |||
Revolving credit facility to fund purchase price | $ 33,772 |
Accrued Warranty Costs (Details) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | |
---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Changes in product warranty liability | ||
Balance at January 1 | $ 4,208 | $ 4,046 |
Claims paid during the year | (1,453) | (3,260) |
Additional warranties issued during the first nine months | 1,771 | 3,265 |
Acquired warranty liabilities | 3,317 | |
Balance at September 30 | $ 7,843 | $ 4,051 |
Inventories (Details) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Components of inventory | ||
Finished goods | $ 117,229 | $ 122,010 |
Work in process | 28,784 | 20,660 |
Raw materials and supplies | 77,909 | 59,369 |
Inventories, net | $ 223,922 | $ 202,039 |
Goodwill and Other Intangible Assets (Details) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Details of other intangible assets | ||
Acquisition Costs | $ 44,490 | $ 15,090 |
Accumulated Amortization | 6,332 | 4,366 |
Net | 38,158 | 10,724 |
Goodwill | 97,550 | 20,187 |
Total | 97,550 | 20,187 |
Tradenames [Member]
|
||
Details of other intangible assets | ||
Net indefinite-lived intangible assets | 11,500 | |
Non-contractual customer relationships [Member]
|
||
Details of other intangible assets | ||
Acquisition Costs | 41,070 | 11,670 |
Accumulated Amortization | 5,052 | 3,320 |
Net | 36,018 | 8,350 |
Other [Member]
|
||
Details of other intangible assets | ||
Acquisition Costs | 3,420 | 3,420 |
Accumulated Amortization | 1,280 | 1,046 |
Net | $ 2,140 | $ 2,374 |
Accounts Receivable (Details) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | |
---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Accounts Receivable (Textual) [Abstract] | ||
Accounts receivables sold | $ 62,393 | $ 43,087 |
Implicit interest on transactions | $ 260 | $ 190 |
Basis of Presentation
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Basis of Presentation [Abstract] | |
Basis of Presentation |
NOTE A — Basis of Presentation The condensed consolidated financial statements include the accounts of Park-Ohio Industries, Inc. and its subsidiaries (collectively, “we” or the “Company”). All significant intercompany transactions have been eliminated in consolidation. Park-Ohio Industries, Inc. is a wholly-owned subsidiary of Park-Ohio Holdings Corp. (“Holdings”). Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation. The accompanying unaudited condensed 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011. |