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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 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 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 October 31, 2012: 12,371,122.

The Exhibit Index is located on page 25.

 

 

 


Table of Contents

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

INDEX

 

           Page  
PART I. FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

     3   
  

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

     3   
  

Condensed consolidated statements of income  — Three and nine months ended September 30, 2012 and 2011

     4   
  

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

     5   
  

Condensed consolidated statement of shareholders’ equity  — Nine months ended September 30, 2012

     6   
  

Condensed consolidated statements of cash flows  — Nine months ended September 30, 2012 and 2011

     7   
  

Notes to unaudited condensed consolidated financial statements — September 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

     21   
PART II. OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     22   

Item 1A.

  

Risk Factors

     23   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     23   

Item 6.

  

Exhibits

     23   

SIGNATURE

     24   

EXHIBIT INDEX

     25   

 

2


Table of Contents

PART I. Financial Information

 

ITEM 1. Financial Statements

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

Current assets:

    

Cash and cash equivalents

   $ 41,309      $ 78,001   

Accounts receivable, less allowances for doubtful accounts of $3,078 at September 30, 2012 and $5,483 at December 31, 2011

     173,030        139,941   

Inventories, net

     223,922        202,039   

Deferred tax assets

     22,244        20,561   

Unbilled contract revenue

     9,541        18,778   

Other current assets

     19,914        8,790   
  

 

 

   

 

 

 

Total current assets

     489,960        468,110   

Property, plant and equipment:

    

Land and land improvements

     5,679        3,654   

Buildings

     55,649        47,594   

Machinery and equipment

     246,923        208,727   
  

 

 

   

 

 

 
     308,251        259,975   

Less accumulated depreciation

     208,353        198,165   
  

 

 

   

 

 

 
     99,898        61,810   

Other assets:

    

Goodwill and other intangible assets

     97,550        20,187   

Other

     64,134        63,833   
  

 

 

   

 

 

 
   $ 751,542      $ 613,940   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Trade accounts payable

   $ 120,386      $ 99,588   

Accrued expenses

     95,118        73,651   

Current portion of long-term debt

     4,230        1,415   

Current portion of other postretirement benefits

     2,002        2,002   
  

 

 

   

 

 

 

Total current liabilities

     221,736        176,656   

Long-term liabilities, less current portion:

    

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   
  

 

 

   

 

 

 
     435,252        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 — 14,131,630 shares in 2012 and 13,813,774 in 2011

     14,132        13,814   

Additional paid-in capital

     74,087        70,248   

Retained earnings

     34,519        10,392   

Treasury stock, at cost, 1,733,133 shares in 2012 and 1,673,926 shares in 2011

     (21,793     (20,607

Accumulated other comprehensive (loss)

     (6,391     (8,405
  

 

 

   

 

 

 
     94,554        65,442   
  

 

 

   

 

 

 
   $ 751,542      $ 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.

 

3


Table of Contents

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

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

Net sales

   $ 286,462       $ 243,544       $ 858,335       $ 731,980   

Cost of products sold

     232,532         201,700         699,576         603,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     53,930         41,844         158,759         128,959   

Selling, general and administrative expenses

     31,233         26,222         89,601         80,733   

Restructuring and asset impairment charges

     —           5,359         —           5,359   

Settlement of litigation

     —           —           13,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     22,697         10,263         56,158         42,867   

Interest expense

     6,520         6,215         19,795         26,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     16,177         4,048         36,363         16,560   

Income taxes

     5,449         1,178         12,236         6,068   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 10,728       $ 2,870       $ 24,127       $ 10,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts per common share:

           

Basic

   $ 0.89       $ 0.25       $ 2.03       $ 0.91   

Diluted

   $ 0.88       $ 0.24       $ 1.99       $ 0.87   

Common shares used in the computation:

           

Basic

     12,003         11,600         11,907         11,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     12,175         12,012         12,109         12,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

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
September 30,
    Nine Months Ended
September 30,
 
     2012      2011     2012      2011  
     (Dollars in thousands)  

Net income

   $ 10,728       $ 2,870      $ 24,127       $ 10,492   

Other comprehensive income:

          

Foreign currency translation gain (loss)

     2,473         (3,191     803         245   

Pension and postretirement benefit adjustments

     404         136        1,211         349   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     2,877         (3,055     2,014         594   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss), net of tax

   $ 13,605       $ (185   $ 26,141       $ 11,086   
  

 

 

    

 

 

   

 

 

    

 

 

 

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


Table of Contents

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

     —          —          24,127         —          2,014        26,141   

Amortization of restricted stock

    
—  
  
    2,030        —           —          —          2,030   

Restricted stock awards

     258        (258     —           —          —          —     

Restricted stock cancelled

     (5 )     5       —           —          —          —     

Purchase of treasury stock (59,207 shares)

     —          —          —           (1,186     —          (1,186

Exercise of stock options (64,856 shares)

     65        1,016        —           —          —          1,081   

Income tax effect of share-based compensation exercises and vesting

     —          1,031        —           —          —          1,031   

Share-based compensation

     —          15        —          —          —          15   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 14,132      $ 74,087      $ 34,519       $ (21,793   $ (6,391   $ 94,554   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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


Table of Contents

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (Dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 24,127      $ 10,492   

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

    

Depreciation and amortization

     13,167        11,922   

Restructuring and asset impairment charges

     —          5,359   

Share-based compensation expense

     2,045        1,525   

Gain on sale of property

     (250     —     

Debt extinguishment costs

     305        7,335   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,169     (18,478

Inventories and other current assets

     (9,099     (22,890

Accounts payable and accrued expenses

     9,459        37,854   

Other

     5,523        (7,048
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     43,108        26,071   

INVESTING ACTIVITIES

    

Purchases of property, plant and equipment

     (19,083     (9,544

Proceeds from sale of property

     400        —     

Acquisitions, net of cash acquired

     (96,570     —     
  

 

 

   

 

 

 

Net Cash Used by Investing Activities

     (115,253     (9,544

FINANCING ACTIVITIES

    

Proceeds from (payments on) term loans and other debt

     25,687        (36,052

Proceeds from revolving credit facility, net

     9,715        1,000   

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     (1,079

Exercise of stock options

     1,081        42   

Income tax effect of share-based compensation exercises and vesting

     1,031        —     

Purchase of treasury stock

     (1,186     (592
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     35,453        18,734   
  

 

 

   

 

 

 

(Decrease) Increase in Cash and Cash Equivalents

     (36,692     35,261   

Cash and Cash Equivalents at Beginning of Period

     78,001        35,311   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 41,309      $ 70,572   
  

 

 

   

 

 

 

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.

 

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Table of Contents

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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 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.

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 Company’s 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 ManagementTM services for a broad range of high-volume, specialty production components. Total Supply ManagementTM manages the efficiencies of every aspect of supplying

 

8


Table of Contents

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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net sales:

        

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   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 286,462      $ 243,544      $ 858,335      $ 731,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss):

        

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   
  

 

 

   

 

 

   

 

 

   

 

 

 
     27,832        20,441        84,264        61,990   

Corporate costs

     (5,135     (4,819     (15,106     (13,764

Settlement of litigation

     —          —          (13,000     —     

Restructuring and asset impairment charge

     —          (5,359     —          (5,359 )

Interest expense

     (6,520     (6,215     (19,490     (18,972 )

Debt extinguishment costs

     —          —          (305     (7,335
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 16,177      $ 4,048      $ 36,363      $ 16,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30,
2012
     December 31,
2011
 

Identifiable assets:

     

Supply Technologies

   $ 222,265       $ 225,346   

Assembly Components

     235,907         72,233   

Engineered Products

     204,407         195,834   

General corporate

     88,963         120,527   
  

 

 

    

 

 

 
   $ 751,542       $ 613,940   
  

 

 

    

 

 

 

 

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NOTE D — Inventories

The components of inventory consist of the following:

 

     September 30,
2012
     December 31,
2011
 

Finished goods

   $ 117,229       $ 122,010   

Work in process

     28,784         20,660   

Raw materials and supplies

     77,909         59,369   
  

 

 

    

 

 

 
   $ 223,922       $ 202,039   
  

 

 

    

 

 

 

NOTE E — Shareholders’ Equity

At September 30, 2012, capital stock consisted 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 14,132 shares were issued, of which 12,399 were outstanding and 1,733 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
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

NUMERATOR

           

Net income

   $ 10,728       $ 2,870       $ 24,127       $ 10,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

DENOMINATOR

           

Denominator for basic earnings per share — weighted average shares

     12,003         11,600         11,907         11,536   

Effect of dilutive securities:

           

Employee stock options and restricted stock

     172         412        202         468   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     12,175         12,012         12,109         12,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts per common share:

           

Basic

   $ 0.89       $ 0.25       $ 2.03       $ 0.91   

Diluted

   $ 0.88       $ 0.24       $ 1.99       $ 0.87   

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.

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 20 shares were excluded in the three months ended September 30, 2012, because they were anti-dilutive. There were no stock options that were anti-dilutive in the three months ended September 30, 2011. Stock options on 40 and 20 shares were excluded in the nine months ended September 30, 2012 and 2011, respectively, because they were anti-dilutive.

NOTE G — Stock-Based Compensation

Total stock compensation expense recorded in the first nine months of 2012 and 2011 was $2,045 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 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 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.

 

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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 September 30,
    Nine Months
Ended September 30,
    Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     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 (credit)

     11        11        33        33        (24     (24     (72     (72

Recognized net actuarial loss

     241        —          723        —          186        129        557        388   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit (gains) cost

   $ (710   $ (1,038   $ (2,130   $ (3,600   $ 378      $ 345      $ 1,133      $ 1,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE I — Comprehensive Loss

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

 

     September 30,
2012
    December 31,
2011
 

Foreign currency translation adjustment

   $ 5,655      $ 4,852   

Pension and postretirement benefit adjustments, net of tax

     (12,046     (13,257
  

 

 

   

 

 

 
   $ (6,391   $ (8,405
  

 

 

   

 

 

 

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 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

     (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   
  

 

 

   

 

 

 

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.

 

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The effective tax rate for the first nine months of 2012 and 2011 was 33.6% and 36.6%, respectfully. 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.

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 $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 Company’s term loan and revolving credit portion of the Credit Agreement, as defined in Note M below, approximated its carrying amount as of September 30, 2012 and December 31, 2011.

NOTE M — 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 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 2.0% at September 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 (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 N — 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.

 

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Table of Contents

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 $98,772. 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 Company’s Assembly Components segment and 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 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

     30,258   

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 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
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

   $ 10,728       $ 6,019       $ 20,468       $ 16,814   

Earnings per share:

           

Basic

   $ 0.89       $ 0.52       $ 1.72       $ 1.46   

Diluted

   $ 0.88       $ 0.50       $ 1.69       $ 1.40   

 

 

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Table of Contents

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 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 intangible 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.

 

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Table of Contents
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 (“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 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 $33.8 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.

 

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Table of Contents

Results of Operations

Third Quarter 2012 Compared with Third Quarter 2011

Net Sales by Segment:

 

     Three Months
Ended
September 30,
           Percent
Change
 
     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
  

 

 

    

 

 

    

 

 

   

Consolidated Net Sales

   $ 286.5       $ 243.5       $ 43.0        18
  

 

 

    

 

 

    

 

 

   

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 Technology segments. Supply Technologies sales decreased 5% primarily due to volume declines in the HVAC, agriculture and construction, lawn and garden, medical, appliance and instruments industries partially offset by increases in the heavy-duty truck, power sports, 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
 
     2012     2011     Change     
     (Dollars in millions)               

Consolidated cost of products sold

   $ 232.5      $ 201.7      $ 30.8         15
  

 

 

   

 

 

   

 

 

    

Consolidated gross profit

   $ 53.9      $ 41.8      $ 12.1         29
  

 

 

   

 

 

   

 

 

    

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 increased 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
 
     2012     2011     Change     
     (Dollars in millions)               

Consolidated SG&A expenses

   $ 31.2      $ 26.2      $ 5.0         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.

 

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Table of Contents

Interest Expense:

 

     Three Months
Ended
September 30,
          Percent
Change
 
     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 33.7% 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
 
     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
  

 

 

    

 

 

    

 

 

    

Consolidated Net Sales

   $ 858.3       $ 732.0       $ 126.3         17
  

 

 

    

 

 

    

 

 

    

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.

 

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Table of Contents

Cost of Products Sold & Gross Profit:

 

     Nine Months
Ended
September 30,
           Percent
Change
 
     2012     2011     Change     
     (Dollars in millions)               

Consolidated cost of products sold

   $ 699.6      $ 603.0      $ 96.6         16
  

 

 

   

 

 

   

 

 

    

Consolidated gross profit

   $ 158.8      $ 129.0      $ 29.8         23
  

 

 

   

 

 

   

 

 

    

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
 
     2012     2011     Change     
     (Dollars in millions)               

Consolidated SG&A expenses

   $ 89.6      $ 80.7      $ 8.9         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
 
     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 interest rate 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 33.6% effective income tax rate, compared to income taxes of $6.1 million provided in the corresponding period of 2011, a 36.6% effective income tax rate. We estimate that the effective tax rate for full-year 2012 will be approximately 33.7%.

 

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Net Income:

Net income increased $13.6 million to $24.1 million for the first nine months of 2012, compared to $10.5 million for the first nine months of 2011. 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.

Liquidity and Sources of Capital

As of September 30, 2012, we had $106.3 million outstanding under our revolving credit facility, approximately $80.9 million of unused borrowing availability and cash and cash equivalents of $41.3 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 Senior Notes. The Senior 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 Senior Notes mature on April 1, 2021.

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 (April 7, 2016).

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 $31.0 million at September 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 September 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 $90.8 million of undistributed earnings of our foreign subsidiaries, as of September 30, 2012, if we were to repatriate these earnings, there would potentially be an adverse tax impact.

At September 30, 2012, our debt service coverage ratio was 2.1, 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 September 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 2.21 at September 30, 2012, versus 2.65 at December 31, 2011. Working capital decreased by $23.3 million to $268.2 million at September 30, 2012, from $291.5 million at December 31,

 

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2011. Accounts receivable increased $33.1 million to $173.0 million at September 30, 2012, from $139.9 million at December 31, 2011, primarily resulting from the acquisition of FRS and its $24.1 million of accounts receivable and sales volume increases. Inventory increased by $21.9 million at September 30, 2012, to $223.9 million from $202.0 million at December 31, 2011, primarily resulting from planned increases due to sales volume increases and $10.4 million of increases associated with the acquisition of FRS. Accrued expenses increased by $21.4 million to $95.1 million at September 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 $11.7 million. Accounts payable increased $20.8 million to $120.4 million at September 30, 2012, from $99.6 million at December 31, 2011, primarily as a result of acquiring the accounts payable of FRS of $16.1 million and the timing of payments at September 30, 2012.

During the first nine months of 2012, we provided $43.1 million of cash from operating activities compared to $26.1 million in the same period of 2011. The increase in the operating cash flows of $17.0 million in the first nine months of 2012 compared to the first nine months of 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 nine months of 2012, we used cash of $19.1 million for capital expenditures and $96.6 million for the acquisition of FRS. These activities and an increase in borrowings of $35.4 million and purchase of treasury stock of $1.2 million offset by funds received upon the exercise of stock options of $1.1 million and the income tax effect of share-based compensation exercises and vesting of $1.0 million, resulted in a decrease in cash of $36.7 million in the first nine 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 September 30, 2012, none were outstanding. We currently have no other derivative instruments.

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;

 

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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.

 

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 and term loan provided by our Credit Agreement, which consisted of borrowings of $129.5 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 nine-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 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 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.

 

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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.

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 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 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 September 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
 

July 1 — July 31, 2012

     3,534 (2)   $ 19.03        —           340,920   

August 1 — August 31, 2012

     5,571 (2)      22.17         —           340,920   

September 1 — September 30, 2012

     —          —           —           340,920   
  

 

 

   

 

 

    

 

 

    

Total

     9,105      $ 20.95         —           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 third 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:

 

  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: November 9, 2012

 

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

 

Exhibit

    
  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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