10-Q 1 d362016d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 June 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 0-3134

 

 

Park-Ohio Holdings Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-1867219

(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

(Registrant’s telephone number, including area code)

Park-Ohio Holdings Corp. is a successor issuer to Park-Ohio Industries, Inc.

 

 

Indicate by check mark whether the registrant:

 

  (1) Has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and

 

  (2) Has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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   x
Non-accelerated filer   ¨  (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

Number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of July 31, 2012: 12,410,885.

The Exhibit Index is located on page 26.

 

 

 


Table of Contents

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

INDEX

 

          Page  
PART I. FINANCIAL INFORMATION   
Item 1.   

Financial Statements

     3   
  

Condensed consolidated balance sheets — June 30, 2012 and December 31, 2011

     3   
  

Condensed consolidated statements of operations — Three and six months ended June  30, 2012 and 2011

     4   
  

Condensed consolidated statements of comprehensive income (loss)  — Three and six months ended June 30, 2012 and 2011

     5   
  

Condensed consolidated statement of shareholders’ equity — Six months ended June  30, 2012

     6   
  

Condensed consolidated statements of cash flows — Six months ended June 30, 2012 and 2011

     7   
  

Notes to unaudited condensed consolidated financial statements — June 30, 2012

     8   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   
Item 3.   

Quantitative and Qualitative Disclosure About Market Risk

     21   
Item 4.   

Controls and Procedures

     22   
PART II. OTHER INFORMATION   
Item 1.   

Legal Proceedings

     23   
Item 1A.   

Risk Factors

     23   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     23   
Item 6.   

Exhibits

     24   

SIGNATURES

     25   

EXHIBIT INDEX

     26   


Table of Contents

PART I. Financial Information

 

ITEM 1. Financial Statements

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
June 30,
2012
    December 31,
2011
 
     (Dollars in thousands)  
ASSETS   

Current Assets:

    

Cash and cash equivalents

   $ 43,440      $ 78,001   

Accounts receivable, less allowances for doubtful accounts of $3,057 at June 30, 2012 and $5,483 at December 31, 2011

     183,473        139,941   

Inventories, net

     226,241        202,039   

Deferred tax assets

     23,036        20,561   

Unbilled contract revenue

     12,441        18,778   

Other current assets

     14,840        8,790   
  

 

 

   

 

 

 

Total Current Assets

     503,471        468,110   

Property, plant and equipment:

    

Land and land improvements

     6,075        3,654   

Buildings

     52,553        47,594   

Machinery and equipment

     237,398        208,727   
  

 

 

   

 

 

 
     296,026        259,975   

Less accumulated depreciation

     203,994        198,165   
  

 

 

   

 

 

 
     92,032        61,810   

Other Assets:

    

Goodwill and other intangible assets

     98,205        20,187   

Other

     65,372        63,833   
  

 

 

   

 

 

 
   $ 759,080      $ 613,940   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current Liabilities:

    

Trade accounts payable

   $ 134,312      $ 99,588   

Accrued expenses

     92,407        73,651   

Current portion of long-term debt

     4,480        1,415   

Current portion of other postretirement benefits

     2,002        2,002   
  

 

 

   

 

 

 

Total Current Liabilities

     233,201        176,656   

Long-Term Liabilities, less current portion:

    

Senior Notes

     250,000        250,000   

Credit facility

     140,829        93,000   

Other long-term debt

     2,937        3,165   

Deferred tax liability

     28,355        1,392   

Other postretirement benefits and other long-term liabilities

     24,456        24,285   
  

 

 

   

 

 

 
     446,577        371,842   

Shareholders’ Equity

    

Capital stock, par value $1 a share:

    

Serial preferred stock:

    

Authorized — 632,470 shares: Issued and outstanding — none

     —          —     

Common stock:

    

Authorized — 40,000,000 shares: Issued — 14,048,630 shares in 2012 and 13,813,774 in 2011

     14,049        13,814   

Additional paid-in capital

     72,332        70,248   

Retained earnings

     23,791        10,392   

Treasury stock, at cost, 1,724,028 shares in 2012 and 1,673,926 shares in 2011

     (21,602     (20,607

Accumulated other comprehensive (loss)

     (9,268     (8,405
  

 

 

   

 

 

 
     79,302        65,442   
  

 

 

   

 

 

 
   $ 759,080      $ 613,940   
  

 

 

   

 

 

 

 

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.

 

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  
     (Amounts in thousands, except per share data)  

Net sales

   $ 308,817       $ 246,808      $ 571,873       $ 488,436   

Cost of products sold

     252,867         201,628        467,044         401,321   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     55,950         45,180        104,829         87,115   

Selling, general and administrative expenses

     29,623         28,846        58,368         54,511   

Settlement of litigation

     13,000         —          13,000         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     13,327         16,334        33,461         32,604   

Interest expense

     6,540         14,229        13,275         20,092   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     6,787         2,105        20,186         12,512   

Income taxes

     2,344         3,212        6,787         4,890   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ 4,443       $ (1,107   $ 13,399       $ 7,622   
  

 

 

    

 

 

   

 

 

    

 

 

 

Amounts per common share:

          

Basic

   $ .37       $ (.10   $ 1.13       $ .66   

Diluted

   $ .37       $ (.10   $ 1.11       $ .64   

Common shares used in the computation:

          

Basic

     11,929         11,545        11,858         11,503   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

     12,112         11,545        12,077         12,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Net income (loss)

   $ 4,443      $ (1,107   $ 13,399      $ 7,622   

Other comprehensive income:

        

Foreign currency translation (loss) gain

     (2,891     816        (1,670     3,436   

Pension and postretirement benefit adjustments, net of tax

     645        107        807        213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

   $ 2,197      $ (184   $ 12,536      $ 11,271   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

     Common
Stock
     Additional
Paid-In
Capital
    Retained
Earnings
     Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss)
    Total  
     (Dollars in thousands)  

Balance at January 1, 2012

   $ 13,814       $ 70,248      $ 10,392       $ (20,607   $ (8,405   $ 65,442   

Other comprehensive income

     —           —          13,399         —          (863     12,536   

Amortization of restricted stock

     —           1,224        —           —          —          1,224   

Restricted stock awards

     170         (170     —           —          —          —     

Purchase of treasury stock (50,102 shares)

     —           —          —           (995     —          (995

Exercise of stock options (64,856 shares)

     65         1,016        —           —          —          1,081   

Share-based compensation

     —           14        —           —          —          14   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 14,049       $ 72,332      $ 23,791       $ (21,602   $ (9,268   $ 79,302   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six Months Ended
June 30,
 
     2012     2011  
     (Dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 13,399      $ 7,622   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     8,295        8,277   

Share-based compensation expense

     1,238        920   

Debt extinguishment costs

     305        7,335   

Changes in operating assets and liabilities:

    

Accounts receivable

     (12,612     (20,896

Inventories and other current assets

     (10,037     (17,370

Accounts payable and accrued expenses

     20,810        26,518   

Other

     (2,278     (831
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     19,120        11,575   

INVESTING ACTIVITIES

    

Purchases of property, plant and equipment, net

     (6,851     (5,258

Acquisitions, net of cash acquired

     (96,707     —     
  

 

 

   

 

 

 

Net Cash Used by Investing Activities

     (103,558     (5,258

FINANCING ACTIVITIES

    

Proceeds from (payments on) term loans and other debt

     23,373        (35,939

Proceeds from revolving credit facility

     27,293        300   

Issuance of 8.125% senior notes, 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

Exercise of stock options

     1,081        8   

Purchase of treasury stock

     (995     (238
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     49,877        18,466   
  

 

 

   

 

 

 

(Decrease) Increase in Cash and Cash Equivalents

     (34,561     24,783   

Cash and Cash Equivalents at Beginning of Period

     78,001        35,311   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 43,440      $ 60,094   
  

 

 

   

 

 

 

Taxes paid

   $ 3,598      $ 1,769   

Interest paid (includes $5,720 of senior subordinated debt redemption costs in 2011)

     11,709        15,389   

See accompanying notes to these condensed consolidated financial statements. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Dollars and shares in thousands, except per share amounts)

NOTE A — Basis of Presentation

The consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries (collectively, the “Company”). All significant intercompany transactions have been eliminated in consolidation. 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 six-month periods ended June 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.

NOTE B — Recent Accounting Pronouncements

Accounting Pronouncements Adopted in the Six Months Ended June 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 Company’s sales of assembled components.

 

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During the second quarter, 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 June 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 ManagementTM services for a broad range of high-volume, specialty production components. Total Supply ManagementTM 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.

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
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net sales:

        

Supply Technologies

   $ 131,495      $ 123,770      $ 264,157      $ 245,323   

Assembly Components

     91,425        40,699        136,048        88,011   

Engineered Products

     85,897        82,339        171,668        155,102   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 308,817      $ 246,808      $ 571,873      $ 488,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income:

        

Supply Technologies

   $ 9,659      $ 8,119      $ 19,572      $ 16,597   

Assembly Components

     7,249        934        8,380        4,056   

Engineered Products

     14,299        12,003        28,480        20,896   
  

 

 

   

 

 

   

 

 

   

 

 

 
     31,207        21,056        56,432        41,549   

Corporate costs

     (4,880     (4,722     (9,971     (8,945

Settlement of litigation

     (13,000     —          (13,000     —     

Interest expense

     (6,540     (14,229     (13,275     (20,092
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 6,787      $ 2,105      $ 20,186      $ 12,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     June 30,
2012
     December 31,
2011
 

Identifiable assets:

     

Supply Technologies

   $ 235,262         $225,346   

Assembly Components

     220,202         72,233   

Engineered Products

     207,288         195,834   

General corporate

     96,328         120,527   
  

 

 

    

 

 

 
   $ 759,080         $613,940   
  

 

 

    

 

 

 

 

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NOTE D — Inventories

The components of inventory consist of the following:

 

     June 30,
2012
     December 31,
2011
 

Finished goods

   $ 123,833         $122,010   

Work in process

     29,630         20,660   

Raw materials and supplies

     72,778         59,369   
  

 

 

    

 

 

 
   $ 226,241         $202,039   
  

 

 

    

 

 

 

NOTE E — Shareholders’ Equity

At June 30, 2012, capital stock consists of (i) Serial Preferred Stock, of which 632 shares were authorized and none were issued, and (ii) Common Stock, of which 40,000 shares were authorized and 14,049 shares were issued, of which 12,325 were outstanding and 1,724 were treasury shares.

NOTE F — Net Income Per Common Share

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  

NUMERATOR

          

Net income (loss)

   $ 4,443       $ (1,107   $ 13,399       $ 7,622   
  

 

 

    

 

 

   

 

 

    

 

 

 

DENOMINATOR

          

Denominator for basic earnings per share — weighted average shares

     11,929         11,545        11,858         11,503   

Effect of dilutive securities:

          

Employee stock options and restricted stock

     183         —          219         497   
  

 

 

    

 

 

   

 

 

    

 

 

 

Denominator for diluted earnings per share — weighted average shares and assumed conversions

     12,112         11,545        12,077         12,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

Amounts per common share:

          

Basic

   $ 0.37       $ (.10   $ 1.13       $ .66   

Diluted

   $ 0.37       $ (.10   $ 1.11       $ .64   

Basic earnings per common share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. Diluted earnings per common share is computed as net income available to common shareholders divided by the weighted average diluted shares outstanding.

Pursuant to ASC 260, “Earnings Per Share,” when a loss is reported the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of stock options and awards because doing so will result in anti-dilution. Therefore, for the three months ended June 30, 2011, basic weighted-average shares outstanding are used in calculating diluted earnings per share.

Outstanding stock options with exercise prices greater than the average price of the common shares are anti-dilutive and are not included in the computation of diluted earnings per share. Stock options on 43 shares were excluded in the three months ended June 30, 2012, because they were anti-dilutive. Stock options on 41 and 20 shares were excluded in the six months ended June 30, 2012 and 2011, respectively, because they were anti-dilutive.

 

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NOTE G — Stock-Based Compensation

Total stock compensation expense recorded in the first six months of 2012 and 2011 was $1,362 and $920, respectively. Total stock compensation expense recorded in the second quarter of 2012 and 2011 was $862 and $492, respectively. There were no stock options awards during the first six months of 2012 and 2011. There were 170 shares of restricted stock awarded during the three months and six months ended June 30, 2012 at prices ranging from $18.82 to $21.59 per share and 140 shares of restricted stock awarded during the three months and six months ended June 30, 2011 at a price of $20.90 per share. As of June 30, 2012, there was $5,857 of unrecognized compensation cost related to non-vested stock-based compensation, which cost is expected to be recognized over a weighted average period of 2.4 years.

NOTE H — Pension Plans and Other Postretirement Benefits

The components of net periodic benefit (gain) cost recognized during interim periods was as follows:

 

     Pension Benefits     Postretirement Benefits  
     Three Months
Ended June 30,
    Six Months
Ended June 30,
    Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011     2012     2011     2012     2011  

Service costs

   $ 542      $ 604      $ 1,084      $ 713      $ 15      $ 12      $ 30      $ 24   

Interest costs

     565        596        1,130        1,192        201        228        402        456   

Expected return on plan assets

     (2,059     (2,239     (4,118     (4,468     —          —          —          —     

Transition obligation

     (10     (10     (20     (20     —          —          —          —     

Amortization of prior service cost

     11        11        22        22        (24     (24     (48     (48

Recognized net actuarial loss

     241        —          482        —          186        129        372        258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (gains) cost

   $ (710   $ (1,038   $ (1,420   $ (2,561   $ 378      $ 345      $ 756      $ 690   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE I — Comprehensive Loss

The components of accumulated comprehensive loss at June 30, 2012 and December 31, 2011 were as follows:

 

     June 30,
2012
    December 31,
2011
 

Foreign currency translation adjustment

   $ 3,182      $ 4,852   

Pension and postretirement benefit adjustments, net of tax

     (12,450     (13,257
  

 

 

   

 

 

 
   $ (9,268   $ (8,405
  

 

 

   

 

 

 

The pension and postretirement benefit liability amounts are net of deferred taxes of $5,571 at June 30, 2012 and December 31, 2011. No income taxes are provided on foreign currency translation adjustments as foreign earnings are considered permanently invested.

 

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NOTE J — Accrued Warranty Costs

The Company estimates the amount of warranty claims on sold products that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:

 

     2012     2011  

Balance at January 1

   $ 4,208      $ 4,046   

Claims paid during the year

     (948     (313

Additional warranties issued during the first six months

     1,414        371   

Acquired warranty liabilities

     3,317        —     
  

 

 

   

 

 

 

Balance at June 30

   $ 7,991      $ 4,104   
  

 

 

   

 

 

 

NOTE K — Income Taxes

The Company’s 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 six months of 2012 and 2011 was 33.6% and 39.1%, respectfully. The 2012 annual effective income tax rate is estimated to be approximately 33.0% 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.

NOTE L — 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-party’s bid price, which was determined to be a Level 1 input. The fair value approximated $256,250 at June 30, 2012 and $247,500 at December 31, 2011 compared to a $250,000 carrying value. The fair value of the Company’s term loan and revolving credit portion of the Credit Agreement as defined in Note M below approximated its carrying amount as of June 30, 2012 and December 31, 2011.

NOTE M — Financing Arrangement

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 bank’s prime lending rate minus .25% to 1.00%, at the Company’s election. The LIBOR-based interest rate is dependent on the Company’s debt service coverage ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing availability to the Company based on percentages of eligible accounts receivable and inventory. The interest rate on the revolving credit facility was 2% at June 30, 2012. Interest on the term loan is at either (i) LIBOR plus 2.75% or (ii) the bank’s prime lending rate plus .25%, at the Company’s election. The term loan is amortized based on a seven-year schedule with the balance due at maturity. The interest rate on the term loan was 3.25% at June 30, 2012.

 

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Long-term debt consists of the following:

 

     June 30,
2012
     December 31,
2011
 

8.125% senior notes due 2021

   $ 250,000       $ 250,000   

Revolving credit

     120,293         93,000   

Term loan

     24,107         —     

Other

     3,846         4,580   
  

 

 

    

 

 

 
     398,246         347,580   

Less current maturities

     4,480         1,415   
  

 

 

    

 

 

 

Total

   $ 393,766       $ 346,165   
  

 

 

    

 

 

 

NOTE N — Accounts Receivable

During the first six months of 2012 and 2011, the Company sold approximately $41,491 and $27,467, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity and recorded a loss in the amount of $184 and $122, respectively, in the condensed consolidated statements of operations. These losses represented implicit interest on the transactions.

NOTE O — 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 $98,909. 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 Company’s Assembly Components segment and had revenues of $61,000 and net income of $4,363 for the period from the date acquired through June 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 $33,909 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 management’s 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

     30,243   

Customer relationships

     30,000   

Trademarks and trade name

     10,900   

Other assets

     212   

Accounts payable

     (17,207

Accrued expenses

     (15,462

Deferred tax liability

     (26,946

Other long-term liabilities

     (776

Goodwill

     38,470   
  

 

 

 

Total purchase price

   $ 98,909   
  

 

 

 

 

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There were $1,047 of direct transaction costs included in selling, general and administrative expenses during the first six months of 2012.

During the second quarter, the Company made adjustments to its preliminary purchase price allocation for FRS resulting in a net decrease to goodwill of $4,878. 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 Company’s 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
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Pro forma revenues

   $ 308,817       $ 292,212       $ 622,742       $ 581,173   

Pro forma net income

   $ 4,443       $ 2,503       $ 9,740       $ 10,795   

Earnings per share:

           

Basic

   $ .37       $ .22       $ .82       $ .94   

Diluted

   $ .37       $ .21       $ .81       $ .90   

NOTE P — 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.

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

 

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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 Evraz’s 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 Q — Goodwill and Other Intangible Assets

The change in goodwill and other intangibles assets reflected on the balance sheet from December 31, 2011 to June 30, 2012 was the result of an increase of $79,370 related to the acquisition of FRS and foreign currency translation. Information regarding other intangible assets as of June 30, 2012 and December 31, 2011 follows:

 

     June 30, 2012      December 31, 2011  
     Acquisition
Costs
     Accumulated
Amortization
     Net      Acquisition
Costs
     Accumulated
Amortization
     Net  

Non-contractual customer relationships

   $ 41,670       $ 4,393       $ 37,277       $ 11,670       $ 3,320       $ 8,350   

Other

     3,420         1,212         2,208         3,420         1,046         2,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 45,090       $ 5,605       $ 39,485       $ 15,090       $ 4,366       $ 10,724   
  

 

 

    

 

 

       

 

 

    

 

 

    

Indefinite-lived tradenames

           10,900               —     

Goodwill

           47,820               9,463   
        

 

 

          

 

 

 

Total

         $ 98,205             $ 20,187   
        

 

 

          

 

 

 

Amortization expense for the first six months of 2012 was $1,239 and is estimated to be $2,640 in 2012, $3,086 in 2013 and $3,029 for each of the three subsequent years thereafter. The weighted-average amortization period for the acquired intangible assets was approximately 14 years.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our condensed consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

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 injected molded rubber components, and fuel filler 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

 

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Table of Contents

(“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 $98.9 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 our 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.

As discussed elsewhere in this quarterly report, in June 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.

Results of Operations

Second Quarter 2012 Compared with Second Quarter 2011

Net Sales by Segment:

 

     Three Months
Ended

June  30,
            Percent  
     2012      2011      Change      Change  
     (Dollars in millions)                

Supply Technologies

   $ 131.5       $ 123.8       $ 7.7         6

Assembly Components

     91.4         40.7         50.7         125

Engineered Products

     85.9         82.3         3.6         4
  

 

 

    

 

 

    

 

 

    

Consolidated Net Sales

   $ 308.8       $ 246.8       $ 62.0         25
  

 

 

    

 

 

    

 

 

    

Net sales increased $62.0 million to $308.8 million in the second quarter of 2012, compared to $246.8 million in the same period in 2011, as we experienced volume increases in each of our segments. Supply Technologies sales increased 6% primarily due to volume increases in the heavy-duty truck, power sports, electrical, lawn and garden, industrial and computer and office equipment

 

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industries offset primarily by declines in the consumer electronics, HVAC, agriculture and construction, medical, appliance and instruments industries. Assembly Components sales increased 125% primarily due to incremental sales of $55.5 million resulting from the acquisition of FRS offset by lower sales in the aluminum products business unit. Engineered Products sales increased 4% primarily due to the increased sales associated with the rail industry in the forged and machine business units.

Cost of Products Sold & Gross Profit:

 

     Three Months
Ended

June 30,
           Percent  
     2012     2011     Change      Change  
     (Dollars in millions)               

Consolidated cost of products sold

   $ 252.9      $ 201.6      $ 51.3         25
  

 

 

   

 

 

   

 

 

    

Consolidated gross profit

   $ 55.9      $ 45.2      $ 10.7         24
  

 

 

   

 

 

   

 

 

    

Gross Margin

     18.1     18.3     

Cost of products sold increased $51.3 million to $252.9 million in the second quarter of 2012, compared to $201.6 million in the same period in 2011, while gross margin decreased to 18.1% in the second quarter of 2012 compared to 18.3% 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 decreased primarily due to product mix.

Selling, General & Administrative (SG&A) Expenses:

 

     Three Months
Ended

June 30,
           Percent  
     2012     2011     Change      Change  
     (Dollars in millions)               

Consolidated SG&A expenses

   $ 29.6      $ 28.8      $ 0.8         3

SG&A as a percentage of net sales

     9.6     11.7     

Consolidated SG&A expenses increased 3% in the second quarter of 2012 compared to the same period in 2011, representing a 210 basis point decrease in SG&A expenses as a percent of sales. SG&A expenses increased in the second quarter of 2012 compared to the same period in 2011 primarily due to the acquisition of FRS.

Interest Expense:

 

     Three Months
Ended

June 30,
          Percent  
     2012     2011     Change     Change  
     (Dollars in millions)              

Interest expense

   $ 6.5      $ 14.2      $ (7.7     (54 )% 

Debt extinguishment costs included in interest expense

   $ —        $ 7.3      $ (7.3     (100 )% 

Amortization of deferred financing costs and bank service charges

   $ 0.6      $ 0.9      $ (0.3     (33 )% 

Average outstanding borrowings

   $ 395.0      $ 336.7      $ 58.3        17

Average borrowing rate

     6.82     8.20     (138     basis points   

Interest expense decreased $7.7 million in the second quarter of 2012 compared to the same period of 2011, primarily due to debt extinguishment costs in 2011 as a result of the refinancing of our senior subordinated notes and amendment of our Revolving

 

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Credit facility. Average borrowings in the second quarter 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 Notes, offset by the purchase of all of our outstanding 8.375% senior subordinated notes due 2014, additional borrowings to fund the acquisition of FRS and the litigation settlement. The lower average borrowing rate in the second quarter of 2012 was due primarily to the interest rate mix of our revolving credit facility and the Notes when compared to the interest rate mix in the same period in 2011.

Income Tax:

The provision for income taxes was $2.3 million in the second quarter of 2012, a 34.5% effective income tax rate, compared to income taxes of $3.2 million provided in the corresponding period of 2011, a 152.6% effective income tax rate. Included in the income tax provision for 2011 was $2.1 million associated with the retirement of senior subordinated notes that were held by a foreign affiliate.

Six Months 2012 Compared with Six Months 2011

Net Sales by Segment:

 

     Six Months
Ended
June 30,
            Percent  
     2012      2011      Change      Change  
     (Dollars in millions)                

Supply Technologies

   $ 264.2       $ 245.3       $ 18.9         8

Assembly Components

     136.0         88.0         48.0         55

Engineered Products

     171.7         155.1         16.6         11
  

 

 

    

 

 

    

 

 

    

Consolidated Net Sales

   $ 571.9       $ 488.4       $ 83.5         17
  

 

 

    

 

 

    

 

 

    

Net sales increased $83.5 million to $571.9 million in the first six months of 2012, compared to $488.4 million in the same period in 2011, as we experienced volume increases in each of our segments. Supply Technologies sales increased 8% 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 55% primarily from sales of $61.0 million resulting from the acquisition of FRS, offset by lower sales in the aluminum business unit. Engineered Products sales increased 11% primarily due to increased volume in the capital equipment and forged and machine business units.

Cost of Products Sold & Gross Profit:

 

     Six Months
Ended
June 30,
           Percent  
     2012     2011     Change      Change  
     (Dollars in millions)               

Consolidated cost of products sold

   $ 467.0      $ 401.3      $ 65.7         16
  

 

 

   

 

 

   

 

 

    

Consolidated gross profit

   $ 104.8      $ 87.1      $ 17.7         20
  

 

 

   

 

 

   

 

 

    

Gross Margin

     18.3     17.8     

Cost of products sold increased $65.7 million to $467.0 million in the first six months of 2012, compared to $401.3 million in the same period in 2011, while gross margin increased to 18.3% in the first six months of 2012 compared to 17.8% 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 volume increases.

 

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SG&A Expenses:

 

     Six Months
Ended

June 30,
           Percent  
     2012     2011     Change      Change  
     (Dollars in millions)               

Consolidated SG&A expenses

   $ 58.4      $ 54.5      $ 3.9         7

SG&A as a percentage of net sales

     10.2     11.2     

Consolidated SG&A expenses increased 7% in the first six months of 2012 compared to the same period in 2011. However, we generated a 100 basis point decrease in SG&A expenses as a percent of sales. SG&A expenses increased in the first six months of 2012 compared to the same period in 2011 primarily due to increases in payroll and payroll related expenses, a reduction in pension income of $1.1 million, and $1.0 million of expenses associated with the acquisition of FRS and $1.0 million of legal expenses associated with the litigation settlement.

Interest Expense:

 

     Six Months
Ended
June 30,
          Percent  
     2012     2011     Change     Change  
     (Dollars in millions)              

Interest expense

   $ 13.3      $ 20.1      $ (6.8     (34 )% 

Debt extinguishment costs included in interest expense

   $ 0.3      $ 7.3        (7.0     (96 )% 

Amortization of deferred financing costs and bank service charges

   $ 1.5      $ 1.7      $ (0.2     (12 )% 

Average outstanding borrowings

   $ 374.1      $ 325.8      $ 48.3        15

Average borrowing rate

     7.10     6.81     29        basis points   

Interest expense decreased $6.8 million in the first six 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 Notes and amendment of its Revolving Credit facility. Average borrowings in the first six 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 Notes, offset by the purchase of all of its outstanding 8.375% senior subordinated notes due 2014, additional borrowings to fund the acquisition of FRS and the litigation settlement. The higher average borrowing rate in the first six months of 2012 was due primarily to the interest rate mix of our revolving credit facility and the Notes when compared to the interest rate mix in the same period in 2011.

Income Tax:

The provision for income taxes was $6.8 million in the first six months of 2012, a 33.6% effective income tax rate, compared to income taxes of $4.9 million provided in the corresponding period of 2011, a 39.1% effective income tax rate. We estimate that the effective tax rate for full-year 2012 will be approximately 33%.

Liquidity and Sources of Capital

As of June 30, 2012, we had $120.3 million outstanding under its revolving credit facility, approximately $73.2 million of unused borrowing availability and cash and cash equivalents of $43.4 million.

Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of our debt securities. On April 7, 2011, we completed the sale of $250.0 million aggregate principal amount of Notes. The Notes bear an interest rate of 8.125% per annum and will be payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2011. The Notes mature on April 1, 2021.

 

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We are a party to the Credit Agreement with a group of banks, under which we 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 million to $220 million, and provide a term loan for $25 million 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 bank’s prime lending rate minus .25% to 1.00%, at our election. The LIBOR-based interest rate is dependent on our debt service coverage ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing availability to us based on percentages of eligible accounts receivable and inventory. Interest on the term loan is at either (i) LIBOR plus 2.75% or (ii) the bank’s prime lending rate plus .25%, at our election. The term loan is amortized based on a seven-year schedule with the balance due at maturity.

Current financial resources (working capital and available bank borrowing arrangements) and anticipated funds from operations are expected to be adequate to meet current cash requirements for at least the next twelve months. The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on our ability to meet a debt service ratio covenant, which could be materially impacted by negative economic trends. Failure to meet the debt service ratio could materially impact the availability and interest rate of future borrowings.

We had cash and cash equivalents held by foreign subsidiaries of $32.1 million at June 30, 2012 and $61.2 million at December 31, 2011. For each of our foreign subsidiaries, we make a determination regarding the amount of earnings intended for permanent reinvestment, with the balance, if any, available to be repatriated to the United States. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the foreign subsidiaries’ operational activities and/or future foreign investments. At June 30, 2012, management believed that sufficient liquidity was available in the United States, and it is our current intention to permanently reinvest undistributed earnings of our foreign subsidiaries outside of the United States. Although we have no intention to repatriate the approximately $87.7 million of undistributed earnings of our foreign subsidiaries, as of June 30, 2012, if we were to repatriate these earnings, there would potentially be an adverse tax impact.

At June 30, 2012, our debt service coverage ratio was 2.0, and, therefore, we were in compliance with the debt service coverage ratio covenant contained in the revolving credit facility. We were also in compliance with the other covenants contained in the revolving credit facility as of June 30, 2012. The debt service coverage ratio is calculated at the end of each fiscal quarter and is based on the most recently ended four fiscal quarters of consolidated EBITDA minus cash taxes paid, minus unfunded capital expenditures, plus cash tax refunds to consolidated debt charges that are consolidated cash interest expense plus scheduled principal payments on indebtedness plus scheduled reductions in our term debt as defined in the Credit Agreement. The debt service coverage ratio must be greater than 1.0 and not less than 1.1 for any two consecutive fiscal quarters. While we expect to remain in compliance throughout 2012, declines in sales volumes in 2012 could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by declines in the economy in general, they may not be able to pay their accounts payable to us on a timely basis or at all, which would make the accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility.

The ratio of current assets to current liabilities was 2.16 at June 30, 2012, versus 2.65 at December 31, 2011. Working capital decreased by $21.2 million to $270.3 million at June 30, 2012, from $291.5 million at December 31, 2011. Accounts receivable increased $43.6 million to $183.5 million at June 30, 2012, from $139.9 million at December 31, 2011, primarily resulting from the acquisition of FRS and its $26.2 million of accounts receivable and sales volume increases. Inventory increased by $24.2 million at June 30, 2012, to $226.2 million from $202.0 million at December 31, 2011, primarily resulting from planned increases due to sales volume increases and $11.1 million of increases associated with the acquisition of FRS. Accrued expenses increased by $18.7 million to $92.4 million at June 30, 2012, from $73.7 million at December 31, 2011, primarily resulting from the terms of the payments of interest due on the Notes and accrued liabilities of FRS of $12.0 million. Accounts payable increased $34.7 million to $134.3 million at June 30, 2012, from $99.6 million at December 31, 2011, primarily as a result of acquiring the accounts payable of FRS of $17.3 million and the timing of payments at June 30, 2012.

During the first six months of 2012, we provided $19.1 million from operating activities compared to $11.6 million in the same period of 2011. The increase in the operating cash flows of $7.5 million in 2012 compared to 2011 was primarily the result of an increase in net income and an increase in cash flows from operating assets and liabilities compared to the prior year. In the first six months of 2012, we used cash of $6.9 million for capital expenditures and $96.7 million for the acquisition of FRS. These activities, plus cash interest and tax payments of $15.3 million, an increase in borrowings of $50.7 million and purchase of treasury stock of $1.0 million offset by funds received upon the exercise of stock options of $1.1 million, resulted in a decrease in cash of $34.6 million in the first six months of 2012.

We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons. There are occasions whereupon we enter into forward contracts on foreign currencies, purely for the purpose of hedging exposure to changes in the value of accounts receivable in those currencies against the U.S. dollar. At June 30, 2012, none were outstanding. We currently have no other derivative instruments.

 

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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. Management’s 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 FRS’s 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 our 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.

Review By Independent Registered Public Accounting Firm

The consolidated financial statements at June 30, 2012, and for the three-month and six-month periods ended June 30, 2012 and 2011, have been reviewed, prior to filing, by Ernst & Young LLP, our independent registered public accounting firm.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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 provided by our Credit Agreement, which consisted of borrowings of $120.3 million at June 30, 2012. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $0.6 million during the six-month period ended June 30, 2012.

 

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Our foreign subsidiaries generally conduct business in local currencies. During the second quarter of 2012, we recorded a favorable foreign currency translation adjustment of $(2.9) million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from strengthening 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.

We periodically enter 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. We currently use no other derivative instruments. At June 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 second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

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.

One of our subsidiaries, Ajax Tocco Magnethermic (“ATM”) included in the Engineered Products segment, was a party to a binding arbitration proceeding 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 $37.0 million, as well as fees and expenses related to the arbitration. ATM counterclaimed in the arbitration, alleging breach of contract for non-payment of $2.7 million 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 Evraz’s 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 $13.0 million in cash, which payment was made in June 2012.

In addition to the routine lawsuits and asserted claims noted above, we were a party to the lawsuits and legal proceedings described below at June 30, 2012.

We were a co-defendant in approximately 287 cases asserting claims on behalf of approximately 722 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 plaintiff’s injury, if any.

 

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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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is information regarding our repurchases of our common stock during the quarter ended June 30, 2012.

 

Period

   Total
Number
of Shares
Purchased
    Average
Price Paid
Per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans(1)
     Maximum Number of
Shares  That May Yet Be
Purchased Under the
Plans or Program
 

April 1 — April 30, 2012

     —        $ —           —           340,920   

May 1 — May 31, 2012

     17,811 (2)      18.86         —           340,920   

June 1 — June 30, 2012

     —          —           —           340,920   
  

 

 

   

 

 

    

 

 

    

Total

     17,811      $ 18.86         —           340,920   
  

 

 

   

 

 

    

 

 

    

 

(1) On September 27, 2006, we announced a share repurchase program whereby we may repurchase up to 1.0 million shares of our common stock. During the second quarter of 2012, no shares were purchased as part of this program.
(2) Consists of shares of common stock we acquired from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient minimum withholding tax liabilities.

Item 6. Exhibits

The following exhibits are included herein:

 

10.1    Park-Ohio Holdings Corp. Amended and Restated 1998 Long-Term Incentive Plan, as amended and restated on May 24, 2012 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on May 30, 2012, SEC File No. 000-03134, and incorporated by reference and made a part hereof)
31.1    Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002
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

 

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SIGNATURE

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 HOLDINGS CORP.

(Registrant)
By  

/s/ W. SCOTT EMERICK

  Name:   W. Scott Emerick
  Title:   Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)

Date: August 9, 2012

 

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

FOR THE QUARTER ENDED JUNE 30, 2012

 

Exhibit

     
  10.1    Park-Ohio Holdings Corp. Amended and Restated 1998 Long-Term Incentive Plan, as amended and restated on May 24, 2012 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by Park-Ohio Holdings Corp. on May 30, 2012, SEC File No. 000-03134)
  31.1    Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32    Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002
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

 

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