WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
For the fiscal year ended December 31, 2004
OR
o
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the transition period from to
Commission file number 0-3134
PARK-OHIO HOLDINGS CORP.
Ohio
(State or other jurisdiction of
incorporation or organization)
34-1867219
-----------------------------------------------------
(I.R.S. Employer Identification No.)
23000 Euclid Avenue
Cleveland, Ohio
(Address of principal executive
offices)
44117
(Zip Code)
Registrant’s telephone number, including area code: (216) 692-7200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 Per Share
Park-Ohio Holdings Corp. is a successor issuer to Park-Ohio Industries, Inc.
Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o
Aggregate market value of the voting stock held by non-affiliates of the registrant: Approximately $87,000,000, based on the closing price of $11.80 per share of the registrant’s Common Stock on the Nasdaq National Market on June 30, 2004.
Number of shares outstanding of the registrant’s Common Stock, par value $1.00 per share, as of February 28, 2005: 10,902,601.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2005 are incorporated by reference into Part III of this Form 10-K.
PARK-OHIO HOLDINGS CORP.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Overview
Park-Ohio Holdings Corp. (“Holdings”) was incorporated
as an Ohio corporation in 1998. Holdings, primarily through the
subsidiaries owned by its direct subsidiary, Park-Ohio
Industries, Inc. (“Park-Ohio”), is an industrial
supply chain logistics and diversified manufacturing business
operating in three segments: Integrated Logistics Solutions,
(“ILS”), Aluminum Products and Manufactured Products.
References herein to “we” or “the Company”
include, where applicable Holdings, Park-Ohio and Holdings’
other direct and indirect subsidiaries.
ILS provides our customers with integrated supply chain
management services for a broad range of high-volume, specialty
production components and has a leading market position in North
America. Our Aluminum Products business manufactures cast and
machined aluminum components, and our Manufactured Products
business is a major manufacturer of highly-engineered industrial
products. Our businesses serve large, industrial original
equipment manufacturers (“OEMs”) in a variety of
industrial sectors, including the automotive, heavy-duty truck,
industrial equipment, steel, rail, electrical controls,
aerospace and defense, lawn and garden and semiconductor
industries. As of December 31, 2004, we employed approximately
3,200 persons.
The following table summarizes the key attributes of each of our
business segments:
We have established leading market positions across a variety of
industries, and we believe we maintain a #1 or #2
market position in products and services that represent more
than 75% of our net sales. We benefit from long-term, entrenched
relationships with high-quality customers that include leading
OEMs, and we derive approximately 70% of our net sales from
sole-source arrangements.
1
Integrated Logistics Solutions
Our ILS business provides our customers with integrated supply
chain management services for a broad range of high-volume,
specialty production components. Our ILS customers receive
various value-added services, such as engineering and design
services, 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. We operate 32 logistics
service centers in the United States, Mexico, Canada, Puerto
Rico and Europe as well as production sourcing and support
centers in Asia. Through our supply chain management programs,
we supply more than 175,000 globally-sourced production
components, many of which are specialized and customized to meet
individual customers’ needs.
Products and Services.
Supply chain management services,
which is ILS’s primary focus for future growth, involves
offering customers comprehensive, on-site management for most of
their production component needs. Some production components are
characterized by low per unit supplier prices relative to the
indirect costs of supplier management, quality assurance,
inventory management and delivery to the production line. In
addition, ILS delivers an increasingly broad range of
higher-cost production components including valves, fittings,
steering components and many others. Applications-engineering
specialists and the direct sales force work closely with the
engineering staff of OEM customers to recommend the appropriate
production components for a new product or to suggest
alternative components that reduce overall production costs,
streamline assembly or enhance the appearance or performance of
the end product. As an additional service, ILS recently began
providing spare parts and aftermarket products to end users of
its customers’ products.
Supply chain management services are typically provided to
customers pursuant to sole-source arrangements. We believe our
services distinguish us from traditional buy/sell distributors,
as well as manufacturers who supply products directly to
customers, because we outsource our customers’ high-volume
production components supply chain management, providing
processes customized to each customer’s needs and replacing
numerous current suppliers with a sole-source relationship. Our
highly-developed, customized, information systems provide
transparency and flexibility through the complete supply chain.
This enables our customers to: (1) significantly reduce the
direct and indirect cost of production component processes by
outsourcing internal purchasing, quality assurance and inventory
fulfillment responsibilities; (2) reduce the amount of
working capital invested in inventory and floor space;
(3) reduce component costs through purchasing efficiencies,
including bulk buying and supplier consolidation; and
(4) receive technical expertise in production component
selection and design and engineering. Our sole-source
arrangements foster long-term, entrenched supply relationships
with our customers and, as a result, the average tenure of
service for our top 50 ILS clients exceeds twelve years.
ILS’s remaining non-manufacturing sales are generated
through the wholesale supply of industrial products to other
manufacturers and distributors pursuant to master or authorized
distributor relationships.
ILS also engineers and manufactures precision cold formed and
cold extruded products, including locknuts, SPAC® nuts and
wheel hardware, that are principally used in applications where
controlled tightening is required due to high vibration. ILS
produces both standard items and specialty products to customer
specifications that are used in large volumes by customers in
the automotive, heavy-duty truck and rail industries.
Markets and Customers.
For the year ended
December 31, 2004, approximately 79% of ILS’s net
sales were to domestic customers. Remaining sales were primarily
to manufacturing facilities of large, multinational customers
located in Canada, Mexico and Europe. Supply chain management
services and production components are used extensively in a
variety of industries, and demand is generally related to the
state of the economy and to the overall level of manufacturing
activity.
ILS markets and sells its services to over 6,500 customers
domestically and internationally. The principal markets served
by ILS are heavy-duty truck, electrical controls, automotive,
other vehicle, industrial equipment, power sports equipment,
lawn and garden and semiconductor industries. The five
2
Competition.
There are a limited number of companies who
compete with ILS for supply chain service contracts. ILS
competes mainly with domestic competitors primarily on the basis
of its value-added services, which includes sourcing,
engineering and delivery capabilities, geographic reach,
extensive product selection, price and reputation for high
service levels.
Aluminum Products
We believe that we are one of the few part suppliers that has
the capability to provide a wide range of high-volume,
high-quality products utilizing a broad range of processes,
including permanent mold, low-pressure, die-cast, sand-cast and
lost-foam, as well as a proprietary sub-liquidous process. Our
ability to offer our customers this comprehensive range of
capabilities at a low cost provides us with a competitive
advantage. We produce our aluminum components at six
manufacturing facilities in Ohio, Indiana and Wisconsin.
Products and Services.
Our Aluminum Products business
casts and machines aluminum engine, transmission, brake,
suspension and other components for automotive, agricultural
equipment, heavy-duty truck and construction equipment OEMs,
primarily on a sole-source basis. Aluminum Products’
principal products include transmission pump housings, intake
manifolds, planetary pinion carriers, oil filter adapters,
clutch retainers, bearing cups, brackets, oil pans and flywheel
spacers. In addition, we also provide value-added services such
as design engineering, machining and part assembly. Although
these parts are lightweight, they possess high durability and
integrity characteristics even under extreme pressure and
temperature conditions.
Demand by automotive OEMs for aluminum castings has increased in
recent years as they have sought lighter alternatives to steel
and iron, primarily to increase fuel efficiency without
compromising structural integrity. We believe that this
replacement trend will continue as end-users and the regulatory
environment require greater fuel efficiency. To capitalize on
this trend, in August 2004, we acquired substantially all of the
assets of the Amcast Components Group, a producer of aluminum
automotive components. This acquisition significantly increased
our production capacity and added attractive new customers,
product lines and production technologies. We believe that the
acquisition of the Amcast Components Group will significantly
increase the net sales of our Aluminum Products business. The
historical financial data contained throughout this annual
report on Form 10-K exclude the results of operations of
the Amcast Components Group other than for the period from
August 23, 2004 through December 31, 2004.
Markets and Customers.
The five largest customers, of
which Aluminum Products sells to multiple operating divisions
through sole-source contracts, accounted for approximately 79%
of Aluminum Products sales for both 2003 and 2004, respectively.
The loss of any one of these customers could have a material
adverse effect on this segment.
Competition.
The domestic aluminum castings industry is
highly competitive. Aluminum Products competes principally on
the basis of its ability to: (1) engineer and manufacture
high-quality, cost-effective, machined castings utilizing
multiple casting technologies in large volumes; (2) provide
timely delivery; and (3) retain the manufacturing
flexibility necessary to quickly adjust to the needs of its
customers. Although there are a number of smaller domestic
companies with aluminum casting capabilities, the
customers’ stringent quality and service standards enable
only large suppliers with the requisite quality certifications
to compete effectively. As one of these suppliers, Aluminum
Products is well-positioned to benefit as customers continue to
consolidate their supplier base.
3
Manufactured Products
Our Manufactured Products segment 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, rubber
products and forged and machined products. We manufacture these
products in eleven domestic facilities and eight international
facilities in Canada, Mexico, the United Kingdom, Belgium,
Germany, China and Japan.
Products and Services.
Our induction heating and melting
business utilizes proprietary technology and specializes in the
engineering, construction, service and repair of induction
heating and melting systems, primarily for the steel, coatings,
forging, foundry, automotive and construction equipment
industries. Our induction heating and melting systems are
engineered and built to customer specifications and are used
primarily for melting, heating, and surface hardening of metals
and curing of coatings. Approximately 35%-40% of our induction
heating and melting systems’ revenues is derived from the
sale of replacement parts and provision of field service,
primarily for the installed base of our own products. We also
produce and provide services and spare parts for other capital
equipment such as pipe threading equipment for the oil and gas
industry, oven systems and mechanical forging presses, as well
as manufacture injection molded rubber and silicone products for
use in automotive and industrial applications. Our forged and
machined products include locomotive crankshafts, aircraft
structural components such as landing gears and rail products
such as railcar center plates. We also engineer and install
mechanical forging presses for the automotive and truck
manufacturing industries and sell spare parts and provide field
service for the large existing base of mechanical forging
presses and hammers in North America.
We manufacture injection molded rubber and silicone products for
use in automotive and industrial applications. The rubber
products facilities manufacture products for customers in the
automotive, food processing and consumer appliance industries.
Their products include wire harnesses, shock and vibration
mounts, spark plug boots and nipples and general sealing
gaskets. During 2002, we reduced rubber products’ costs and
discontinued underperforming products by selling one business
unit and closing a manufacturing plant.
Markets and Customers.
In our Manufactured Products’
capital equipment business, approximately 38% of net sales for
the year ended December 31, 2004 was derived from
replacement parts and the provision of field service. In
addition, we manufacture forged and machined products produced
from closed-die metal forgings of up to 6,000 pounds. Aerospace
forgings are sold primarily to machining companies and
sub-assemblers who finish the products for sale to OEMs. We also
machine, induction harden and surface finish crankshafts and
camshafts used primarily in locomotives. In the fourth quarter
of 2003, we decided to shut down our locomotive crankshaft
forging plant and entered into a long-term supply contract to
purchase locomotive crankshaft forgings at a more favorable
price from a third-party supplier. Forged rail products are sold
primarily to railcar builders and maintenance providers. Forged
and machined products are sold to a wide variety of domestic and
international OEMs and other manufacturers, primarily in the
transportation industries.
Competition.
Our capital equipment units compete with
small to medium-sized domestic and international equipment
manufacturers on the basis of service capability, ability to
meet customer specifications, delivery performance and
engineering expertise. Our rubber products operating units
compete primarily on the basis of price and product quality with
other domestic small- to medium-sized manufacturers of injection
molded rubber and silicone products. Our forged and machined
products business competes domestically and internationally with
other small- to medium-sized businesses on the basis of product
quality and precision.
Sales and Marketing
ILS markets its products and services in the United States,
Mexico, Canada and Europe, primarily through its direct sales
force, which is assisted by applications engineers who provide
the technical expertise necessary to assist the engineering
staff of OEM customers in designing new products and
4
Raw Materials and Suppliers
ILS purchases substantially all of its production components
from third-party suppliers. Aluminum Products and Manufactured
Products purchase substantially all of their raw materials,
principally metals and certain component parts incorporated into
their products, from third-party suppliers and manufacturers.
Management believes that raw materials and component parts other
than certain specialty products are available from alternative
sources. ILS has multiple sources of supply for its products. An
increasing portion of ILS’s delivered components are
purchased from suppliers in foreign countries, primarily Taiwan,
China, South Korea, India and Eastern Europe. We are dependent
upon the ability of such suppliers to meet stringent quality and
performance standards and to conform to delivery schedules. Most
raw materials required by Aluminum Products and Manufactured
Products are commodity products available from several domestic
suppliers.
Customer Dependence
We have thousands of customers who demand quality, delivery and
service. Numerous customers have recognized our performance by
awarding us with supplier quality awards. No customer accounted
for more than 10% of consolidated sales in any of the past three
years, except for International Truck in 2004 and 2003.
Backlog
Management believes that backlog is not a meaningful measure for
ILS, as a majority of ILS’s customers require just-in-time
delivery of production components. Management believes that
Aluminum Products’ and Manufactured Products’ backlog
as of any particular date is not a meaningful measure of sales
for any future period as a significant portion of sales are on a
release or firm order basis.
Environmental, Health and Safety Regulations
We are subject to numerous federal, state and local laws and
regulations designed to protect public health and the
environment, particularly with regard to discharges and
emissions, as well as handling, storage, treatment and disposal,
of various substances and wastes. Our failure to comply with
applicable environmental laws and regulations and permit
requirements could result in civil and criminal fines or
penalties or enforcement actions, including regulatory or
judicial orders enjoining or curtailing operations or requiring
corrective measures. Pursuant to certain environmental laws,
owners or operators of facilities may be liable for the costs of
response or other corrective actions for contamination
identified at or emanating from current or former locations,
without regard to whether the owner or operator knew of, or was
responsible for, the presence of any such contamination, and for
related damages to natural resources. Additionally, persons who
arrange for the disposal or treatment of hazardous substances or
materials may be liable for costs of response at sites where
they are located, whether or not the site is owned or operated
by such person.
From time to time, we have incurred and are presently incurring
costs and obligations for correcting environmental noncompliance
and remediating environmental conditions at certain of our
properties. In general, we have not experienced difficulty in
complying with environmental laws in the past, and compliance
with environmental laws has not had a material adverse effect on
our financial condition, liquidity and results of operations.
Our capital expenditures on environmental control facili-
5
We are currently, and may in the future, be required to incur
costs relating to the investigation or remediation of property,
including property where we have disposed of our waste, and for
addressing environmental conditions. For instance, we have been
identified as a potentially responsible party at third-party
sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or
comparable state laws, which provide for strict and, under
certain circumstances, joint and several liability. We are
participating in the cost of certain clean-up efforts at several
of these sites. The availability of third-party payments or
insurance for environmental remediation activities is subject to
risks associated with the willingness and ability of the third
party to make payments. However, our share of such costs has not
been material and, based on available information, we do not
expect our exposure at any of these locations to have a material
adverse effect on our results of operations, liquidity or
financial condition.
Information as to Industry Segment Reporting and Geographic
Areas
The information contained under the heading of
“Note M—Industry Segments” of the notes to
the consolidated financial statements included herein, relating
to (i) net sales, income (loss) before income taxes and
change in accounting principles, identifiable assets and other
information by industry segment and (ii) net sales and
assets by geographic region for the years ended
December 31, 2004, 2003, and 2002 is incorporated herein by
reference.
Recent Developments
The information contained under the heading of
“Note D—Acquisitions” of the notes to the
consolidated financial statements included herein, is
incorporated by reference.
Available Information
We file annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and other
information, including amendments to these reports, with the
Securities and Exchange Commission (“SEC”). The public
can obtain copies of these materials by visiting the SEC’s
Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549, by calling the SEC at
1-800-SEC-0330, or by accessing the SEC’s website at
http://www.sec.gov. In addition, as soon as reasonably
practicable after such materials are filed with or furnished to
the SEC, we make such materials available on our website at
http://www.PKOH.com.
As of December 31, 2004, our operations included numerous
manufacturing and supply chain logistics services facilities
located in 23 states in the United States, and in Puerto
Rico, as well as in Asia, Canada, Europe and Mexico.
Approximately 90% of the available square footage was located in
the United States. Approximately 49% of the available square
footage was owned. In 2004, approximately 35% of the available
domestic square footage was used by the ILS segment, 38% was
used by the Manufactured Products segment and 27% by the
Aluminum Products segment. Approximately 27% of the available
foreign square footage was used by the ILS segment and 73% was
used by the Manufactured Products segment. In the opinion of
management, our facilities are generally well maintained and are
suitable and adequate for their intended uses.
6
The following table provides information relative to our
principal facilities as of December 31, 2004.
Item 3. 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 will not
have a material adverse effect on our financial condition,
liquidity or results of operations. We have been named as one of
many defendants in a number of asbestos-related personal injury
lawsuits. Most of the cases that have been dismissed were
because of a failure to identify an asbestos containing product
manufactured by us or a predecessor. Our cost of defending such
lawsuits has not been material to date and based upon available
information, our management does not expect our future
7
Item 4. Submission of Matters to a Vote of Security
Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of 2004.
Item 4A. Executive Officers of the Registrant
Information with respect to the executive officers of the
Company is as follows:
Mr. E. Crawford
has been Chairman of the Board and
Chief Executive Officer since 1992. Mr. E. Crawford has
also served as the Chairman of The Crawford Group, a group of
manufacturing companies, since 1964 and is also a Director of
Continental Global Group, Inc.
Mr. M. Crawford
has been President and Chief
Operating Officer since 2003 and joined us in 1995 as Assistant
Secretary and Corporate Counsel. He was also our Senior Vice
President from 2001 to 2003. Mr. M. Crawford became one of
our directors in August 1997 and has served as President of
Crawford Container since 1991 and President of The Crawford
Group since 1995. Mr. E. Crawford is the father of
Mr. M. Crawford.
Mr. Elliott
has been Vice President and Chief
Financial Officer since joining us in May 2000. Mr. Elliott
held various positions, including partner, at Ernst &
Young LLP from January 1986 to April 2000. At Ernst &
Young, Mr. Elliott did not perform services for us.
Mr. Vilsack
has been Secretary and General Counsel
since joining us in 2002. From 1999 until his employment with
us, Mr. Vilsack was engaged in the private practice of law.
From 1997 to 1999, Mr. Vilsack was Vice President, General
Counsel and Secretary of Medusa Corporation, a manufacturer of
Portland cement, and prior to that was Vice President, General
Counsel and Secretary of Figgie International Inc., a
manufacturing conglomerate.
Mr. Fogarty
has been Director of Corporate
Development since 1997 and joined us in 1995 as Director of
Finance.
8
Item 1.
Business
Integrated Logistics
Solutions
Aluminum Products
Manufactured Products
$453.2 million
(56% of total)
$135.4 million
(17% of total)
$220.1 million
(27% of total)
Sourcing, planning and procurement of over
175,000 production components, including:
• Fasteners
• Pins
• Valves
• Hoses
• Wire harnesses
• Clamps and fittings
• Rubber and plastic
components
• Pump housings
• Pinion carriers
• Clutch retainers
• Control arms
• Knuckles
• Brake calipers
• Master cylinders
• Induction heating
and
melting systems
• Pipe threading
systems
• Industrial oven
systems
• Injection molded
rubber components
• Forging presses
• Heavy-duty truck
• Electrical controls
• Automotive
• Other vehicle
• Industrial equipment
• Power sports
equipment
• Lawn and garden
• Semiconductor
• Automotive
• Agricultural equipment
• Construction
equipment
• Heavy-duty truck
• Steel
• Automotive
• Oil and gas
• Rail
• Aerospace and
defense
(1)
Results are for the year ended December 31, 2004 and
exclude the results of operations related to the assets of the
Amcast Components Group prior to the date of acquisition on
August 23, 2004.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Item 2.
Properties
Table of Contents
Related Industry
Owned or
Approximate
Segment
Location
Leased
Square Footage
Use
Cleveland, OH
Leased
41,000
(2)
Dayton, OH
Leased
84,700
Lawrence, PA
Leased
116,000
St. Paul, MN
Leased
74,425
Atlanta, GA
Leased
56,000
Dallas, TX
Leased
49,985
Nashville, TN
Leased
44,900
Charlotte, NC
Leased
36,800
Kent, OH
Leased
225,000
Mississauga, Ontario, Canada
Leased
56,000
Solon, OH
Leased
42,600
Cleveland, OH
Leased
40,000
Delaware, OH
Owned
45,000
Conneaut, OH(3)
Leased/Owned
283,800
Huntington, IN
Leased
132,000
Fremont, IN
Owned
108,000
Wapakoneta, OH
Owned
185,000
Richmond, IN
Leased/Owned
140,000
Cedarburg, WI
Leased
130,000
Cuyahoga Hts., OH
Owned
427,000
Le Roeulx, Belgium
Owned
120,000
Euclid, OH
Owned
154,000
Wickliffe, OH
Owned
110,000
Boaz, AL
Owned
100,000
Warren, OH
Owned
195,000
Oxted, England
Owned
135,000
Cicero, IL
Owned
450,000
Cleveland, OH
Leased
150,000
Shanghai, China
Leased
40,000
(1)
ILS has 31 other facilities, none of which is deemed to be a
principal facility.
(2)
Includes 10,000 square feet used by Park-Ohio Corporate
Office.
(3)
Includes three leased properties with square footage of 82,300,
64,000 and 45,700 and one owned property of 91,800 square
feet.
(4)
Manufactured Products has 18 other owned and leased facilities,
none of which is deemed to be a principal facility.
Table of Contents
Name
Age
Position
65
Chairman of the Board, Chief Executive Officer
and Director
35
President and Chief Operating Officer and Director
48
Vice President and Chief Financial Officer
44
Secretary and General Counsel
44
Director of Corporate Development
Table of Contents
Part II
The Company’s common stock, par value $1 per share,
trades on The Nasdaq National Market under the symbol PKOH. The
table below presents the high and low sales prices of the common
stock during the periods presented. No dividends were paid
during the five years ended December 31, 2004. There is no
present intention to pay dividends. Additionally, the terms of
the Company’s revolving credit agreement and the indenture
governing the Company’s 8.375% Senior Subordinated Notes
restrict the payment of dividends.
Quarterly Common Stock Price Ranges
The number of shareholders of record for the Company’s
common stock as of February 28, 2005 was 980. The three
largest shareholders of the Company as of February 28, 2005
and their respective percentage beneficial ownership of common
stock of the Company were as follows: Edward F. Crawford with
20.8%, Matthew V. Crawford with 11.4% and GAMCO Investors, Inc.
(Gabelli Funds) with 13.6%.
9
(Dollars in thousands, except per share data)
10
Our consolidated financial statements include the accounts of
Park-Ohio Holdings Corp. and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
The historical financial information is not directly comparable
on a year-to-year basis, primarily due to debt extinguishment
costs and writeoff of deferred financing costs associated with
the tender and early redemption during 2004 of our
9.25% Senior Subordinated Notes due 2007, restructuring and
unusual charges in 2002 and 2003, a goodwill impairment charge
in 2002 to reflect the cumulative effect of an accounting
change, and acquisitions and divestitures during the three years
ended December 31, 2004.
11
Executive Overview
We are an industrial supply chain logistics and diversified
manufacturing business, operating in three segments: ILS,
Aluminum Products and Manufactured Products. ILS provides
customers with integrated supply chain management services for a
broad range of high-volume, specialty production components. ILS
customers receive various value-added services, such as
engineering and design services, 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 and ongoing technical support. The principal
customers of ILS are in the heavy-duty truck, electrical
controls, automotive and other vehicle, industrial equipment,
power sports equipment, lawn and garden equipment, and
semiconductor equipment industries. Aluminum Products casts and
machines aluminum engine, transmission, brake, suspension and
other components for automotive, agricultural equipment,
construction equipment and heavy-duty truck OEMs, primarily on a
sole-source basis. Aluminum Products also provides value-added
services such as design and engineering and assembly.
Manufactured 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, rubber products, and forged and machined products.
Manufactured Products also produces and provides services and
spare parts for the equipment it manufactures. The principal
customers of Manufactured Products are OEMs and end-users in the
steel, automotive, oil and gas, rail, and aerospace and defense
industries. Sales, earnings and other relevant financial data
for these three segments are provided in Note M to the
consolidated financial statements.
During 2004, we experienced the increased sales and
profitability previously forecast, as the manufacturing economy
returned to growth, particularly in three of our customer
industries: heavy-duty truck; semiconductor equipment; and
equipment for steel manufacturing. Net sales increased 30%
compared to 2003. Profitability increased more than
proportionally to sales, based on cost reductions from our
restructuring during the downturn in 2001, 2002 and 2003. During
those years, we consolidated 28 supply chain logistics
facilities, and closed or sold 11 manufacturing plants.
During 2004, we reinforced our long-term availability and
attractive pricing of funds by refinancing both of our major
sources of borrowed funds: senior subordinated notes and our
revolving credit agreement. In November 2004, we sold
$210.0 million of 8.375% Senior Subordinated Notes due
2014. We used the net proceeds to fund the tender and early
redemption of $199.9 million of our 9.25% Senior
Subordinated Notes due 2007. We incurred debt extinguishment
costs primarily related to premiums and other transaction costs
associated with the tender and early redemption and wrote off
deferred financing costs totaling $6.0 million associated
with the repurchased senior subordinated notes.
In December 2004, we amended our revolving credit agreement,
extending its maturity to six years so that it now expires in
December 2010, increasing the credit limit so that we may borrow
up to $200.0 million subject to an asset based formula, and
providing lower interest rate levels. Borrowings under the
credit agreement are secured by substantially all our assets. We
had approximately $53.9 million of unused borrowing
availability at December 31, 2004. Funds provided by
operations plus available borrowings under the revolving credit
agreement are expected to be adequate to meet our cash
requirements.
We acquired substantially all of the assets of the Amcast
Components Group on August 23, 2004 for $10.0 million
cash and the assumption of approximately $9.0 million of
operating liabilities. We sold substantially all the assets of
St. Louis Screw and Green Bearing in first quarter 2003,
for cash totaling approximately $7.3 million, and Castle
Rubber Company in second quarter 2002, for cash of approximately
$2.5 million. We purchased substantially all the assets of
Ajax Magnethermic Corp. in third quarter 2002, for cash of
approximately $5.5 million.
Accounting Changes and Goodwill
On January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, “Goodwill and Other
Intangible Assets” (“FAS 142”). Under
FAS 142, we reviewed goodwill and other intangible
12
In accordance with FAS 142, goodwill is now reviewed
annually for potential impairment. This review was performed as
of October 1, 2004, 2003 and 2002, using forecasted
discounted cash flows, and it was determined that no further
impairment is required.
At December 31, 2004, the balance sheet reflected
$82.6 million of goodwill in the ILS and Aluminum Products
segments. In 2004, discount rates used ranged from 10.25% to
12.25%, and long-term revenue growth rates used ranged from 3.5%
to 4.0%.
In 2003, we changed our method of accounting for the 15% of
inventories utilizing the LIFO method to the FIFO method. As
required by accounting principles generally accepted in the
United States, the Company restated its balance sheet as of
December 31, 2002 and increased inventories by the recorded
LIFO reserve ($4.4 million), increased deferred tax
liabilities ($1.7 million), and increased
shareholders’ equity ($2.7 million). Previously
reported results of operations were not restated because the
impact of utilizing the LIFO method had an insignificant impact
on the Company’s reported amounts for consolidated net
income (loss). See also Note B to the consolidated
financial statements.
Results of Operations
Net sales increased by 30% in 2004, compared to 2003. ILS sales
increased due to general economic growth, in particular due to
significant growth in the heavy-duty truck and semiconductor
industries, the addition of new customers, and increases in
product range to existing customers. ILS growth was partially
offset by a $1.0 million sales decrease related to the 2003
sale of Green Bearing. Aluminum Products 2004 sales increased
$30.4 million due to the Amcast Components Group
acquisition in August 2004, with additional growth from new
contracts and increased volumes in the existing business.
Manufactured Products sales increased primarily in the induction
equipment, pipe threading equipment and forging businesses. Of
this increase, $15.9 million was due to the second quarter
2004 acquisition of the remaining 66% of the common stock of
Jamco, partially offset by the divestiture of St. Louis
Screw in the first quarter of 2003.
13
Cost of products sold increased 29% in 2004 compared to 2003,
while gross margin increased to 15.6% from 15.5% in 2003. ILS
gross margin decreased modestly, primarily due to steel price
increases and mix changes, and the negative impact of
$1.1 million resulting from the bankruptcy of a significant
customer, Murray, Inc. Aluminum Products gross margin decreased
due to a combination of the addition of lower-margin Amcast
business, product mix and pricing changes, and specific one-time
costs incurred in 2004 for product startup, scrap and reserves.
The $30.4 million of sales from the acquired Amcast
business generated significantly lower margins than the existing
Aluminum Products business. We expect margins at the acquired
plants to increase over time, as a result of post-acquisition
cost reductions, price increases and new business. Gross margin
in the Manufactured Products segment increased, primarily as a
result of increased sales and overhead efficiencies achieved in
the induction equipment, pipe threading equipment and forging
businesses. Gross margins in both the Aluminum Products and
Manufactured Products segments were negatively impacted by
rising natural gas costs.
Consolidated SG&A expenses increased by 23% in 2004 compared
to 2003. Approximately $5.5 million of the SG&A
increase was due to acquisitions, primarily Jamco and Amcast
Components Group, and compliance costs associated with
Section 404 of the Sarbanes-Oxley Act, while the remainder
was primarily due to increased sales and production volumes.
Despite this increase, SG&A expenses as a percent of sales
decreased by 50 basis points due both to cost reductions
from restructuring and to the absorption of these expenses over
increased sales. SG&A expenses were reduced in 2004 compared
to 2003 by a $2.3 million increase in net pension credits
reflecting improved returns on pension plan assets.
Interest expense increased in 2004 compared to 2003, primarily
due to the fourth quarter 2004 debt extinguishment costs. These
costs primarily related to premiums and other transaction costs
associated with the tender and early redemption and writeoff of
deferred financing costs associated with the 9.25% Senior
Subordinated Notes. Excluding these costs, interest decreased
due to lower average interest rates in 2004, partially offset by
higher average outstanding borrowings. The lower average
14
The effective income tax rate for 2004 was 19%. Primarily
foreign and certain state income taxes were provided for in both
years, because federal income taxes were not owed due to the
recognition of net operating loss carryforwards for which
valuation allowances had been provided. At December 31,
2004, our subsidiaries had $47.7 million of net operating
loss carryforwards for federal tax purposes. We have not
recognized any tax benefit for these loss carryforwards. In
accordance with the provision of Statement of Financial
Accounting Standards No. 109 (“FAS 109”),
“Accounting for Income Taxes,” we recorded no tax
benefit for the 2003 net loss because we had incurred three
years of cumulative losses. Income taxes of $.9 million
were provided in 2003, primarily for state and foreign taxes on
profitable operations.
Net sales declined by 2% in 2003. $10.4 million of the ILS
sales decline related to the sale of Green Bearing and the
termination of a high-margin pharmaceutical sales contract,
while the remainder reflected general economic weakness.
Aluminum Products net sales were lower primarily due to the
ending of $10.0 million of sales contracts, the majority of
which relate to the closure of the Tupelo and Hudson plants.
Manufactured Products net sales increased $26.4 million
primarily in the induction business. The acquisition of Ajax
Magnethermic increased 2003 net sales by $29.6 million
and the divestiture of Castle Rubber and St. Louis Screw
decreased 2003 net sales by $6.8 million.
Cost of products sold declined 4% in 2003, and gross profit
increased 10%, while gross margin increased to 15.5% in 2003,
from 13.8% in 2002. ILS gross margin decreased primarily due to
reduced absorption of fixed overhead over a smaller sales base
and the positive effect on 2002 of the early termination of a
high-margin pharmaceutical sales contract, partially offset by
lower inventory costs, facility costs and other cost reductions.
Aluminum Products gross margin increased significantly,
primarily as a result of restructuring and cost reductions and
higher margins on new contracts. Gross
15
Consolidated SG&A expenses increased by 8% in 2003, while
SG&A expenses as a percentage of net sales increased to
10.0% for 2003 compared to 9.1% for 2002. This increase was due
primarily to the net impact of acquisitions and divestitures and
the $2.6 million reduction of net pension credits
reflecting less favorable returns on pension plan assets,
partially offset by reductions in other SG&A costs in all
three segments.
Interest expense decreased by 5% due to lower average debt
outstanding and lower average interest rates during 2003. The
decrease in average borrowings resulted primarily from the sale
of two manufacturing units and lower working capital
requirements. The lower average borrowing rate in 2003 was due
primarily to decreased rates on the Company’s new revolving
credit agreement, beginning in August 2003.
In accordance with the provision of FAS 109, the Company
recorded no tax benefit for the 2003 or 2002 net losses,
because in both years it had incurred three years of cumulative
losses. Income taxes of $.9 million were provided in 2003
and 2002, primarily for state and foreign taxes on profitable
operations. At December 31, 2003, subsidiaries of the
Company had $35.7 million of net operating loss
carryforwards for federal tax purposes. The Company has not
recognized any tax benefit for these loss carryforwards.
Liquidity and Sources of Capital
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 senior subordinated
notes. On July 30, 2003, we entered into a new revolving
credit agreement with a group of banks. On November 5,
2003, this credit agreement was amended to provide a facility
for our subsidiaries in Canada and the United Kingdom. On
December 29, 2004, we amended this credit agreement to
extend the maturity to six years, increase the credit line,
provide lower interest rate brackets and modify certain
covenants to provide greater flexibility. Under the terms of the
revolving credit agreement, as amended, we may borrow up to
$200.0 million subject to an asset based formula.
Borrowings under the revolving credit agreement are secured by
substantially all our assets. Borrowings from the revolving
credit agreement will be used for general corporate purposes.
The revolving credit agreement expires on December 31, 2010.
16
Amounts borrowed under the revolving credit agreement may be
borrowed at the Company’s election at either (i) LIBOR
plus 75 – 225 basis points or (ii) the
bank’s prime lending rate. The LIBOR-based interest rate is
dependent on the Company’s debt service coverage ratio, as
defined in the revolving credit agreement. Under the revolving
credit agreement, a detailed borrowing base formula provides
borrowing availability to the Company based on percentages of
eligible accounts receivable, inventory and fixed assets. As of
December 31, 2004, the Company had $120.6 million
outstanding under the revolving credit agreement, and
approximately $53.9 million of unused borrowing
availability.
Current financial resources (working capital and available bank
borrowing arrangements) and anticipated funds from operations
are expected to be adequate to meet cash requirements for the
next twelve months and through 2010, when the revolving credit
agreement matures. The future availability of bank borrowings
under the revolving credit agreement is based on the
Company’s ability to meet a debt service ratio covenant,
which could be materially impacted by negative economic trends.
Failure to meet the financial covenant could materially impact
the availability and interest rate of future borrowings.
A significant component of the debt service ratio coverage
calculation is EBITDA, as defined. EBITDA, as defined, reflects
earnings before cumulative effect of accounting change, interest
and income taxes, and excludes depreciation, amortization,
certain non-cash charges and corporate-level expenses as defined
in the Company’s revolving credit agreement. EBITDA, as
defined, is not a measure of performance under generally
accepted accounting principles (“GAAP”) and should not
be considered in isolation or as a substitute for net income,
cash flows from operating, investing and financing activities
and other income or cash flow statement data prepared in
accordance with GAAP or as a measure of profitability or
liquidity. The Company presents EBITDA, as defined, because
management believes that this measure could be useful to
investors as an indication of the Company’s satisfaction of
its debt service coverage ratio covenant in its revolving credit
agreement and because EBITDA, as defined, is a measure used
under the Company’s revolving credit agreement to determine
whether the Company may incur additional debt under such
facility. EBITDA as defined herein may not be comparable to
other similarly titled measures of other companies.
The following table reconciles net income (loss) to EBITDA, as
defined:
At December 31, 2004, the Company was in compliance with
the debt service ratio covenant and the other covenants in the
revolving credit agreement.
The ratio of current assets to current liabilities was 1.97 at
December 31, 2004 versus 2.29 at December 31, 2003.
Working capital increased by $20.9 million to
$169.8 million at December 31, 2004 from
$148.9 million at December 31, 2003. Major components
of working capital, including accounts receivable, inventories,
other current assets, trade accounts payable and accrued
expenses, increased
17
During 2004, the Company provided $1.6 million from
operating activities as compared to providing $13.3 million
in 2003. The decrease of $11.7 million was primarily the
result of the increase in working capital, net of the impact of
acquisitions, of $18.9 million and the absence of non-cash
restructuring charges ($18.6 million in 2003) offset by the
increase in net income of $26.0 million. During 2004, the
Company also invested $12.0 million in capital expenditures
and $10.0 million in an acquisition, generated
$205.2 million from the issuance of the 8.375% Senior
Subordinated Notes and $18.0 million from its bank credit
agreements and used $199.9 million to redeem the
9.25% Senior Subordinated Notes. These activities resulted
in an increase in cash of $3.4 million for the year.
During 2003, the Company provided $13.3 million from
operating activities as compared to providing $28.6 million
in 2002. The decrease of $15.3 million was primarily the
result of a reduction in the net loss of $49.3 million
adjusted for non-cash items equaling $34.2 million in 2003
as compared to $77.5 million of similar non-cash items in
2002. The non-cash items include cumulative effect of a change
in accounting principle, depreciation and amortization expense,
restructuring and impairment charges and deferred income taxes.
Net cash provided by operating activities was also impacted by
the reduction in accounts payable and accrued expenses. During
2003, the Company also invested $10.9 million in capital
expenditures, used $14.9 million to pay down debt, and
generated $7.3 million from the divestiture of two
manufacturing units. These activities resulted in a decrease in
cash of $5.1 million for the year.
During 2002, the Company provided $28.6 million from
operating activities as compared to providing $23.8 million
in 2001. The increase of $4.8 million was primarily the
result of an increase in the net loss of $35.2 million
adjusted for non-cash items of $77.5 million in 2002 as
compared to $29.8 million in 2001, which was the result of
the cumulative effect of a change in accounting principle of
$48.8 in 2002. Net cash provided by operating activities was
also impacted by the reduction in the increase in accounts
receivable and inventory in 2002 compared to 2001. During 2002,
the Company also invested $14.7 million in capital
expenditures, used $5.6 million to pay down debt, and
consumed $3.3 million from the net of an acquisition and a
divestiture. These activities resulted in an increase in cash of
$5.0 million for the year.
We do not have off-balance-sheet arrangements, financing or
other relationships with unconsolidated entities or other
persons. We enter into forward contracts on foreign currencies,
primarily the euro, purely for the purpose of hedging exposure
to changes in the value of accounts receivable in those
currencies against the US dollar. At December 31, 2004,
$.5 million of such hedge contracts were outstanding. We
currently use no other derivative instruments.
The following table summarizes our principal contractual
obligations and other commercial commitments over various future
periods as of December 31, 2004:
18
Critical Accounting Policies
Preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions
which affect amounts reported in our consolidated financial
statements. Management has made their best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. We do not
believe that there is great likelihood that materially different
amounts would be reported under different conditions or using
different assumptions related to the accounting policies
described below. However, application of these accounting
policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates.
Revenue Recognition:
We recognize more than 93% of our
revenue when title is transferred to unaffiliated customers,
typically upon shipment. Our remaining revenue, from long-term
contracts, is recognized using the percentage of completion
method of accounting. Selling prices are fixed based on purchase
orders or contractual arrangements. Our revenue recognition
policies are in accordance with the SEC’s Staff Accounting
Bulletin (“SAB”) No. 101, “Revenue
Recognition.”
Allowance for Uncollectible Accounts Receivable:
Accounts
receivable have been reduced by an allowance for amounts that
may become uncollectible in the future. Allowances are developed
by the individual operating units based on historical losses,
adjusting for economic conditions. Our policy is to identify and
reserve for specific collectibility concerns based on
customers’ financial condition and payment history. The
establishment of reserves requires the use of judgment and
assumptions regarding the potential for losses on receivable
balances. Writeoffs of accounts receivable have historically
been low.
Allowance for Obsolete and Slow Moving Inventory:
Inventories are stated at the lower of cost or market value and
have been reduced by an allowance for obsolete and slow-moving
inventories. The estimated allowance is based on
management’s review of inventories on hand with minimal
sales activity, which is compared to estimated future usage and
sales. Inventories identified by management as slow-moving or
obsolete are reserved for based on estimated selling prices less
disposal costs. Though we consider these allowances adequate and
proper, changes in economic conditions in specific markets in
which we operate could have a material effect on reserve
allowances required.
Impairment of Long-Lived Assets:
Long-lived assets are
reviewed by management for impairment whenever events or changes
in circumstances indicate the carrying amount may not be
recoverable. During 2003, 2002 and 2001, the Company decided to
exit certain under-performing product lines and to close or
consolidate certain operating facilities and, accordingly,
recorded restructuring and impairment charges as discussed above
and in Note P to the consolidated financial statements
included elsewhere herein.
Restructuring:
We recognize costs in accordance with
Emerging Issues Task Force Issue No. 94-3, “Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring)” (“EITF 94-3”), and SAB
No. 100, “Restructuring and Impairment Charges”
for charges prior to 2003. Detailed contemporaneous
documentation is maintained and updated on a quarterly basis to
ensure that accruals are properly supported. If management
determines that there is a change in the estimate, the accruals
are adjusted to reflect the changes.
In 2003, the Company adopted Statement of Financial Accounting
Standards No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”
(“FAS 146”), which nullified EITF 94-3 and
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at the
fair value only when the liability is incurred. FAS 146 has
no effect on charges recorded for exit activities begun prior to
2002.
Goodwill:
We adopted FAS 142 as of January 1,
2002. Under FAS 142, we are required to review goodwill for
impairment annually or more frequently if impairment indicators
arise.
19
We completed the transitional impairment review of goodwill
during the fourth quarter of 2002 and recorded a non-cash charge
of $48.8 million. The charge has been reported as a
cumulative effect of a change in accounting principle. We have
also completed the annual impairment test as of October 1,
2004, 2003 and 2002 and have determined that no additional
goodwill impairment existed as of those dates.
Deferred Income Tax Assets and Liabilities:
We account
for income taxes under the liability method, whereby deferred
tax assets and liabilities are determined based on temporary
differences between the financial reporting and the tax bases of
assets and liabilities and are measured using the currently
enacted tax rates. In determining these amounts, management
determined the probability of realizing deferred tax assets,
taking into consideration factors including historical operating
results, expectations of future earnings and taxable income and
the extended period of time over which the postretirement
benefits will be paid.
At December 31, 2004, the Company had net operating loss
carryforwards for income tax purposes of approximately
$47.7 million, which will expire between 2021 and 2024. In
accordance with the provisions of FAS 109, the tax benefits
related to these carryforwards have been fully reserved as of
December 31, 2004 because the Company is in a three-year
cumulative loss position.
Pension and Other Postretirement Benefit Plans:
We and
our subsidiaries have pension plans, principally noncontributory
defined benefit or noncontributory defined contribution plans
and postretirement benefit plans covering substantially all
employees. The measurement of liabilities related to these plans
is based on management’s assumptions related to future
events, including interest rates, return on pension plan assets,
rate of compensation increases and health care cost trends.
Pension plan asset performance in the future will directly
impact our net income. We have evaluated our pension and other
postretirement benefit assumptions, considering current trends
in interest rates and market conditions and believe our
assumptions are appropriate.
Stock-Based Compensation:
We have elected to account for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25
“Accounting for Stock Issued to Employees”
(“APB 25”), and related interpretations. Under
APB 25, because the exercise price of our employee stock
options equals the fair market value of the underlying stock on
the date of grant, no compensation expense is recognized.
Compensation expense resulting from fixed awards of restricted
shares is measured at the date of grant and expensed over the
vesting period.
An alternative method of accounting for stock-based compensation
would be the fair value method defined by Statement of Financial
Accounting Standards No. 123, “Accounting for
Stock-Based Compensation” (“FAS 123”).
FAS 123 permits use of the intrinsic value method and does
not require companies to account for employee stock options
using the fair value method. Had compensation cost for stock
options granted been determined based on the fair value method
of FAS 123, our net income (loss) and diluted income (loss)
per share would have been (decreased) increased by
($.3) million (($.03) per share) in 2004, $.3 million
($.03 per share) in 2003, and $.4 million
($.04 per share) in 2002.
In December 2004, the FASB issued Statement of Financial
Accounting Standard No. 123 (revised), “Share-Based
Payment” (“FAS 123R”). FAS 123R
requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements and
establishes a fair-value measurement objective in determining
the value of such a cost. FAS 123R will be effective as of
July 1, 2005. FAS 123R is a revision of FAS 123
and supersedes APB 25. The Company is currently evaluating
the impact of FAS 123R on its consolidated financial
statements.
Environmental
We have been identified as a potentially responsible party at
third-party sites under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or
comparable state laws that provide for strict and, under certain
circumstances, joint and several liability. We are participating
in the cost of certain clean-up efforts at several of these
sites. However, our share of such costs
20
We have been named as one of many defendants in a number of
asbestos-related personal injury lawsuits. Our cost of defending
such lawsuits has not been material to date and, based upon
available information, our management does not expect our future
costs for asbestos-related lawsuits to have a material adverse
effect on our results of operations, liquidity or financial
condition. We caution, however, that inherent in
management’s estimates of our exposure are expected trends
in claims severity, frequency and other factors that may
materially vary as claims are filed and settled or otherwise
resolved.
Seasonality; Variability of Operating Results
Our results of operations are typically stronger in the first
six months than the last six months of each calendar year due to
scheduled plant maintenance in the third quarter to coincide
with customer plant shutdowns and due to holidays in the fourth
quarter.
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 businesses, included in the Manufactured
Products segment, which typically ship a few large systems per
year.
Forward-Looking Statements
This Annual Report on Form 10-K 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
uncertainties and other factors include such things as: general
business conditions and competitive factors, including pricing
pressures and product innovation; demand for our products and
services; raw material 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 recent and
future acquisitions into existing operations; changes in general
domestic economic conditions such as inflation rates, interest
rates, tax rates and 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 our revolving credit agreement and the indenture governing
the Senior Subordinated Notes; 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; dependence on the automotive and heavy-duty truck
industries, which are highly cyclical; dependence on key
management; and dependence on information systems. 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. 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.
21
We are exposed to market risk including changes in interest
rates. We are subject to interest rate risk on our floating rate
revolving credit facility, which consisted of borrowings of
$120.6 million at December 31, 2004. A 100 basis
point increase in the interest rate would have resulted in an
increase in interest expense of approximately $1.2 million
for the year ended December 31, 2004.
Our foreign subsidiaries generally conduct business in local
currencies. During 2004, we recorded a favorable foreign
currency translation adjustment of $2.1 million related to
net assets located outside the United States. This foreign
currency translation adjustment resulted primarily from the
weakening of the United States dollar in relation to the
Canadian dollar, British pound and euro. 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.
Our largest exposures to commodity prices relate to steel and
natural gas price increases, which have increased significantly
in 2004. We do not have any commodity swap agreements or hedge
contracts for future increases in steel or natural gas prices.
22
Index to Consolidated Financial Statements and Supplementary
Financial Data
23
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under
the Exchange Act. As required by Rule 13a-15(c) under the
Exchange Act, the Company’s management carried out an
evaluation, with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of its internal control over financial reporting
as of the end of the last fiscal year. The framework on which
such evaluation was based is contained in the report entitled
“Internal Control — Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO Report”). Based upon
the evaluation described above under the framework contained in
the COSO Report, the Company’s management concluded that
the Company’s internal control over financial reporting was
effective as of December 31, 2004. Management has
identified no material weakness in internal control over
financial reporting.
Ernst & Young LLP, the Company’s independent
registered public accounting firm, has issued an attestation
report on the Company’s management’s assessment of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004. This
attestation report is included at page 25 of this Annual
Report on Form 10-K.
Park-Ohio Holdings Corp.
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
Over Financial Reporting, that Park-Ohio Holdings Corp.
maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Park-Ohio Holdings Corp.’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Park-Ohio
Holdings Corp. maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Park-Ohio Holdings Corp. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Park-Ohio Holdings Corp. as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2004 and our report dated March 10, 2005
expressed an unqualified opinion thereon.
Cleveland, Ohio
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of
Park-Ohio Holdings Corp. and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2004. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Park-Ohio Holdings Corp. and subsidiaries
at December 31, 2004 and 2003 and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity
with U.S. generally accepted accounting principles.
As discussed in Note B to the consolidated financial
statements, effective June 30, 2003, the Company changed
its method of accounting for inventories at certain
subsidiaries. As discussed in Note C to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in the Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 10, 2005 expressed an unqualified opinion thereon.
Cleveland, Ohio
26
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
See notes to consolidated financial statements.
27
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Operations
See notes to consolidated financial statements.
28
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
See notes to consolidated financial statements.
29
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
30
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
December 31, 2004, 2003 and 2002
NOTE A — Summary of Significant Accounting
Policies
Consolidation:
The consolidated financial statements
include the accounts of the Company and all of its subsidiaries.
All significant intercompany accounts and transactions have been
eliminated upon consolidation.
Accounting Estimates:
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
Inventories:
Inventories are stated at the lower of
first-in, first-out (FIFO) cost or market value (See
Note B). Inventory reserves were $18,500 and $18,817 at
December 31, 2004 and 2003, respectively.
Major Classes of Inventories
Property, Plant and Equipment:
Property, plant and
equipment are carried at cost. Major additions and associated
interest costs are capitalized and betterments are charged to
accumulated depreciation; expenditures for repairs and
maintenance are charged to operations. Depreciation of fixed
assets is computed principally by the straight-line method based
on the estimated useful lives of the assets ranging from
25-60 years for buildings, and 3-16 years for
machinery and equipment. The Company reviews long-lived assets
for impairment when events or changes in business conditions
indicate that their full carrying value may not be recoverable
(See Note P).
Goodwill:
As discussed in Note C, the Company
adopted Statement of Financial Accounting Standards No. 142
(“FAS 142”), “Goodwill and Other Intangible
Assets,” as of January 1, 2002. Under FAS 142,
goodwill is no longer amortized but is subject to impairment
testing at least annually on October 1. Prior to 2002,
goodwill was amortized primarily over 40 years using the
straight-line method.
Pensions and Other Postretirement Benefits:
The Company
and its subsidiaries have pension plans, principally
noncontributory defined benefit or noncontributory defined
contribution plans, covering substantially all employees. In
addition, the Company has two unfunded postretirement benefit
plans. For the defined benefit plans, benefits are based on the
employee’s years of service and the Company’s policy
is to fund that amount recommended by its independent actuaries.
For the defined contribution plans, the costs charged to
operations and the amount funded are based upon a percentage of
the covered employees’ compensation.
Stock-Based Compensation:
The Company has elected to
continue to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option plan, as
permitted under FAS 123 and “Accounting for
Stock-Based Compensation — Transition and
Disclosure — an Amendment to FASB Statement
No. 123” (“FAS 148”). Accordingly, no
compensation cost has been recognized for its stock
31
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
option plan since the exercise price of the stock options equals
or exceeds the fair value of the common stock at the date of
grant. However, the Company recognizes compensation expense
resulting from fixed awards of restricted shares, which is
measured at the date of grant and expensed over the vesting
period.
Had compensation cost for stock options granted been determined
based on the fair value method of FAS 123, the
Company’s net income (loss) and diluted income (loss) per
share would have been (decreased) increased by ($284)
(($.03) per share) to $13,915 in 2004, $345 ($.03 per
share) to ($12,166) in 2003 and $397 ($.04 per share) to
($61,549) in 2002.
Fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 2004, 2003 and 2002,
respectively: risk-free interest rates of 3.5%, 3.85% and 3.85%;
zero dividend yield; expected volatility of 52%, 49% and 49% and
expected option lives of 6 years.
Income Taxes:
The Company accounts for income taxes under
the liability method, whereby deferred tax assets and
liabilities are determined based on temporary differences
between the financial reporting and the tax bases of assets and
liabilities and are measured using the current enacted tax
rates. In determining these amounts, management determined the
probability of realizing deferred tax assets, taking into
consideration factors including historical operating results,
expectations of future earnings and taxable income and the
extended period of time over which the postretirement benefits
will be paid and accordingly records valuation allowances when
necessary (See Note H).
Revenue Recognition:
The Company recognizes revenue,
other than from long-term contracts, when title is transferred
to the customer, typically upon shipment. Revenue from long-term
contracts (less than 7% of consolidated revenue) is accounted
for under the percentage of completion method, and recognized on
the basis of the percentage each contract’s cost to date
bears to the total estimated contract cost. Revenue earned on
contracts in process in excess of billings is classified in
other current assets in the accompanying consolidated balance
sheet. The Company’s revenue recognition policies are in
accordance with the SEC’s Staff Accounting Bulletin
(“SAB”) No. 101, “Revenue Recognition.”
Accounts Receivable:
Accounts receivable are recorded at
selling price which is fixed based on a purchase order or
contractual arrangement. Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the
future. The Company’s policy is to identify and reserve for
specific collectibility concerns based on customers’
financial condition and payment history.
Concentration of Credit Risk:
The Company sells its
products to customers in diversified industries. The Company
performs ongoing credit evaluations of its customers’
financial condition but does not require collateral to support
customer receivables. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
Write-offs of accounts receivable have historically been low. As
of December 31, 2004, the Company had uncollateralized
receivables with six customers in the automotive and heavy-duty
truck industries, each with several locations, aggregating
$44,522, which represented approximately 31% of the
Company’s trade accounts receivable. During 2004, sales to
these customers amounted to approximately $240,787, which
represented approximately 30% of the Company’s net sales.
Shipping and Handling Costs:
All shipping and handling
costs are included in cost of products sold in the Consolidated
Statements of Operations.
Environmental:
The Company accrues environmental costs
related to existing conditions resulting from past or current
operations and from which no current or future benefit is
discernible. Costs that extend the life of the related property
or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability when environmental
assessments and/or remedial
32
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
efforts are probable and can be reasonably estimated. The
estimated liability of the Company is not discounted or reduced
for possible recoveries from insurance carriers.
Foreign Currency Translation:
The functional currency for
all subsidiaries outside the United States is the local
currency. Financial statements for these subsidiaries are
translated into United States dollars at year-end exchange rates
as to assets and liabilities and weighted-average exchange rates
as to revenues and expenses. The resulting translation
adjustments are recorded in shareholders’ equity.
Impact of Other Recently Issued Accounting
Pronouncements:
In January 2003, the FASB issued
Interpretation No. 46 (“FIN 46”),
“Consolidation of Variable Interest Entities,” which
clarifies the application of Accounting Research Bulletin
(“ARB”) No. 51, “Consolidated Financial
Statements,” relating to consolidation of certain entities.
First, FIN 46 will require identification of the
Company’s participation in variable interest entities
(“VIEs”), which are defined as entities with a level
of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or
whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as
VIEs, FIN 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE,
if any, bears a majority of the exposure to its expected losses,
or stands to gain from a majority of its expected returns.
FIN 46 also sets forth certain disclosures regarding
interests in VIEs that are deemed significant, even if
consolidation is not required. The Company’s adoption of
FIN 46 had no effect on its financial position, results of
operations and cash flows.
In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities (“FAS 149”). FAS 149 amends and
clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under FAS 133, “Accounting for
Derivative Instruments and Hedging Activities.”
FAS 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The
Company’s adoption of FAS 149 had no effect on its
financial position, results of operations and cash flows.
In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity (“FAS 150”). FAS 150 requires
that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for
as liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. FAS 150 is
effective for all financial instruments entered into or modified
after May 31, 2003 and must be applied to the
Company’s existing financial instruments effective
July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted FAS 150 on
June 1, 2003. The adoption of this statement had no effect
on the Company’s financial position, results of operations
or cash flows.
In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Medicare
Act”) was enacted in the United States. The Medicare Act,
among other things, expanded existing Medicare healthcare
benefits to include an outpatient prescription drug benefit to
Medicare eligible residents of the
U.S. (“Part D”) beginning in 2006.
Prescription drug coverage will be available to eligible
individuals who voluntarily enroll under a Part D plan. As
an alternative, employers may provide drug coverage at least
“actuarially equivalent to standard coverage” and
receive a tax-free federal subsidy equal to 28% of a portion of
a Medicare beneficiary’s drug costs. However, if covered
retirees enroll in a Part D plan, the employer would not
receive the subsidy.
The FASB has issued Staff Position (“FSP”)
FAS No. 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003,” to
33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
provide guidance on accounting for effects of this healthcare
benefit legislation. The FSP treats the effect of the employer
subsidy on the accumulated postretirement benefit obligation
(“APBO”) as an actuarial gain. The effect of the
subsidy would also be reflected in the estimate of service cost
in measuring the cost of benefits attributable to current
service. The effects of plan amendments adopted subsequent to
the adoption of the Medicare Act to qualify plans as actuarially
equivalent would be treated as actuarial gains if the net effect
of the amendments reduces the APBO. The net effect on the APBO
of any plan amendments that (a) reduce benefits under the
plan and thus disqualify the benefits as actuarially equivalent
and (b) eliminate the subsidy would be accounted for as
prior service cost.
The Company has completed its assessment of the provisions of
the Medicare Act on its postretirement healthcare plans. The
effect of the Medicare Act is a reduction to the APBO of $2,350.
The effect of the Medicare Act reduced the net periodic
postretirement benefit cost by $310 in 2004.
On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004), “Share-Based
Payment”, which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation”.
SFAS No. 123(R) supercedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees”, and amends
SFAS No. 95, “Statement of Cash Flows”.
Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS No. 123(R) must be adopted no later than
July 1, 2005. Early adoption will be permitted in periods
in which financial statements have not yet been issued. The
Company expects to adopt SFAS No. 123(R) on
July 1, 2005. SFAS No. 123(R) permits public
companies to adopt its requirements using one of two methods:
(1) a “modified prospective” method in which
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date; or (2) a
“modified retrospective” method that includes the
requirements of the modified prospective method described above,
but also permits entities to restate based on the amounts
previously recognized under SFAS No. 123 for purposes
of pro forma disclosures, either (a) all prior periods
presented or (b) prior interim periods of the year of
adoption. The Company plans to adopt SFAS No. 123(R)
using the “modified prospective” method.
As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method could have a
significant impact on the results of operations, although it
will have no impact on the Company’s overall financial
position. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However,
had the Company adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure
of pro forma net earnings and earnings per share earlier in this
note. SFAS No. 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the Company cannot
estimate what those amounts will be in the future (because they
depend on , among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior
years were zero because the Company did not owe federal income
taxes due to the recognition of net operating loss carryforwards
for which valuation allowances had been provided.
34
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
In the fourth quarter of 2004, the FASB issued Statement of
Financial Accounting Standards No. 151, “Inventory
Costs” (“FAS 151”), an amendment of
Accounting Research Bulletin No. 43, Chapter 4.
The amendments made by FAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs and
wasted materials (spoilage) are to be recognized as
current-period charges and will require the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after
November 23, 2004. The Company expects the adoption of
FAS 151 to have little impact on its consolidated financial
position, results of operations, or cash flows.
The American Jobs Creation Act of 2004 (the “Jobs
Act”) was signed into law in October 2004. The Jobs Act
provides, among other things, for a tax deduction on qualified
domestic production activities and introduced a special one-time
dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer, provided certain criteria
are met. The FASB issued FASB Staff Position 109-1 to provide
guidance on the application of FAS 109, and FASB Staff
Position 109-2 to provide accounting and disclosure guidance for
the repatriation provision. The Company is reviewing the
implication of the Jobs Act, recently released treasury
guidance, and the FASB staff positions and does not expect the
Jobs Act will have a material impact on the Company’s
financial position, results of operations or cash flows.
Reclassification:
Certain amounts in the prior
years’ financial statements have been reclassified to
conform to the current year presentation.
NOTE B — Accounting Change
Effective June 30, 2003, the Company changed the method of
accounting for the 15% of its inventories utilizing the LIFO
method to the FIFO method. The Company believes that this change
is preferable for the following reasons: 1) the change
conforms all of its inventories to one method of determining
cost, which is the FIFO method; 2) the costs of the
Company’s inventories have remained fairly level during the
past several years, which has substantially negated the benefits
of the LIFO method (a better matching of current costs with
current revenue in periods of rising costs); 3) the impact
of utilizing the LIFO method has had an insignificant impact on
the Company’s consolidated net income (loss) during the
past several years; and 4) the FIFO method results in the
valuation of inventories at current costs on the consolidated
balance sheet, which provides a more meaningful presentation for
investors and financial institutions.
As required under accounting principles generally accepted in
the United States, the Company has restated the consolidated
balance sheet as of December 31, 2002 to increase
inventories by the recorded LIFO reserve $4,400, increase
deferred tax liabilities ($1,700), and increase
shareholders’ equity $2,700. Previously reported results of
operations have not been restated because the impact of
utilizing the LIFO method had an insignificant impact on the
Company’s reported amounts for consolidated net income
(loss).
NOTE C — Adoption of FAS 142, “Goodwill
and Other Intangible Assets”
Effective January 1, 2002, the Company adopted
FAS 142, “Goodwill and Other Intangible Assets.”
Under this standard, goodwill is no longer amortized, but is
subject to an impairment test at least annually. The Company has
selected October 1 as its annual testing date. In the year
of adoption, FAS 142 also requires the Company to perform a
transitional test to determine whether goodwill was impaired as
of the beginning of the year. Under FAS 142, the initial
step in testing for goodwill impairment is to compare the fair
value of each reporting unit to its book value. To the extent
the fair
35
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
value of any reporting unit is less than its book value, which
would indicate that potential impairment of goodwill exists, a
second test is required to determine the amount of impairment.
The Company, with assistance of an outside consultant, completed
the transitional impairment review of goodwill using a
discounted cash flow approach to determine the fair value of
each reporting unit. Based upon the results of these
calculations, the Company recorded a non-cash charge for
goodwill impairment which aggregated $48,799. In accordance with
the provisions of FAS 142, the charge has been accounted
for as a cumulative effect of a change in accounting principle,
effective January 1, 2002. The Company also completed the
annual impairment tests as of October 1, 2004, 2003 and
2002, and has determined that no additional impairment of
goodwill existed as of those dates.
The following table summarizes the transitional goodwill
impairment charge by reporting segment as well as the carrying
amount of goodwill for the years ended December 31, 2003
and December 31, 2004.
The increase in the goodwill in the ILS segment during 2003 and
2004 results from foreign currency fluctuations.
NOTE D — Acquisitions
On August 23, 2004, the Company acquired substantially all
of the assets of the Automotive Components Group (“Amcast
Components Group”) of Amcast Industrial Corporation. The
purchase price was approximately $10,000 in cash and the
assumption of approximately $9,000 of operating liabilities. The
acquisition was funded with borrowings under the Company’s
revolving credit facility. The purchase price and the results of
operations of Amcast Components Group prior to its date of
acquisition were not deemed significant as defined in
Regulation S-X. The results of operations for Amcast
Components Group have been included since August 23, 2004.
The tentative allocation of the purchase price has been
performed based on the assignment of fair values to assets
acquired and liabilities assumed. Final fair values will be
based primarily on appraisals from an independent appraisal firm.
36
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
The tentative allocation of the purchase price is as follows:
The Company has a plan for integration activities and plant
rationalization. In accordance with FASB EITF Issue
No. 95-3, “Recognition of Liabilities in Connection
with a Purchase Business Combination”, the Company recorded
accruals for severance, exit and relocation costs in the
purchase price allocation. A reconciliation of the beginning and
ending accrual balances is as follows:
On April 1, 2004, the Company acquired the remaining 66% of
the common stock of Japan Ajax Magnethermic Company
(“Jamco”) for cash existing on the balance sheet of
Jamco at that date. No additional purchase price was paid by the
Company. The purchase price and the results of operations of
Jamco prior to its date of acquisition were not deemed
significant as defined in Regulation S-X.
NOTE E — Other Assets
Other assets consists of the following:
37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE F — Accrued Expenses
Accrued expenses include the following:
Substantially all advance billings and warranty, project and
installation accruals relate to the Company’s capital
equipment businesses.
The changes in the aggregate product warranty liability are as
follows for the year ended December 31, 2004 and 2003:
The acquired warranty liability during 2004 reflects the
warranty liability of Jamco, which was acquired in April 2004.
NOTE G — Financing Arrangements
Long-term debt consists of the following:
38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
Maturities of long-term debt during each of the five years
following December 31, 2004 are approximately $2,931 in
2005, $821 in 2006, $836 in 2007, $674 in 2008 and $689 in 2009.
In November 2004, the Company issued $210,000 of
8.375% Senior Subordinated Notes due November 15, 2014
(“8.375% Notes”). The net proceeds from this debt
issuance were approximately $205,178 net of underwriting and
other debt offering fees. Proceeds from the 8.375% Notes
were used to fund the tender and early redemption of the
Company’s 9.25% Senior Subordinated Notes due 2007.
The Company incurred debt extinguishment costs related primarily
to premiums and other transaction costs associated with the
tender and early redemption and wrote off deferred financing
costs associated with the 9.25% Senior Subordinated Notes
totaling $5,963 or $.53 per share on a diluted basis.
The Company is a party to a credit and security agreement dated
November 5, 2003, as amended (“Credit
Agreement”), with a group of banks, under which it may
borrow or issue standby letters of credit or commercial letters
of credit up to $200,000. During 2004, the Credit Agreement was
amended to extend the maturity to December 31, 2010 and increase
the credit line from $165,000 at December 31, 2003 to $200,000
at December 31, 2004. The amended credit agreement provides
lower interest rate brackets and modified certain covenants to
provide greater flexibility. The Credit Agreement currently
contains a detailed borrowing base formula that provides
borrowing capacity to the Company based on negotiated
percentages of eligible accounts receivable, inventory and fixed
assets. At December 31, 2004, the Company had approximately
$53,941 of unused borrowing capacity available under the Credit
Agreement. Interest is payable quarterly at either the
bank’s prime lending rate (5.25% at December 31, 2004)
or, at the Company’s election, at LIBOR plus .75%-2.25%.
The Company’s ability to elect LIBOR-based interest as well
as the overall interest rate are dependent on the Company’s
Debt Service Coverage Ratio, as defined in the Credit Agreement.
Up to $20,000 in standby letters of credit and commercial
letters of credit may be issued under the Credit Agreement. As
of December 31, 2004, in addition to amounts borrowed under
the Credit Agreement, there was $9,133 outstanding primarily for
standby letters of credit. A fee of .25% is imposed by the bank
on the unused portion of available borrowings. The Credit
Agreement expires on December 31, 2010 and borrowings are
secured by substantially all of the Company’s assets.
A foreign subsidiary of the Company had outstanding standby
letters of credit of $1,485 at December 31, 2004 under its
credit arrangement.
The 8.375% Notes are general unsecured senior obligations of the
Company and are fully and unconditionally guaranteed on a joint
and several basis, by all domestic subsidiaries of the Company.
Provisions of the indenture governing the 8.375% Notes and the
Credit Agreement contain restrictions on the Company’s
ability to incur additional indebtedness, to create liens or
other encumbrances, to make certain payments, investments, loans
and guarantees and to sell or otherwise dispose of a substantial
portion of assets or to merge or consolidate with an
unaffiliated entity. At December 31, 2004, the Company was
in compliance with all financial covenants of the Credit
Agreement.
The weighted average interest rate on all debt was 6.84% at
December 31, 2004.
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable, borrowings under the credit
agreement and the senior subordinated notes approximate fair
value at December 31, 2004 and 2003.
39
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE H — Income Taxes
Income taxes consisted of the following:
The reasons for the difference between income tax expense and
the amount computed by applying the statutory Federal income tax
rate to income before income taxes are as follows:
40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
Significant components of the Company’s net deferred tax
assets and liabilities are as follows:
At December 31, 2004, the Company has net operating loss
carryforwards for income tax purposes of approximately $47,700,
which will expire between 2021 and 2024. In accordance with the
provisions of FAS 109 “Accounting for Income
Taxes”, the tax benefits related to these carryforwards
have been fully reserved as of December 31, 2004 because
the Company is in a three year cumulative loss position.
At December 31, 2004 the Company has research and developmental
credit carryforwards of approximately $1,691 which will expire
between 2010 and 2023. The Company also has an alternative
minimum tax credit carryforward in the amount of approximately
$1,020 which has an indefinite carryforward life.
NOTE I — Stock Plan
Under the provisions of the 1998 Long-Term Incentive Plan, as
amended (“1998 Plan”), which is administered by the
Compensation Committee of the Company’s Board of Directors,
incentive stock options, non-statutory stock options, stock
appreciation rights (“SARs”), restricted shares,
performance shares or stock awards may be awarded to all
employees of the Company and its subsidiaries. Stock options
will be exercisable in whole or in installments as may be
determined provided that no options will be exercisable more
than ten years from date of grant. The exercise price will be
the fair market value at the date of grant. The aggregate number
of shares of the Company’s stock that may be awarded under
the 1998 Plan is 1,650,000, all of which may be incentive stock
options. No more than 500,000 shares shall be the subject
of awards to any individual participant in any one calendar year.
41
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
The following table reflects activity in option shares from
January 1, 2002 through December 31, 2004, and the
weighted average exercise prices:
The following table summarizes information about options
outstanding as of December 31, 2004:
Participants may also be awarded restricted stock under the
plan. The Company granted 28,000 shares of restricted
Common Stock under the plan in 2004. The restricted shares were
valued at $433 and will be recognized as compensation expense
ratably over a one-three year vesting period. Compensation
expense associated with the restricted shares of $83 was
recognized in 2004.
NOTE J — Legal Proceedings
The Company is 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 will not have a material adverse effect on
the Company’s financial condition, liquidity and results of
operations.
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE K — Pensions and Postretirement Benefits
The following tables set forth the change in benefit obligation,
plan assets, funded status and amounts recognized in the
consolidated balance sheet for the defined benefit pension and
postretirement benefit plans as of December 31, 2004 and
2003:
Amounts recognized in the consolidated balance sheets consists
of:
43
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
The pension plan weighted-average asset allocation at year ended
2004 and 2003 and target allocation for 2004 are as follows:
The Company recorded a minimum pension liability of $4,838 at
December 31, 2004 and $4,355 at December 31, 2003, as
required by Financial Accounting Standards Board Statement
No. 87. The adjustment is reflected in other comprehensive
income and long-term liabilities. The adjustment relates to two
of the Company’s defined benefit plans, for which the
accumulated benefit obligations of $17,458 at December 31,
2004 ($16,336 at December 31, 2003), exceed the fair value
of the underlying pension assets of $13,247 at December 31,
2004 ($13,374 at December 31, 2003). Amounts were as
follows:
The following tables summarize the assumptions used by the
consulting actuary and the related cost information.
In determining its expected return on plan assets assumption for
the year ended December 31, 2004, the Company considered
historical experience, its asset allocation, expected future
long-term rates of return for each major asset class, and an
assumed long-term inflation rate. Based on these factors, the
Company derived an expected return on plan assets for the year
ended December 31, 2004 of 8.75%. This assumption was
supported by the asset return generation model used by the
Company’s independent actuaries, which projected future
asset returns using simulation and asset class correlation.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
For measurement purposes, a 10% percent annual rate of increase
in the per capita cost of covered health care benefits was
assumed for 2004. The rate was assumed to decrease gradually to
5% for 2009 and remain at that level thereafter.
Below is a table summarizing the Company’s expected future
benefit payments and the expected payments due to the Medicare
subsidy over the next ten years:
The Company recorded $167 of non-cash pension curtailment
charges in 2003 and $2,700 in 2002 related to the disposal or
closure of three manufacturing facilities. These were classified
as restructuring charges in each year.
The Company has two postretirement benefit plans. Under both of
these plans, health care benefits are provided on both a
contributory and noncontributory basis. The assumed health care
cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health
care cost trend rate would have the following effects:
The total contribution charged to pension expense for the
Company’s defined contribution plans was $1,446 in 2004,
$1,331 in 2003 and $1,273 in 2002. The Company expects to have
no contributions to its defined benefit plans in 2005.
45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE L — Leases
Rental expense for 2004, 2003 and 2002 was $10,588, $10,263 and
$10,749, respectively. Future minimum lease commitments during
each of the five years following December 31, 2004 are as
follows: $9,820 in 2005, $7,632 in 2006, $5,030 in 2007, $3,993
in 2008, $3,094 in 2009 and $3,858 thereafter.
NOTE M — Industry Segments
The Company operates through three segments: Integrated
Logistics Solutions (“ILS”), Aluminum Products and
Manufactured Products. ILS is a leading supply chain logistics
provider of production components to large, multinational
manufacturing companies, other manufacturers and distributors.
In connection with the supply of such production components, ILS
provides a variety of value-added, cost-effective supply chain
management services. The principal customers of ILS are in the
semiconductor equipment, heavy-duty truck, industrial equipment,
aerospace and defense, electrical controls, HVAC, vehicle parts
and accessories, appliances, and lawn and garden equipment
industries. Aluminum Products manufactures cast aluminum
components for automotive, agricultural equipment, heavy-duty
truck and construction equipment. Aluminum Products also
provides value-added services such as design and engineering,
machining and assembly. Manufactured 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 principal customers of
Manufactured Products are original equipment manufacturers and
end-users in the aerospace, automotive, railroad, truck and oil
industries.
The Company’s sales are made through its own sales
organization, distributors and representatives. Intersegment
sales are immaterial and eliminated in consolidation and are not
included in the figures presented. Intersegment sales are
accounted for at values based on market prices. Income allocated
to segments excludes certain corporate expenses and interest
expense. Identifiable assets by industry segment include assets
directly identified with those operations.
Corporate assets generally consist of cash and cash equivalents,
deferred tax assets, property and equipment, and other assets.
46
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
The Company had sales of $95,610 in 2004 and $68,238 in 2003 to
International Truck, which represented approximately 12% and 11%
of consolidated net sales for each respective year. For 2002,
sales to no single customer were greater than 10% of
consolidated net sales.
The Company’s approximate percentage of net sales by
geographic region were as follows:
At December 31, 2004, approximately 86% of the
Company’s assets are maintained in the United States.
47
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE N — Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share (all dollars and share amounts are in
thousands):
NOTE O — Accumulated Comprehensive Loss
The components of accumulated comprehensive loss at
December 31, 2004 and 2003 are as follows:
48
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE P — Restructuring and Unusual Charges
Since 2001, the Company has responded to the economic downturn
by reducing costs in a variety of ways, including restructuring
businesses and selling non-core manufacturing assets. These
activities generated restructuring and asset impairment charges
in 2001, 2002 and 2003, as the Company’s restructuring
efforts continued and evolved.
During 2001, the Company recorded restructuring and asset
impairment charges aggregating $28,462, primarily related to
management’s decision to exit certain under-performing
product lines and to close or consolidate certain operating
facilities in 2002. The Company’s actions included
1) selling or discontinuing the businesses of Castle Rubber
and Ajax Manufacturing, 2) closing the Cicero Flexible
Products’ manufacturing facility and discontinue certain
product lines, 3) inventory write-downs and other
restructuring activities at St. Louis Screw & Bolt
and Tocco, 4) closing twenty ILS supply chain logistics
facilities and two ILS manufacturing plants, 5) closing an
Aluminum Products machining facility, and 6) write-down of
certain Corporate assets to current value. The charges were
composed of $11,280 for the impairment of property and equipment
and other long-term assets; $10,299 of cost of goods sold,
primarily to write down inventory of discontinued businesses and
product lines to current market value; and $6,883 for severance
(525 employees) and exit costs. Below is a summary of these
charges by segment.
During 2002, the Company recorded further restructuring and
asset impairment charges aggregating $19,190, primarily related
to management decisions to exit additional product lines and
consolidate additional facilities. The Company’s planned
actions included 1) selling or discontinuing the businesses
of St. Louis Screw and Bolt and Green Bearing,
2) closing five additional supply chain logistics
facilities and 3) closing or selling two Aluminum Products
manufacturing plants (one of which was closed as of
December 31, 2002). The charges were composed of $5,599 for
severance (490 employees) and exit costs, $2,700 for pension
curtailment costs; $5,628 of costs of goods sold, primarily to
write down inventory of discontinued businesses and product
lines to current market value; and $5,263 for impairment of
property and equipment and other long-term assets. Below is a
summary of these charges by segment.
During the fourth quarter of 2003, the Company continued its
multi-year efforts to position the Company for renewed, more
profitable growth and recorded restructuring and asset
impairment charges aggregating $19,446. The action primarily
related to restructuring at the Company’s Forge
49
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
Group resulting from a decision to shut down its locomotive
crankshaft forging plant after entering into a long-term supply
contract to purchase these forgings from a third party. The
charges were composed of $990 for exit costs; $638 of cost of
goods sold primarily to write down inventory of discontinued
product lines to current market value; $1,767 for pension
curtailment and multi-employer pension plan withdrawal costs
resulting primarily from the termination of union representation
at the locomotive crankshaft forging plant and another
Manufactured Products manufacturing facility and the closure of
an Aluminum Products manufacturing plant; and $16,051 for
impairment of property and equipment and other long-term assets.
Below is a summary of these charges by segment.
The accrued liability for severance and exit costs and related
cash payments consisted of:
As of December 31, 2004, all of the 525 employees
identified in 2001 and all of the 490 employees identified
in 2002 had been terminated. The workforce reductions under the
restructuring plan consisted of hourly and salaried employees at
various operating facilities due to either closure or
consolidation. As of December 31, 2004, the Company had an
accrued liability of $462 for future estimated employee
severance and plant closing payments.
Idle fixed assets of $6,040 were included in other assets as of
December 31, 2004. These consisted primarily of property,
plant and equipment of two idled aluminum casting plants, for
which the Company is evaluating new products and technologies.
These assets may either be reclassified to property, plant and
equipment if placed in service, or sold. They are currently
carried at estimated fair value.
At December 31, 2004, the Company’s balance sheet
reflected assets held for sale at their estimated current value
of $3,027 for inventory, property, plant and equipment and other
long-term assets. Net sales for the businesses that were
included in net assets held for sale were $ -0- in 2004, $1,139
in 2003, and $19,159 in 2002. Operating income (loss), excluding
restructuring and unusual charges for these entities were $ -0-
in 2004, $(32) in 2003, and $(334) in 2002.
50
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — Continued
NOTE Q — Derivatives and Hedging
The Company recognizes all derivative financial instruments as
either assets or liabilities at fair value. The Company has no
derivative instruments that are classified as fair value hedges.
Changes in the fair value of derivative instruments that are
classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are
recognized in net income.
During the second quarter of 2004, the Company entered into
forward contracts, for the purpose of hedging exposure to
changes in the value of accounts receivable in Euros against the
US dollar, for a notional amount of $5,075, of which $500 was
outstanding at December 31, 2004. These transactions are
considered cash flow hedges and, therefore, the fair market
value at December 31, 2004 of a $75 loss, has been
recognized in other comprehensive income (loss). Because there
is no ineffectiveness on the cash flow hedges, all changes in
fair value of these derivatives are recorded in equity and not
included in the current period’s income statement. The $75
of loss on the fair value of the hedges is classified in current
accrued liabilities. The Company recognized $169 of foreign
currency losses upon settlement of the forward contracts.
51
Supplementary Financial Data
Selected Quarterly Financial Data (Unaudited)
There were no changes in nor disagreements with the
Company’s independent auditors on accounting and financial
disclosure matters within the two-year period ended
December 31, 2004.
Evaluation of disclosure controls and procedures
As of December 31, 2004, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company’s
disclosure controls and procedures. Based upon, and as of the
date of, that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and
procedures were effective, in all material respects, to ensure
that information required to be disclosed in the reports we file
and submit under the Exchange Act is recorded, processed,
summarized and reported as and when required.
52
Changes in internal controls
There have been no changes in the Company’s internal
control over financial reporting that occurred during the fourth
quarter of 2004 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Management’s Assessment of the Effectiveness of the
Company’s Internal Control over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Rule 13a-15(f) under the
Exchange Act. As required by Rule 13a-15(c) under the
Exchange Act, management carried out an evaluation, with
participation of the Company’s Chief Executive Officer and
Chief Financial Officer, of the effectiveness of its internal
control over financial reporting as of December 31, 2004.
The framework on which such evaluation was based is contained in
the report entitled “Internal Control —
Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO
Report”). Management has identified no material weakness in
internal control over financial reporting. The Company’s
management has assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2004 based on the framework contained in the
COSO Report, and has prepared Management’s Annual Report on
Internal Control Over Financial Reporting included at
page 24 of this Annual Report on Form 10-K.
Ernst & Young LLP, the Company’s independent
registered public accounting firm, have issued an attestation
report on the Company’s management’s assessment of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004. This
attestation report is included at page 25 of this
Form 10-K.
Item 9B. Other Information.
None.
Item 5.
Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
2004
2003
Quarter
High
Low
High
Low
1st
$
10.06
$
7.30
$
4.42
$
2.55
2nd
13.32
8.60
5.12
3.10
3rd
20.12
11.26
9.99
4.76
4th
26.19
18.18
12.26
6.92
Table of Contents
Item 6.
Selected Financial Data
Year Ended December 31,
2004
2003
2002
2001
2000
$
808,718
$
624,295
$
634,455
$
636,417
$
754,674
682,658
527,586
546,857
552,293
627,162
126,060
96,709
87,598
84,124
127,512
77,048
62,667
57,830
66,623
74,974
-0-
-0-
-0-
3,733
3,907
-0-
18,808
13,601
18,163
-0-
49,012
15,234
16,167
(4,395
)
48,631
-0-
-0-
-0-
1,850
10,118
31,413
26,151
27,623
31,108
30,812
17,599
(10,917
)
(11,456
)
(37,353
)
7,701
3,400
904
897
(11,400
)
7,183
14,199
(11,821
)
(12,353
)
(25,953
)
518
-0-
-0-
(48,799
)
-0-
-0-
$
14,199
$
(11,821
)
$
(61,152
)
$
(25,953
)
$
518
$
1.34
$
(1.13
)
$
(1.18
)
$
(2.49
)
$
.05
$
-0-
$
-0-
$
(4.68
)
$
-0-
$
-0-
$
1.34
$
(1.13
)
$
(5.86
)
$
(2.49
)
$
.05
$
1.27
$
(1.13
)
$
(1.18
)
$
(2.49
)
$
.05
$
-0-
$
-0-
$
(4.68
)
$
-0-
$
-0-
$
1.27
$
(1.13
)
$
(5.86
)
$
(2.49
)
$
.05
Year Ended December 31,
2004
2003
2002
2001
2000
$
1,633
$
13,305
$
28,578
$
23,766
$
24,025
(21,952
)
(3,529
)
(17,993
)
(7,872
)
(25,781
)
23,758
(14,870
)
(5,645
)
(14,634
)
(1,499
)
11,955
10,869
14,731
13,923
24,968
$
7,157
$
3,718
$
8,812
$
3,872
$
2,612
169,836
148,919
148,151
183,025
227,297
610,022
507,452
540,858
593,117
649,261
338,307
310,225
325,122
330,768
345,402
72,393
56,025
62,899
127,708
154,867
Table of Contents
(a)
The selected consolidated financial data is not directly
comparable on a year-to-year basis due to acquisitions made
throughout the five years ended December 31, 2004, which
include the following:
2004 —
Amcast Components Group
2002 —
Ajax Magnethermic
2000 —
IBM’s plant automation software product lines and related
assets
All of the acquisitions were accounted for as purchases. During
2003, the Company sold substantially all of the assets of Green
Bearing and St. Louis Screw and Bolt. During 2002, the
Company sold substantially all the assets of Castle Rubber.
During 2001, the Company sold substantially all of the assets of
Cleveland City Forge. During 2000, the Company sold
substantially all of the assets of Kay Home Products.
(b)
Operating income (loss) represents net sales less cost of
products sold, selling, general and administrative expenses,
amortization of goodwill and restructuring and impairment
charges. In 2001, the Company incurred restructuring and
impairment charges of $28.5 million related primarily to
the consolidation of manufacturing plants and logistics
warehouses and the discontinuation of certain product lines. The
write-down of inventory related to discontinued product lines to
fair value aggregated $10.3 million and is included in cost
of products sold.
In 2002, the Company recorded further restructuring and asset
impairment charges aggregating $19.2 million related to
management decisions to exit additional product lines and
consolidate additional facilities. The write-down of inventory
related to the discontinued businesses and product lines to fair
value aggregated $5.6 million and is included in cost of
products sold.
In 2003, the Company recorded non-cash charges aggregating
$19.4 million for restructuring and asset impairment
charges primarily related to restructuring at the Company’s
Forge Group. The charges are composed of $.6 million for
the impairment of inventory, which is included in cost of
products sold, and $18.8 million for other restructuring
and asset impairment charges.
(c)
In 2000, non-operating items, net was comprised of (i) a
loss of $15.3 million on the sale of substantially all of
the assets of Kay Home Products and (ii) a gain of
$5.2 million resulting from interim payments from the
Company’s insurance carrier related primarily to
replacement of property, plant and equipment destroyed in a fire
at its Cicero Flexible Products facility. In 2001, non-operating
items, net was comprised of $1.9 million of fire-related
non-recurring business interruption costs, which were not
covered by insurance.
(d)
In 2004, the Company issued $210 million of
8.375% Senior Subordinated Notes due 2014. Proceeds from
this debt were used to fund the tender and early redemption of
the 9.25% Senior Subordinated Notes due 2007. The Company
incurred debt extinguishment costs and wrote off deferred
financing costs associated with the 9.25% Senior
Subordinated Notes totaling $6.0 million.
(e)
No dividends were paid during the five years ended
December 31, 2004.
Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Table of Contents
Table of Contents
2004 versus 2003
Net Sales by Segment:
Year Ended
December 31,
Acquired/
Percent
(Divested)
2004
2003
Change
Change
Sales
$
453.2
$
377.6
$
75.6
20
%
$
(1.0
)
135.4
90.1
45.3
50
%
30.4
220.1
156.6
63.5
41
%
15.9
$
808.7
$
624.3
$
184.4
30
%
$
45.3
Table of Contents
Cost of Products Sold & Gross Profit:
Year Ended
December 31,
Percent
2004
2003
Change
Change
$
682.6
$
527.6
$
155.0
29
%
$
126.1
$
96.7
$
29.4
30
%
15.6
%
15.5
%
Selling, General & Administrative
(“SG&A”) Expenses:
Year Ended
December 31,
Percent
2004
2003
Change
Change
$
77.0
$
62.7
$
14.3
23
%
9.5
%
10.0
%
Interest Expense:
Year Ended
December 31,
Percent
2004
2003
Change
Change
$
31.4
$
26.2
$5.2
20
%
$
6.0
$
328.9
$
320.8
$8.1
3
%
7.74
%
8.15
%
(41) basis points
Table of Contents
Income Tax:
2003 versus 2002
Net Sales by Segment:
Year Ended
December 31,
Percent
2003
2002
Change
Change
$
377.6
$
398.1
$
(20.5
)
-5
%
90.1
106.1
(16.0
)
-15
%
156.6
130.2
26.4
20
%
$
624.3
$
634.4
$
(10.1
)
-2
%
Cost of Products Sold & Gross Profit:
Year Ended
December 31,
2003
2002
Change
Percent
$
527.6
$
546.9
$(19.3
)
-4%
0.6
5.6
(5.0
)
(4.4
)
(4.4
)
$
96.7
$
87.6
$ 9.1
10%
15.5
%
13.8
%
Table of Contents
SG&A Expenses:
Year Ended
December 31,
2003
2002
Percent
SG&A
SG&A
2003
2002
Change
Change
Percent
Percent
$
62.7
$
57.8
$
4.9
8
%
10.0%
9.1
%
(3.9
)
(3.9
)
Interest Expense:
Year Ended
December 31,
2003
2002
Change
Percent
$
26.2
$
27.6
$(1.4
)
-5%
$
320.8
$
333.6
$(12.8
)
-4%
8.15
%
8.28
%
(13) basis points
Income Tax:
Table of Contents
2004
2003
2002
2001
2000
$
14,199
$
(11,821
)
$
(61,152
)
$
(25,953
)
$
518
-0-
-0-
48,799
-0-
-0-
3,400
904
897
(11,400
)
7,183
31,413
26,151
27,623
31,108
30,812
15,385
15,562
16,307
19,911
20,048
-0-
19,446
19,190
28,463
-0-
-0-
-0-
-0-
1,850
10,118
335
319
580
507
205
$
64,732
$
50,561
$
52,244
$
44,486
$
68,884
Table of Contents
Payments due or Commitment Expiration Per
Period
Less Than
More than
Total
1 Year
1-3 Years
4-5 Years
5 Years
(In Thousands)
$
338,307
$
2,931
$
1,657
$
1,363
$
332,356
-0-
-0-
-0-
-0-
-0-
33,428
9,820
12,663
7,087
3,858
103,809
103,802
7
-0-
-0-
10,618
7,212
3,370
36
-0-
$
486,162
$
123,765
$
17,697
$
8,486
$
336,214
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Table of Contents
Item 8.
Financial Statements and Supplementary Data
Page
24
25
26
27
28
29
30
31
52
Table of Contents
Table of Contents
/s/ Ernst & Young LLP
Table of Contents
/s/ Ernst & Young LLP
Table of Contents
December 31,
2004
2003
(Dollars in thousands)
$
7,157
$
3,718
145,475
100,938
177,294
149,075
14,593
10,780
344,519
264,511
6,788
6,059
36,217
37,606
186,489
182,045
229,494
225,710
118,821
129,559
110,673
96,151
82,565
82,278
3,027
2,321
69,238
62,191
$
610,022
$
507,452
$
108,868
$
66,158
60,003
46,623
5,812
2,811
174,683
115,592
210,000
-0-
-0-
199,930
120,600
101,000
4,776
8,234
27,570
26,671
362,946
335,835
-0-
-0-
11,547
11,288
56,530
55,858
15,206
1,007
(8,864
)
(8,864
)
(1,676
)
(3,264
)
(350
)
-0-
72,393
56,025
$
610,022
$
507,452
Table of Contents
Year Ended December 31,
2004
2003
2002
(Dollars in thousands,
except per share data)
$
808,718
$
624,295
$
634,455
682,658
527,586
546,857
126,060
96,709
87,598
77,048
62,667
57,830
-0-
18,808
13,601
49,012
15,234
16,167
31,413
26,151
27,623
17,599
(10,917
)
(11,456
)
3,400
904
897
14,199
(11,821
)
(12,353
)
-0-
-0-
(48,799
)
$
14,199
$
(11,821
)
$
(61,152
)
$
1.34
$
(1.13
)
$
(1.18
)
$
-0-
$
-0-
$
(4.68
)
$
1.34
$
(1.13
)
$
(5.86
)
$
1.27
$
(1.13
)
$
(1.18
)
$
-0-
$
-0-
$
(4.68
)
$
1.27
$
(1.13
)
$
(5.86
)
Table of Contents
Accumulated
Additional
Other
Common
Paid-In
Retained
Treasury
Comprehensive
Unearned
Stock
Capital
Earnings
Stock
Income (Loss)
Compensation
Total
(Dollars in thousands)
$
11,210
$
56,135
$
73,980
$
(9,092
)
$
(4,252
)
$
(273
)
$
127,708
187
187
(61,152
)
(61,152
)
1,711
1,711
(5,555
)
(5,555
)
(64,996
)
11,210
56,135
12,828
(9,092
)
(8,096
)
(86
)
62,899
86
86
(11,821
)
(11,821
)
3,632
3,632
1,200
1,200
(6,989
)
78
(277
)
228
29
11,288
55,858
1,007
(8,864
)
(3,264
)
-0-
56,025
14,199
14,199
2,071
2,071
(483
)
(483
)
15,787
28
405
(433
)
-0-
83
83
231
267
498
$
11,547
$
56,530
$
15,206
$
(8,864
)
$
(1,676
)
$
(350
)
$
72,393
Table of Contents
Year Ended December 31,
2004
2003
2002
(Dollars in thousands)
$
14,199
$
(11,821
)
$
(61,152
)
-0-
-0-
48,799
15,468
15,562
16,307
-0-
18,641
10,399
-0-
-0-
1,951
(35,606
)
539
4,652
(26,541
)
6,991
4,682
39,419
(11,984
)
15,787
(5,306
)
(4,623
)
(12,847
)
1,633
13,305
28,578
(11,955
)
(10,869
)
(14,731
)
(9,997
)
-0-
(5,748
)
-0-
7,340
2,486
(21,952
)
(3,529
)
(17,993
)
18,012
112,000
6,749
(199,930
)
(126,899
)
(12,394
)
205,178
-0-
-0-
498
29
-0-
23,758
(14,870
)
(5,645
)
3,439
(5,094
)
4,940
3,718
8,812
3,872
$
7,157
$
3,718
$
8,812
$
3,370
$
(1,038
)
$
(4,817
)
28,891
25,213
25,880
Table of Contents
December 31,
2004
2003
$
151,759
$
121,154
25,535
27,921
$
177,294
$
149,075
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Impairment Charge
Reporting
recorded effective
Goodwill at
Goodwill at
Segment
January 1, 2002
December 31, 2003
December 31, 2004
$
32,239
$
65,763
$
66,050
9,700
16,515
16,515
6,860
-0-
-0-
$
48,799
$
82,278
$
82,565
Table of Contents
$
10,000
(8,931
)
(1,677
)
(16,964
)
(115
)
4,041
5,504
8,142
$
-0-
Severance
Exit
Relocation
Total
$
-0-
$
-0-
$
-0-
$
-0-
1,916
100
265
2,281
295
-0-
2
297
$
1,621
$
100
$
263
$
1,984
December 31,
2004
2003
$
41,295
$
36,186
6,040
6,516
7,846
5,774
3,570
4,222
3,390
3,947
7,097
5,546
$
69,238
$
62,191
Table of Contents
December 31,
2004
2003
$
14,098
$
9,484
10,059
8,496
5,660
6,762
2,175
2,535
2,022
2,055
4,553
3,809
21,436
13,482
$
60,003
$
46,623
December 31,
2004
2003
$
5,614
$
6,506
(4,708
)
(2,399
)
2,874
1,139
501
-0-
-0-
368
$
4,281
$
5,614
December 31,
2004
2003
$
210,000
$
-0-
-0-
199,930
120,600
101,000
4,041
4,478
3,666
4,817
338,307
310,225
2,931
1,061
$
335,376
$
309,164
Table of Contents
Table of Contents
Year Ended December 31,
2004
2003
2002
$
(426
)
$
-0-
$
(2,210
)
23
16
387
3,245
888
769
2,842
904
(1,054
)
-0-
-0-
1,951
-0-
-0-
-0-
558
-0-
-0-
558
-0-
1,951
$
3,400
$
904
$
897
Year Ended December 31,
2004
2003
2002
$
5,984
$
(3,712
)
$
(3,895
)
16
11
411
661
815
599
(3,042
)
3,695
3,475
(219
)
95
307
$
3,400
$
904
$
897
Table of Contents
December 31,
2004
2003
$
7,933
$
7,600
11,277
8,400
20,384
14,300
11,867
15,200
51,461
45,500
15,492
13,900
16,725
11,400
1,087
-0-
33,304
25,300
18,157
20,200
(19,231
)
(20,200
)
$
(1,074
)
$
-0-
Table of Contents
Weighted
Number of
Average Price
Shares
Per Share
1,220,700
$
1.91
38,000
4.07
1,258,700
1.99
83,000
4.82
(15,667
)
1.91
(110,533
)
1.91
1,215,500
2.19
21,000
7.77
(11,333
)
7.08
(231,748
)
2.15
993,419
$
2.25
Options Outstanding
Options Exercisable
Number
Weighted
Number
Outstanding
Average
Weighted
Exercisable
Weighted
as of
Remaining
Average
as of
Average
December 31,
Contractual
Exercise
December 31,
Exercise
2004
Life
Price
2004
Price
993,419
6.97
$
2.25
951,082
$
2.15
Table of Contents
Postretirement
Pension
Benefits
2004
2003
2004
2003
$
53,075
$
52,481
$
27,366
$
24,869
291
545
136
147
-0-
(208
)
-0-
-0-
3,320
3,498
1,532
1,701
566
-0-
-0-
-0-
2,799
1,800
(637
)
3,758
(4,748
)
(5,041
)
(3,717
)
(3,109
)
$
55,303
$
53,075
$
24,680
$
27,366
$
97,603
$
85,401
$
-0-
$
-0-
11,093
17,243
-0-
-0-
-0-
-0-
3,717
3,109
(4,748
)
(5,041
)
(3,717
)
(3,109
)
$
103,948
$
97,603
$
-0-
$
-0-
$
48,645
$
44,528
$
(24,680
)
$
(27,366
)
(439
)
(487
)
-0-
-0-
(6,929
)
(7,235
)
4,639
5,375
1,210
773
(247
)
(327
)
$
42,487
$
37,579
$
(20,288
)
$
(22,318
)
2004
2003
$
41,295
$
36,186
(4,211
)
(2,962
)
565
-0-
4,838
4,355
$
42,487
$
37,579
Table of Contents
Plan Assets
Target 2005
2004
2003
60-70
%
66.7
%
64.8
%
20-30
20.5
26.0
7-15
12.8
9.2
100
%
100
%
100
%
2004
2003
$
17,458
$
16,336
$
17,458
$
16,336
$
13,247
$
13,374
Postretirement
Pension
Benefits
2004
2003
2002
2004
2003
2002
6.00
%
6.50
%
7.00
%
6.00
%
6.50
%
7.00
%
8.75
%
8.75
%
8.75
%
N/A
N/A
N/A
N/A
2.00
%
2.00
%
N/A
N/A
N/A
Table of Contents
Pension Benefits
Other Benefits
2004
2003
2002
2004
2003
2002
$
291
$
545
$
399
$
136
$
147
$
204
3,320
3,498
3,556
1,532
1,701
1,712
(8,313
)
(7,229
)
(8,394
)
-0-
-0-
-0-
(49
)
(49
)
(49
)
-0-
-0-
-0-
129
257
319
(80
)
(80
)
(79
)
(286
)
361
(1,055
)
99
43
11
$
(4,908
)
$
(2,617
)
$
(5,224
)
$
1,687
$
1,811
$
1,848
Pension
Other
Payments due to
Benefits
Benefits
Medicare Subsidy
$
4,512
$
2,881
$
-0-
4,386
2,568
288
4,303
2,482
290
4,254
2,413
285
4,285
2,319
278
20,567
9,875
1,199
1-Percentage
1-Percentage
Point
Point
Increase
Decrease
$
129
$
110
$
1,797
$
1,558
Table of Contents
Year Ended December 31,
2004
2003
2002
$
453,223
$
377,645
$
398,141
135,402
90,080
106,148
220,093
156,570
130,166
$
808,718
$
624,295
$
634,455
$
29,191
$
24,893
$
17,467
9,021
10,201
4,739
18,890
(13,759
)
(1,342
)
57,102
21,335
20,864
(8,090
)
(6,101
)
(4,697
)
(31,413
)
(26,151
)
(27,623
)
$
17,599
$
(10,917
)
$
(11,456
)
Table of Contents
Year Ended December 31,
2004
2003
2002
$
297,002
$
267,361
$
273,442
105,535
88,031
79,797
163,230
121,331
151,880
44,255
30,729
35,739
$
610,022
$
507,452
$
540,858
$
4,608
$
4,868
$
5,206
5,858
5,342
6,432
4,728
5,050
4,307
274
302
362
$
15,468
$
15,562
$
16,307
$
3,691
$
3,017
$
1,603
5,497
1,878
5,927
2,712
5,867
6,355
55
107
846
$
11,955
$
10,869
$
14,731
Year Ended
December 31,
2004
2003
2002
74
%
83
%
80
%
9
%
8
%
13
%
17
%
9
%
7
%
100
%
100
%
100
%
Table of Contents
Year Ended December 31,
2004
2003
2002
$
14,199
$
(11,821
)
$
(12,353
)
$
-0-
$
-0-
$
(48,799
)
$
14,199
$
(11,821
)
$
(61,152
)
10,624
10,506
10,434
561
(a
)
(a
)
11,185
10,506
10,434
$
1.34
$
(1.13
)
$
(1.18
)
$
-0-
$
-0-
$
(4.68
)
$
1.34
$
(1.13
)
$
(5.86
)
$
1.27
$
(1.13
)
$
(1.18
)
$
-0-
$
-0-
$
(4.68
)
$
1.27
$
(1.13
)
$
(5.86
)
(a)
The addition of 456 shares in 2003 and 291 shares in
2002 would result in anti-dilution because the Company reported
a net loss in those periods.
December 31,
2004
2003
$
(3,162
)
$
(1,091
)
4,838
4,355
$
1,676
$
3,264
Table of Contents
Cost of
Products
Asset
Restructuring
Sold
Impairment
& Severance
Total
$
8,599
$
10,080
$
2,030
$
20,709
1,700
600
4,070
6,370
-0-
-0-
783
783
-0-
600
-0-
600
$
10,299
$
11,280
$
6,883
$
28,462
Cost of
Products
Asset
Restructuring
Pension
Sold
Impairment
& Severance
Curtailment
Total
$
4,500
$
-0-
$
2,534
$
2,000
$
9,034
1,128
2,103
2,628
700
6,559
-0-
3,160
437
-0-
3,597
$
5,628
$
5,263
$
5,599
$
2,700
$
19,190
Table of Contents
Cost of
Products
Asset
Restructuring
Pension
Sold
Impairment
& Severance
Curtailment
Total
$
638
$
16,051
$
990
$
1,600
$
19,279
-0-
-0-
-0-
167
167
$
638
$
16,051
$
990
$
1,767
$
19,446
$
6,883
(2,731
)
4,152
5,599
(5,706
)
4,045
990
(2,500
)
2,535
-0-
(2,073
)
$
462
Table of Contents
Table of Contents
Quarter Ended
2004
March 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share data)
$
192,370
$
200,908
$
200,875
$
214,565
30,237
33,652
31,326
30,845
$
5,814
$
6,666
$
3,991
$
(2,272
)
$
.55
$
.63
$
.38
$
(.21
)
$
.52
$
.60
$
.36
$
(.21
)
Quarter Ended
2003
March 31
June 30
Sept. 30
Dec. 31
(Dollars in thousands, except per share data)
$
154,850
$
159,916
$
146,830
$
162,699
24,410
25,847
21,752
24,700
-0-
-0-
-0-
18,808
$
2,436
$
2,697
$
88
$
(17,042
)
$
.23
$
.26
$
.01
$
(1.62
)
$
.22
$
.25
$
.01
$
(1.62
)
In the fourth quarter of 2003, the Company
recorded primarily non-cash charges for restructuring and asset
impairment primarily related to restructuring at the
Company’s Forge Group. The charges are composed of $638 for
the impairment of inventory which is included in cost of
products sold and $18,808 for other restructuring and asset
impairment which are reflected in restructuring and other
unusual charges.
In the third quarter of 2004, the Company
acquired substantially all of the assets of Amcast Components
Group. The purchase price for the assets acquired was $10,000 in
cash, plus the assumption of certain operating liabilities.
In the fourth quarter of 2004, the Company issued
$210,000 of 8.375% Senior Subordinated Notes due 2014.
Proceeds from this debt issuance were used to fund the tender
and early redemption of the Company’s 9.25% Senior
Subordinated Notes due 2007. The Company incurred debt
extinguishment costs and wrote off deferred financing costs
associated with the 9.25% Senior Subordinated Notes
totaling $5,963 or $ .53 per share on a diluted basis.
Item 9.
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
Item 9A.
Controls and Procedures
Table of Contents
Part III
| Item 10. | Directors and Executive Officers of the Registrant |
The information concerning directors, the identification of the audit committee and the audit committee financial expert and the Company’s code of ethics required under this item is incorporated herein by reference from the material contained under the captions “Election of Directors” and “Certain Matters Pertaining to the Board of Directors and Corporate Governance”, as applicable, in the registrant’s definitive proxy statement for the 2005 annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the fiscal year (the “Proxy Statement”). The information concerning Section 16(a) beneficial ownership reporting compliance is incorporated herein by reference from the material contained under the caption “Principal Shareholders — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. Information relating to executive officers is contained in Part I of this Annual Report on Form 10-K.
| Item 11. | Executive Compensation |
The information relating to executive compensation contained under the headings “Certain Matters Pertaining to the Board of Directors and Corporate Governance — Compensation of the Board of Directors” and “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
53
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required under this item is incorporated herein by reference from the material contained under the caption “Principal Shareholders” in the Proxy Statement, except that information required by Item 201(d) of Regulation S-K can be found below.
The following table provides information about the
Company’s common stock that may be issued under the
Company’s equity compensation plan as of December 31, 2004.
Equity Compensation Plan Information
Number of securities
Number of securities
remaining available for
to be issued upon
Weighted-average
future issuance under
exercise price of
exercise price of
equity compensation plans
Plan
outstanding options
outstanding
(excluding securities
Category
warrants and rights
warrants and rights
reflected in column (a))
(a)
(b)
(c)
993,419
$
2.25
228,700
-0-
-0-
-0-
993,419
$
2.25
228,700
| (1) | Includes the Company’s Amended and Restated 1998 Long-Term Incentive Plan. |
| Item 13. | Certain Relationships and Related Transactions |
The information required under this item is incorporated herein by reference from the material contained under the captions “Certain Matters Pertaining to the Board of Directors and Corporate Governance — Company Affiliations with the Board of Directors and Nominees” and “Certain Transactions” in the Proxy Statement.
| Item 14. | Principal Accountant Fees and Services |
The information required under this item is incorporated herein by reference from the material contained under the caption “Audit Committee — Independent Auditor Fee Information” in the Proxy Statement.
54
Part IV
(a)(1) The following financial statements are included in
Part II, Item 8:
(2) Financial Statement Schedules
(3) Exhibits:
55
Item 15.
Exhibits and Financial Statement Schedules
Page
24
25
26
27
28
29
30
31
52
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable and, therefore, have been omitted.
The exhibits filed as part of this Form 10-K are listed on
the Exhibit Index immediately preceding such exhibits and
are incorporated herein by reference.
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ RICHARD P. ELLIOTT |
|
|
|
| Richard P. Elliott, Vice President | |
| and Chief Financial Officer |
Date: March 14, 2005
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
*
Edward F. Crawford
Chairman, Chief Executive Officer and Director
*
Richard P. Elliott
Vice President — and Chief Financial
Officer (Principal Financial and Accounting Officer)
*
Matthew V. Crawford
President and Director
*
Patrick V. Auletta
Director
*
Kevin R. Greene
Director
*
Lewis E. Hatch, Jr.
Director
March 14, 2005
*
Dan T. Moore
Director
*
Lawrence O. Selhorst
Director
*
Ronna Romney
Director
*
James W. Wert
Director
| * | The undersigned, pursuant to a Power of Attorney executed by each of the Directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. |
March 14, 2005
| By: | /s/ ROBERT D. VILSACK |
|
|
|
| Robert D. Vilsack, Attorney-in-Fact |
56
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2004
EXHIBIT INDEX
| Exhibit | ||||
|
|
||||
| 3 | .1 | Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 3 | .2 | Code of Regulations of Park-Ohio Holdings Corp. (filed as Exhibit 3.2 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .1 | Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets Inc. (filed as Exhibit 4 to the Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 4 | .2 | First Amendment, dated September 30, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto, Bank One, NA and Bank One Capital Markets, Inc. (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. on October 1, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .3 | Second Amendment, dated December 29, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 4 | .4 | Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined herein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .1 | Form of Indemnification Agreement entered into between Park-Ohio Holdings Corp. and each of its directors and certain officers (filed as Exhibit 10.1 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .2* | Amended and Restated 1998 Long-Term Incentive Plan (filed as Appendix A to the Definitive Proxy Statement of Park-Ohio Holdings Corp., filed on April 23, 2001, SEC File No. 000-03134 and incorporated by reference and made a part hereof) | ||
| 10 | .3 | Registration Rights Agreement, dated November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and the initial purchasers that are party thereto (filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .4 | Form of Restricted Share Agreement between the Company and each non-employee director (Filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on January 25, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) | ||
| 10 | .5 | Form of Incentive Stock Option Agreement | ||
| 10 | .6 | Form of Non-Statutory Stock Option Agreement | ||
| 12 | .1 | Computation of Ratio of Earnings to Fixed Charges | ||
| 21 | .1 | List of Subsidiaries of Park-Ohio Holdings Corp. | ||
| 23 | .1 | Consent of Ernst & Young LLP | ||
| 24 | .1 | Power of Attorney | ||
57
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
.1
Certification requirement under Section 906
of the Sarbanes-Oxley Act of 2002
| * | Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(c) of this Report. |
58
Exhibit 10.5
PARK-OHIO HOLDINGS CORP.
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") dated this ___ day of __________, _________ (being the date this option is granted) by and between Park-Ohio Holdings Corp., an Ohio corporation, (the "Company") and _____________________________ (the "Employee"), a key employee of the Company or a wholly owned subsidiary of the Company.
Section 1. Under the provisions of the Company's Amended and Restated 1998 Long-Term Incentive Plan (the "Plan"), the Company hereby grants to the Employee the option of purchasing an aggregate of __________shares of Common Stock of the Company at the price of $_______ per share, subject to the terms and conditions of this Agreement.
Section 2. The option rights are exercisable only if and after the Employee shall have remained in the employ of the Company for one year from the date this option is granted, whereupon such rights shall become exercisable to the extent of [ ] of the aggregate number of shares above specified. Thereafter, the rights shall become exercisable to the extent of (i) [ ] of the aggregate number of shares above specified on and after two years from the date hereof, and (ii) 100% of the aggregate number of shares above specified on and after [ ] years from the date hereof.
Section 3. Except as may be allowed by applicable law, this option is not transferable by the Employee otherwise than by will or the laws of descent and distribution, and is exercisable, during the lifetime of the Employee, only by him or her or his or her guardian or legal representative. The option so transferred shall continue to be subject to all the terms and conditions contained in this Agreement. Except as otherwise provided in Sections 5, 6 and 9, this option can be exercised only if the Employee has remained in the employ of the Company continuously from the date this option is granted.
Section 4. Notwithstanding any other provision hereof, this option shall not be exercisable after the expiration of ten years from the date this option is granted, or upon such earlier date as provided in Sections 5, 6 and 9(a).
Section 5.
(a) Except as otherwise provided for herein, if the Employee shall cease to be employed by the Company by reason of retirement in accordance with any retirement plan or policy of the Company then in effect, then the Employee, at any time within the three-month period following such cessation of employment (but within the ten-year period specified in Section 4), may exercise all option rights to the full extent not previously exercised, notwithstanding the provisions of Section 2.
(b) Except as otherwise provided for herein, if at any time after the expiration of one year from the date this option is granted, the Employee shall cease to be employed by the Company by a reason other than retirement in accordance with any retirement plan or policy of the
Company then in effect, death or disability as defined below, the Employee at any time within the three-month period following such cessation of employment (but within the ten-year period specified in Section 4) may exercise the option rights to the extent he/she was entitled to exercise the same immediately prior to such cessation of employment.
(c) If at any time after the date these options are granted, the Employee shall die while in the employ of the Company or he/she shall die within the three-month period available to him/her to exercise his/her option rights under the circumstances provided for in this Section 5, then within the six months next succeeding his/her death (but within the ten-year period specified in Section 4), the person entitled by will or the applicable laws of descent and distribution may exercise all option rights to the full extent not previously exercised, notwithstanding the provisions of Section 2.
(d) If at any time after the date these options are granted, the Employee shall become disabled while in the employ of the Company then within the three months next succeeding his/her disability (but within the ten-year period specified in Section 4), the Employee or his/her legal guardian may exercise all option rights to the full extent not previously exercised, notwithstanding the provisions of Section 2.
(e) For purposes of this Agreement, the Employee shall be deemed
disabled if, as a result of his incapacity due to physical or mental illness, he
shall have been absent from his duties with the Company on a full-time basis for
a period of at least six months and a physician selected by him and acceptable
to the Company is of the opinion that (i) he is suffering from "Total
Disability" as defined in the Company's Pension Plan, or any successor plan or
program and (ii) he will qualify for Social Security Disability Payment and
(iii) within thirty (30) days after such determination is made, he shall not
have returned to the full-time performance of his duties with the Company.
Section 6. Nothing herein contained shall limit or restrict any right which the Company would otherwise have to terminate the employment of the Employee with or without cause or to adjust his/her compensation.
Section 7. Subject to the provisions of Section 8(a) of this Agreement, in the event of a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that shares of Common Stock of the Company shall be changed into or exchanged for a larger or smaller number of shares, thereafter the number of shares subject to this option shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock of the Company by reason of such change in corporate structure; provided, however, that the number of shares shall always be a whole number, and the purchase price per share shall in the case of an increase in the number of shares, be proportionately reduced, and, in the case of a decrease in the number of shares, shall be proportionately increased. In the event that there shall be any other change in the number or kind of outstanding shares of Common Stock of the Company or other securities of the Company, or of any shares of stock or other securities into which such shares of Common Stock of the Company shall have been changed or for which they shall have been exchanged, the Compensation Committee may make such adjustment in the number or kind of shares of stock or other securities purchasable hereunder, and in the manner of purchasing such stock
or other securities and the price to be paid therefor, in the opinion of counsel for the Committee may determine is equitably required by such change, and such adjustment so made shall be effective and binding for all purposes of this option.
Section 8.
(a) If the Company shall liquidate or dissolve, or shall be a party to a merger or consolidation with respect to which it shall not be the surviving corporation, the Company shall give written notice thereof to the Employee at least thirty days prior thereto, and the Employee shall have the right within said thirty-day period (but within the ten-year period specified in Section 4) to exercise this option in full to the extent not previously exercised. To the extent that this option shall not have been exercised on or prior to the effective date of such liquidation, dissolution, merger or consolidation, it shall terminate on said date, unless it is assumed by another corporation.
(b) The option granted hereby shall become exercisable in full to the extent not previously exercised upon the occurrence of any Change in Control of the Company. For purposes of this Agreement, a "Change in Control of the Company" (assuming such event has not been previously reported) shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided, without limitation, that a Change in Control of the Company shall be deemed to have occurred if and at such times as (i) any "person" within the meaning of Section 14(d) of the Exchange Act becomes the beneficial owner, directly or indirectly, of securities of the Company representing 34% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
Section 9. Subject to the terms and conditions hereof, this option may be
exercised by delivering to the Company at the office of its Corporate Secretary
a written notice, signed by the person entitled to exercise the option, of the
election to exercise and stating the number of shares such person then elects to
purchase. Such notice shall be accompanied by the payment in full of the
purchase price of the shares then to be purchased. Payment of the full option
exercise price may be made, at the election of the Employee (a) in cash, (b) in
Common Stock of the Company, or (c) in any combination of cash and Common Stock
of the Company, provided that Common Stock may not be used to pay the purchase
price unless such Common Stock has been held by the Employee for at least six
(6) months. Common Stock of the Company used in payment of the purchase price
shall be valued at its reported closing price on NASDAQ on the date of exercise,
with cash paid by the Employee in lieu of any fractional share of Common Stock
so determined. The Employee agrees he or any holder of this option shall be
responsible for paying all federal, state or local taxes on account of the
exercise of the option. In the event the option is exercised by any person other
than the Employee, evidence satisfactory to the Company that such person has the
right to exercise the option must accompany such notice and payment. Subject to
the right of the Company to postpone the date upon which exercise of this option
becomes effective, as provided in Section 10 hereof, upon the due
exercise of the option as hereinbefore provided, the Company shall issue in the name of the person exercising the option, and deliver to him, a certificate or certificates for the shares in respect of which the option shall have been so exercised. The Employee agrees neither he nor any other holder of this option shall have any rights as a stockholder or otherwise in respect of any of the shares as to which the option shall not have been effectively exercised as provided herein.
Section 10. This option shall not be exercisable if such exercise would violate:
(a) Any applicable state securities law;
(b) Any applicable registration or other requirements under the Securities Act of 1933, as amended ("Securities Act"), Exchange Act, or the listing requirements of the NASD or any stock exchange; or
(c) Any applicable legal requirement of any other governmental authority.
The Company agrees to make reasonable efforts to comply with the foregoing laws and requirements so as to permit the exercise of this option. Furthermore, if a Registration Statement with respect to the shares to be issued upon the exercise of this option is not in effect or if counsel for the Company deems it necessary or desirable in order to avoid possible violation of the Securities Act, the Company may require, as a condition to its issuance and delivery of certificates for the shares, the delivery to the Company of a commitment in writing by the person exercising the option that at the time of such exercise it is his intention to acquire such shares for his own account for investment only and not with a view to, or for resale in connection with, the distribution thereof; that such person understands the shares may be "restricted securities" as defined in Rule 144 of the Securities and Exchange Commission; and that any resale, transfer or other disposition of said shares will be accomplished only in compliance with Rule 144, the Securities Act, or the other Rules and Regulations thereunder. The Company may place on the certificates evidencing such shares an appropriate legend reflecting the aforesaid commitment and may refuse to permit transfer of such certificates until it has been furnished evidence satisfactory to it that no violation of the Securities Act or the Rules and Regulations thereunder would be involved in such transfer.
Section 11. This option is intended to qualify as an "incentive stock option" within the meaning of Section 244 of the Internal Revenue Code of 1986, as amended to the date hereof, and shall be interpreted in accordance with such intention.
Section 12. Notwithstanding the foregoing, any incentive stock option granted pursuant to this Agreement is exercisable only to the extent that the aggregate fair market value (determined at the time such incentive stock option is granted) of the shares Common Stock with respect to which such incentive stock options first become exercisable during any calendar year does not exceed $100,000 (the "$100,000 Exercise Limitation"); provided, however, that if the aggregate fair market value of the shares of Common Stock with respect to which such incentive stock options first became exercisable exceeds the $100,000 Exercise Limitation as a result of the accelerated vesting of the option pursuant to any provision in this Agreement, the maximum number of whole shares of Common Stock with an aggregate fair market value not in excess of $100,000 shall be treated as
shares issued pursuant to an incentive stock option and the remaining aggregate fair market value in excess of such amount shall be treated as shares issued pursuant to an option that is not an incentive stock option.
Section 13. The Compensation and Stock Option Committee of the Company shall have authority, subject to the express provision of the Plan, to construe this Incentive Stock Option and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The Board of Directors may at any time or from time to time grant to the Committee such further powers and authority as the Board shall determine to be necessary or desirable. All action by the Committee under the provision of this section shall be conclusive for all purposes
Section 14. The Employee agrees that the Company may make appropriate provision for tax withholding including such withholding as may be appropriate with respect to any disqualifying disposition of this stock option.
Section 15. The Employee agrees that if he should dispose of any shares of
Common Stock acquired upon the exercise of this stock option, including a
disposition by sale, exchange, gift or transfer of legal title within two (2)
years after the date such option was granted to the Employee or within one (1)
year after the transfer of such shares of Common Stock to the Employee upon the
exercise of such option, the Employee shall so notify the Company within three
(3) days following such disposition.
Section 16. This Agreement is subject to all of the terms, conditions, and provisions of the Plan, as amended from time to time, and to such rules, regulations, and interpretations relating to the Plan as may be adopted by the Board and in effect from time to time. In the event and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions, and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.
Section 17. The liability of the Company under this Agreement and any distribution of shares of Common Stock made hereunder is limited to the obligations set forth herein with respect to such distribution and no term or provision of this Agreement shall be construed to impose any liability on the Company or the Board in favor of any person with respect to any loss, cost or expense which the person may incur in connection with or arising out of any transaction in connection with this Agreement.
SECTION 18. BY EXECUTING AND DELIVERING THIS AGREEMENT, THE EMPLOYEE ACKNOWLEDGES AND AGREES THAT, AS IN THE PAST, HE/SHE IS AN EMPLOYEE AT WILL OF THE COMPANY OR ITS WHOLLY OWNED SUBSIDIARY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate as of the day and year first-above written.
PARK-OHIO HOLDINGS CORP.
EXHIBIT 10.6
PARK-OHIO HOLDINGS CORP.
NON-STATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT, dated this _____ day of __________________ (being the date this option is granted) by and between Park-Ohio Holdings Corp., an Ohio corporation, (the "Company") and ______________________________ (the "Director"), a director of the Company.
Section 1. Under the provisions of the Company's Amended and Restated 1998 Long-Term Incentive Plan (the "Plan"), the Company hereby grants to the Director the option of purchasing an aggregate of ______________ shares of Common Stock of the Company at the price of $_________ per share, subject to the terms and conditions of this Agreement.
Section 2. The option rights are exercisable only after _____________ year(s) from the date this option is granted, whereupon such rights shall become fully exercisable.
Section 3. This option may not be assigned or transferred except
that, (i) in the case of the Director's death, such option, and other rights and
interests under the Plan, shall be transferable to the person or persons to whom
the option shall have been transferred by will or the laws of descent and
distribution, (ii) such option, and such other rights and interests, may be
transferred to (x) any trust or estate in which the original holder (or such
holder's spouse or other immediate relative) has a substantial beneficial
interest or (y) a spouse or other immediate relative of the original holder, and
(iii) such option, and such other rights and interests, may be transferred
pursuant to a qualified domestic relations order (as defined in the Internal
Revenue Code of 1986, as amended). The option so transferred shall continue to
be subject to all the terms and conditions contained in this Agreement. Except
as otherwise provided in Sections 5, 6 and 9, this option can be exercised only
if the Director has remained a director of the Company continuously from the
date this option is granted.
Section 4. Notwithstanding any other provision hereof, this option shall not be exercisable after the expiration of ten years from the date this option is granted, or upon such earlier date as provided in Sections 5, 6 and 9(a).
Section 5.
(a) Except as otherwise provided herein, if the Director ceases to be a member of the Board (otherwise than as a result of his death or after attainment of age 65), this option may be exercised, during any period approved by the Compensation and Stock Option Committee of the Company or any other Committee performing a similar function (the "Compensation Committee"), after the date on which he ceased to be a director; provided, that in no event shall the option be exercisable for a period of six months from the date of grant.
(b) Notwithstanding anything to the contrary herein contained, if the Director resigns his directorship prior to his attainment of age 65 and such resignation is effective prior to six months from the date of grant, then this option shall terminate as of the effective date of such resignation.
(c) At such time as the right of the Director to exercise this option terminates, this option, to the extent not theretofore exercised, shall terminate.
Section 6.
(a) If the Director dies or becomes disabled (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended) while a member of the Board, this option may be exercised at any time within one year after the date of the Director's death or resignation by reason of disability or such later date approved by the Compensation Committee (by the executor or administrator of the Director's estate, or the person entitled by will or the applicable laws of descent and distribution); provided, that in no event shall this option be exercisable for a period of six months from the date of grant.
(b) If the Director ceases to be a member of the Board after attainment of age 65, this option may be exercised at any time within one year of the date such Director ceased to be a Board member or such later date approved by the Compensation Committee, as the case may be; provided, that in no event shall this option be exercisable for a period of six months from the date of grant.
Section 7. In consideration of the granting of this option, the Director covenants and agrees that he will not, while a director of Company or at any time thereafter, disclose, duplicate, distribute or use any Confidential Information, other than on behalf and for the benefit of Park-Ohio. The foregoing agreement shall not be construed as superseding or abridging any other stricter requirements or greater restrictions with respect to the subject matter thereof that may also be applicable to the Director. The obligations contained in this Section 7 are, and constitute, separate and several obligations of the Director, and such obligations shall not be affected by, but rather shall survive, any termination of the Plan and/or any exercise or termination of this option. For purposes of this Section 7:
(a) "Confidential Information" means customer lists, rating formulae, rate sheets, trade secrets, market studies, financial data and projections, analyses, strategic plans and other documents, material and/or information, whether or not in writing, acquired by a director of the Company as a result of such director's service as such, which are (a) not totally within the public domain and (b) such that a reasonable, prudent businessman would not voluntarily relinquish, disseminate or communicate same to an actual or potential competitor, customer or supplier.
(b) "Park-Ohio" includes the Company and also includes any other entity in which the Company owns, whether directly or indirectly, fifty percent (50%) or more of the stock and/or assets.
Notwithstanding any other provision hereof, all rights under this option of the Director (or his legal transferee, designated beneficiary or legal representatives) including the right to exercise, shall be forfeited if, prior to the time of such exercise, the Director shall violate any of the agreements and covenants contained in this Section 7.
Section 8. Subject to the provisions of Section 9(a) of this Agreement, in the event of a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that shares of Common Stock of the Company shall be changed into or exchanged for a larger or smaller number of shares, thereafter the number of shares subject to this option shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock of the Company by reason of such change in corporate structure; provided, however, that the number of shares shall always be a whole number, and the purchase price per share shall in the case of an increase in the number of shares, be proportionately reduced, and, in the case of a decrease in the number of shares, shall be proportionately increased. In the event that there shall be any other change in the number or kind of outstanding shares of Common Stock of the Company or other securities of the Company, or of any shares of stock or other securities into which such shares of Common Stock of the Company shall have been changed or for which they shall have been exchanged, the Compensation Committee may make such adjustment in the number or kind of shares of stock or other securities purchasable hereunder, and in the manner of purchasing such stock or other securities and the price to be paid therefor, as the Committee, in its sole discretion, may determine is equitably required by such change, and such adjustment so made shall be effective and binding for all purposes of this option.
Section 9.
(a) If the Company shall liquidate or dissolve, or shall be a party to a merger or consolidation with respect to which it shall not be the surviving corporation, and the Company shall give written notice thereof to the Director at least thirty days prior thereto, the Director shall have the right within said thirty-day period (but within the ten-year period specified in Section 4) to exercise this option in full to the extent not previously exercised. To the extent that this option shall not have been exercised on or prior to the effective date of such liquidation, dissolution, merger or consolidation, it shall terminate on said date, unless it is assumed by another corporation.
(b) The option granted hereby shall become exercisable in full to the extent not previously exercised upon the occurrence of any Change in Control of the Company. For purposes of this Agreement, a "Change in Control of the Company" (assuming such event has not been previously reported) shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided, without limitation, that a Change in Control of the Company shall be deemed to have occurred if and at such times as (i) any "person" within the meaning of Section 14(d) of the Exchange Act becomes the beneficial owner, directly or indirectly, of securities of the Company representing 34% or more of the combined voting power of the Company's then outstanding securities, or (ii) during
any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
Section 10. Subject to the terms and conditions hereof, this option
may be exercised by delivering to the Company at the office of its Corporate
Secretary a written notice, signed by the person entitled to exercise the
option, of the election to exercise and stating the number of shares such person
then elects to purchase. Such notice shall be accompanied by the payment in full
of the purchase price of the shares then to be purchased. Payment of the full
option exercise price may be made, at the election of the Director (a) in cash,
(b) in Common Stock of the Company, or (c) in any combination of cash and Common
Stock of the Company, provided that Common Stock may not be used to pay the
purchase price unless such Common Stock has been held by the Director for at
least six (6) months. Common Stock of the Company used in payment of the
purchase price shall be valued at its reported closing price on NASDAQ on the
date of exercise, with cash paid by the Director in lieu of any fractional share
of Common Stock so determined. The Director agrees he or any holder of this
option shall be responsible for paying all federal, state or local taxes on
account of the exercise of the option. In the event the option is exercised by
any person other than the Director, evidence satisfactory to the Company that
such person has the right to exercise the option must accompany such notice and
payment. Subject to the right of the Company to postpone the date upon which
exercise of this option becomes effective, as provided in Section 11 hereof,
upon the due exercise of the option as hereinbefore provided, the Company shall
issue in the name of the person exercising the option, and deliver to him, a
certificate or certificates for the shares in respect of which the option shall
have been so exercised. The Director agrees neither he nor any other holder of
this option shall have any rights as a stockholder or otherwise in respect of
any of the shares as to which the option shall not have been effectively
exercised as provided herein.
Section 11. This option shall not be exercisable if such exercise would violate:
(a) Any applicable state securities law;
(b) Any applicable registration or other requirements under the Securities Act of 1933, as amended ("Securities Act"), Exchange Act, or the listing requirements of the NASD or any stock exchange; or
(c) Any applicable legal requirement of any other governmental authority.
The Company agrees to make reasonable efforts to comply with the foregoing laws and requirements so as to permit the exercise of this option. Furthermore, if a Registration Statement with respect to the shares to be issued upon the exercise of this option is not in effect or if counsel for the Company deems it necessary or desirable in order to avoid possible violation of the Securities Act, the Company may require, as a condition to its issuance and delivery of certificates for the shares, the delivery to the Company of a commitment in writing by the person exercising the option that at the time of such exercise it is his intention to acquire such shares for
his own account for investment only and not with a view to, or for resale in connection with, the distribution thereof, that such person understands the shares may be "restricted securities" as defined in Rule 144 of the Securities and Exchange Commission; and that any resale, transfer or other disposition of said shares will be accomplished only in compliance with Rule 144, the Securities Act, or the other Rules and Regulations thereunder. The Company may place on the certificates evidencing such shares an appropriate legend reflecting the aforesaid commitment and may refuse to permit transfer of such certificates until it has been furnished evidence satisfactory to it that no violation of the Securities Act or the Rules and Regulations thereunder would be involved in such transfer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate as of the day and year first-above written.
PARK-OHIO HOLDINGS CORP.
.
.
.
PARK OHIO HOLDINGS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO DATA)
Exhibit 12.1
2004 2003 2002 2001 2000
---------------------------------------------------------------------------
Earnings (loss) before Income Taxes $17,599 ($10,917) ($11,456) ($37,353) $7,701
Less Capitalized Interest
Fixed Charges 34,942 29,572 31,206 35,320 35,084
---------------------------------------------------------------------------
Earnings available for Fixed Charges $52,541 $18,655 $19,750 ($2,033) $42,785
Fixed Charges:
Interest Component of Rent Expense 3,529 3,421 3,583 4,212 4,272
Interest Expense 31,413 26,151 27,623 31,108 30,812
Interest Capitalized
Amortization of Deferred Financing Costs(1)
---------------------------------------------------------------------------
Total Fixed Charges $34,942 $29,572 $31,206 $35,320 $35,084
===========================================================================
Ratio of Earnings to Fixed Charges 1.5 (2) (2) (2) 1.2
|
(1) Included in Interest Expense
(2) Earnings were inadequate to cover fixed charges for the years ended
December 31, 2003, 2002 and 2001, and the coverage deficiency
totaled $10,917, $11,456 and $37,353 respectively.
.
.
.
Exhibit 21.1
Name State of Incorporation ---- ---------------------- Ajax Tocco International Limited England Ajax Tocco Magnethermic Canada Limited Ontario Ajax Tocco Magnethermic Corporation Ohio Chambersburg Acquisition Corp. Pennsylvania Control Transformer, Inc. Ohio FECO, Inc. Illinois General Aluminum Mfg. Company Ohio ILS Technology, LLC Ohio Integrated Holding Company Ohio Integrated Logistics Company of Canada (1) Nova Scotia Integrated Logistics Holding Company Ohio Integrated Logistics Solutions de Mexico S.A. de C.V. Mexico Integrated Logistics Solutions, Inc. Ohio Integrated Logistics Solutions Limited England Integrated Logistics Solutions LLC (2) Ohio Japan Ajax Magnethermic Co. Ltd. Japan LLRM Acquisition Corp. Illinois Park-Ohio Forged & Machined Products LLC (7) Ohio Park-Ohio Industries, Inc. (3) Ohio Park-Ohio Industries (Shanghai) Co. Ltd. China Park-Ohio Products, Inc. Ohio Pharmaceutical Logistics, Inc. Ohio Pharmacy Wholesale Logistics, Inc. Ohio PMC - Colinet, Inc. Ohio PMC Industries Corp. Ohio Precision Machining Connection LLC (4) Ohio RB&W Corporation of Canada Ontario RB&W Logistics of Canada, Inc. Canada RB&W Manufacturing LLC (5) Ohio Southwest Steel Processing LLC Ohio The Ajax Manufacturing Company (6) Ohio The Clancy Bing Company Pennsylvania Tocco, Inc. Alabama Tocco de Mexico S.A. de C.V. |
(1) Doing business as Direct Fasteners
(2) Doing business as RB&W Logistics, Arden Fasteners, Gateway Industrial Supply, Free Gate and Georgia Industrial Fasteners
(3) Doing business as Park Drop Forge, Ohio Crankshaft and Park-Ohio Forged & Machined Products
(4) Doing business as PMC Industries and M.P. Colinet
(5) Doing business as Delo Screw Products, RB&W Manufacturing, Sabina Mfg., and American Fasteners
(6) Doing business as Ajax Technologies and Forging Development
(7) Doing business as Kropp Forge
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference of our reports dated March 10, 2005, with respect to the consolidated financial statements of Park-Ohio Holdings Corp., Park-Ohio Holdings Corp. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Park-Ohio Holdings Corp., included in this Annual Report (Form 10-K) for the year ended December 31, 2004, in the following Registration Statements and in the related Prospectuses:
Registration Statement Description Shares Registered
------------------------------------- --------------------------------------------- -------------------------
Form S-8 (33-01047) Individual Account Retirement Plan 1,500,000
Form S-8 (333-58161) 1998 Long-Term Incentive Plan 550,000
Form S-8 (333-110536) 1998 Long-Term Incentive Plan 1,100,000
|
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 10, 2005
|
Exhibit 24.1
PARK-OHIO HOLDINGS CORP.
FORM 10-K
POWER OF ATTORNEY
Each of the undersigned officers and directors of Park-Ohio Holdings Corp., an Ohio corporation, hereby constitutes and appoints Richard P. Elliott and Robert D. Vilsack, and each of them, as his true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for each of the undersigned and in the name, place and stead of each of the undersigned, to sign on behalf of each of the undersigned an Annual Report on Form 10-K for the fiscal year ended December 31, 2004 pursuant to Section 13 of the Securities Exchange Act of 1934 and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith including, without limitation, a Form 12b-25 with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes may lawfully do or cause to be done by virtue thereof.
This power of attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it.
EXECUTED as of March 14, 2005.
/s/ Edward F. Crawford /s/ Richard P. Elliott -------------------------------- -------------------------------- Edward F. Crawford Richard P. Elliott, Vice President and Chief Chief Executive Officer, Chairman of the Board Financial Officer and Director /s/ Matthew V. Crawford /s/ Dan T. Moore -------------------------------- -------------------------------- Matthew V. Crawford Dan T. Moore, Director President, Chief Operating Officer, and Director /s/ Patrick V. Auletta /s/ Ronna Romney -------------------------------- -------------------------------- Patrick V. Auletta, Director Ronna Romney, Director /s/ Kevin R. Greene /s/ Lawrence O. Selhorst -------------------------------- -------------------------------- Kevin R. Greene, Director Lawrence O. Selhorst, Director /s/ Lewis E. Hatch, Jr. /s/ James W. Wert -------------------------------- -------------------------------- Lewis E. Hatch, Jr., Director James W. Wert, Director |
Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATIONS
I, Edward F. Crawford, Chairman and Chief Executive Officer,
certify that:
1.
I have reviewed this annual report on Form 10-K of Park
Ohio Holdings Corp.;
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d.
Disclosed in this report any changes in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and
report financial information; and
b.
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ EDWARD F. CRAWFORD
-----------------------------------------------------
Edward F. Crawford, Chairman and Chief Executive Officer
Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATIONS
I, Richard P. Elliott, Vice President and Chief Financial
Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of Park
Ohio Holdings Corp.;
2.
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared.
b.
Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d.
Disclosed in this report any changes in the registrant’s
internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
5.
The registrant’s other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s
auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and
report financial information; and
b.
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ RICHARD P. ELLIOTT
-----------------------------------------------------
Richard P. Elliott, Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
In connection with the annual report of Park-Ohio Holdings Corp.
(the “Company”) on Form 10-K for the period ended
December 31, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”),
each of the undersigned officers of the Company certifies,
pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that, to
such officer’s knowledge:
Dated: March 14, 2005
The foregoing certification is being furnished solely pursuant
to 18 U.S.C. § 1350 and is not being filed as
part of the Report or as a separate disclosure document.
(1)
The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company as of the dates and for the periods
expressed in the Report.
By
/s/ EDWARD F. CRAWFORD
Name: Edward F. Crawford
Title: Chairman and Chief Executive Officer
By
/s/ RICHARD P. ELLIOTT
Name: Richard P. Elliott
Title: Vice President and Chief Financial Officer