13
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, 2003,2004, the balance sheet reflected $82.3$82.6 million of goodwill in the ILS and Aluminum Products segments. In 2003,2004, discount rates used ranged from 11%10.25% to 13%12.25%, and long-term revenue growth rates used ranged from 3.5% to 4.0%.
In the ILS segment, over the next five years, higher sales growth rates were forecasted and operating profit margins were forecasted to improve to historical levels, as the manufacturing economy rebounds and reduced fixed overheads are absorbed over higher sales volumes.
The Company2003, we changed itsour method of accounting for the 15% of its inventories utilizing the LIFO method to the FIFO method. As required by accounting principles generally accepted in the United States, the Company has restated its balance sheet as of December 31, 2002 to increaseand increased inventories by the recorded LIFO reserve ($4.4 million), increaseincreased deferred tax liabilities ($1.7 million), and increaseincreased shareholders’ equity ($2.7 million). Previously reported results of operations havewere 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). See also Note B to the consolidated financial statements.
Results of Operations
| 2004 versus 2003 |
| Net Sales by Segment: |
| Percent | ||||||||||||||||
| 2003 | 2002 | Change | Change | |||||||||||||
| ILS | $ | 377.6 | $ | 398.1 | $ | (20.5 | ) | -5 | % | |||||||
| Aluminum products | 90.1 | 106.1 | (16.0 | ) | -15 | % | ||||||||||
| Manufactured products | 156.6 | 130.2 | 26.4 | 20 | % | |||||||||||
| Consolidated Net Sales | $ | 624.3 | $ | 634.4 | $ | (10.1 | ) | -2 | % | |||||||
| Year Ended | ||||||||||||||||||||
| December 31, | Acquired/ | |||||||||||||||||||
| Percent | (Divested) | |||||||||||||||||||
| 2004 | 2003 | Change | Change | Sales | ||||||||||||||||
| ILS | $ | 453.2 | $ | 377.6 | $ | 75.6 | 20 | % | $ | (1.0 | ) | |||||||||
| Aluminum Products | 135.4 | 90.1 | 45.3 | 50 | % | 30.4 | ||||||||||||||
| Manufactured Products | 220.1 | 156.6 | 63.5 | 41 | % | 15.9 | ||||||||||||||
| Consolidated net sales | $ | 808.7 | $ | 624.3 | $ | 184.4 | 30 | % | $ | 45.3 | ||||||||||
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.
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| Cost of Products Sold & Gross Profit: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Consolidated cost of products sold | $ | 682.6 | $ | 527.6 | $ | 155.0 | 29 | % | ||||||||
| Consolidated gross profit | $ | 126.1 | $ | 96.7 | $ | 29.4 | 30 | % | ||||||||
| Gross margin | 15.6 | % | 15.5 | % | ||||||||||||
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.
| Selling, General & Administrative (“SG&A”) Expenses: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Consolidated SG&A expenses | $ | 77.0 | $ | 62.7 | $ | 14.3 | 23 | % | ||||||||
| SG&A as a percent of sales | 9.5 | % | 10.0 | % | ||||||||||||
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: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2004 | 2003 | Change | Change | |||||||||||||
| Interest expense | $ | 31.4 | $ | 26.2 | $5.2 | 20 | % | |||||||||
| Debt extinguishment costs included in interest expense | $ | 6.0 | ||||||||||||||
| Average outstanding borrowings | $ | 328.9 | $ | 320.8 | $8.1 | 3 | % | |||||||||
| Average borrowing rate | 7.74 | % | 8.15 | % | (41) basis points | |||||||||||
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
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| Income Tax: |
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.
| 2003 versus 2002 |
| Net Sales by Segment: |
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| Percent | ||||||||||||||||
| 2003 | 2002 | Change | Change | |||||||||||||
| ILS | $ | 377.6 | $ | 398.1 | $ | (20.5 | ) | -5 | % | |||||||
| Aluminum products | 90.1 | 106.1 | (16.0 | ) | -15 | % | ||||||||||
| Manufactured products | 156.6 | 130.2 | 26.4 | 20 | % | |||||||||||
| Consolidated net sales | $ | 624.3 | $ | 634.4 | $ | (10.1 | ) | -2 | % | |||||||
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 thea 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.
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| Cost of Products Sold & Gross Profit: |
| Year Ended | ||||||||||||||||||||||||||||||||||||||||
| 2003 | 2002 | December 31, | ||||||||||||||||||||||||||||||||||||||
| Percent | Gross | Gross | ||||||||||||||||||||||||||||||||||||||
| 2003 | 2002 | Change | Change | Margin | Margin | 2003 | 2002 | Change | Percent | |||||||||||||||||||||||||||||||
| Consolidated cost of products sold | $ | 527.6 | $ | 546.9 | $ | (19.3 | ) | -4 | % | $ | 527.6 | $ | 546.9 | $(19.3 | ) | -4% | ||||||||||||||||||||||||
| Inventory writedowns from restructuring included in Cost of Products Sold | 0.6 | 5.6 | (5.0 | ) | 0.6 | 5.6 | (5.0 | ) | ||||||||||||||||||||||||||||||||
| Net gross profit impact of acquisition & divestitures | (4.4 | ) | (4.4 | ) | (4.4 | ) | (4.4 | ) | ||||||||||||||||||||||||||||||||
| Consolidated gross profit | $ | 96.7 | $ | 87.6 | $ | 9.1 | 10 | % | 15.5 | % | 13.8 | % | $ | 96.7 | $ | 87.6 | $ 9.1 | 10% | ||||||||||||||||||||||
| Gross margin | 15.5 | % | 13.8 | % | ||||||||||||||||||||||||||||||||||||
Note: 25% of increase in Induction gross profit attributed to non-acquisition actions.
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 marginhigh-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
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Selling, General & Administrative (“SG&A”)
| SG&A Expenses: |
| Year Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2003 | 2002 | December 31, | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||||||
| Percent | SG&A | SG&A | Percent | SG&A | SG&A | |||||||||||||||||||||||||||||||||||||||||||
| 2003 | 2002 | Change | Change | Percent | Percent | 2003 | 2002 | Change | Change | Percent | Percent | |||||||||||||||||||||||||||||||||||||
| Consolidated SG&A expenses | $ | 62.7 | $ | 57.8 | $ | 4.9 | 8 | % | 10.0 | % | 9.1 | % | $ | 62.7 | $ | 57.8 | $ | 4.9 | 8 | % | 10.0% | 9.1 | % | |||||||||||||||||||||||||
| Net SG&A expense impact of acquisition & divestitures | (3.9 | ) | (3.9 | ) | (3.9 | ) | (3.9 | ) | ||||||||||||||||||||||||||||||||||||||||
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: |
| Year Ended | ||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||
| 2003 | 2002 | Change | Percent | 2003 | 2002 | Change | Percent | |||||||||||||||||||||||||
| Interest expense | $ | 26.2 | $ | 27.6 | $ (1.4 | ) | -5% | $ | 26.2 | $ | 27.6 | $(1.4 | ) | -5% | ||||||||||||||||||
| Average outstanding borrowings | $ | 320.8 | $ | 333.6 | $(12.8 | ) | -4% | $ | 320.8 | $ | 333.6 | $(12.8 | ) | -4% | ||||||||||||||||||
| Average borrowing rate | 8.15 | % | 8.28 | % | (13) basis points | 8.15 | % | 8.28 | % | (13) basis points | ||||||||||||||||||||||
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 facility,agreement, beginning in August 2003.
| Income Tax: |
In accordance with the provision of Statement of Financial Accounting Standards No.FAS 109, (“FAS 109”), “Accounting for Income Taxes,” 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.
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2002 versus 2001
Net Sales by Segment:
| Percent | ||||||||||||||||
| 2002 | 2001 | Change | Change | |||||||||||||
| ILS | $ | 398.1 | $ | 416.9 | $ | (18.8 | ) | -5 | % | |||||||
| Aluminum products | 106.1 | 84.9 | 21.2 | 25 | % | |||||||||||
| Manufactured products | 130.2 | 134.6 | (4.4 | ) | -3 | % | ||||||||||
| Consolidated Net Sales | $ | 634.4 | $ | 636.4 | $ | (2.0 | ) | 0 | % | |||||||
Net sales declined less than 1% in 2002. The ILS net sales decline of 5% was due primarily to the sales volume reductions in heavy truck and other customer industries. The Aluminum Products net sales increase of 25% was due primarily to the initiation or ramp-up of new production contracts. The Manufactured Products net sales decline of 3% or $4.4 million was due primarily to divestitures. The divestitures of Castle Rubber and Cleveland City Forge decreased 2002 net sales by $13.0 million and the acquisition of Ajax Magnethermic increased 2002 net sales by $6.1 million.
Cost of Products Sold & Gross Profit:
| 2002 | 2001 | |||||||||||||||||||||||
| Percent | Gross | Gross | ||||||||||||||||||||||
| 2002 | 2001 | Change | Change | Margin | Margin | |||||||||||||||||||
| Consolidated cost of products sold | $ | 546.9 | $ | 552.3 | $ | (5.4 | ) | -1 | % | |||||||||||||||
| Inventory writedowns from restructuring included in Cost of Products Sold | 5.6 | 10.3 | (4.7 | ) | ||||||||||||||||||||
| Net gross profit impact of acquisition & divestitures | 1.7 | 1.7 | ||||||||||||||||||||||
| Consolidated gross profit | $ | 87.6 | $ | 84.1 | $ | 3.5 | 4 | % | 13.8 | % | 13.2 | % | ||||||||||||
Cost of products sold declined 1% in 2002. Inventory write-downs included in cost of products sold primarily related to discontinued product lines. Gross profit increased 4% in 2002, while gross margin increased to 13.8% in 2002, from 13.2% in 2001. This increase reflected increased margins in Aluminum Products, partially offset by decreased margins in the ILS and Manufactured Products segments. Declines in ILS and Manufactured Products gross margins related primarily to reduced volumes resulting in the absorption of fixed operational overheads over a smaller sales or production base. The increase in Aluminum Products gross margin related to new, higher-margin contracts, discontinuation of low margin contracts, cost reductions, plant closures and the absorption of fixed manufacturing overheads over a larger production base.
Selling, General & Administrative (“SG&A”) Expenses:
| 2002 | 2001 | |||||||||||||||||||||||
| Percent | SG&A | SG&A | ||||||||||||||||||||||
| 2002 | 2001 | Change | Change | Percent | Percent | |||||||||||||||||||
| Consolidated SG&A expenses | $ | 57.8 | $ | 66.6 | $ | (8.8 | ) | -13 | % | 9.1 | % | 10.5 | % | |||||||||||
Consolidated SG&A expenses decreased by 13% in 2002, while SG&A expenses as a percentage of net sales decreased to 9.1% during 2002 as compared to 10.5% for 2001. This decrease was primarily due to cost reductions in all three segments resulting from business restructuring initiatives implemented by the Company. During 2003, SG&A expenses were negatively affected by a decrease in net pension credits of $.8 million, reflecting less favorable investment returns on pension plan assets.
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Interest Expense:
| 2002 | 2001 | Change | Percent | |||||||||||||
| Interest expense | $ | 27.6 | $ | 31.1 | $ (3.5 | ) | -11 | % | ||||||||
| Average outstanding borrowings | $ | 333.6 | $ | 353.4 | $(19.8 | ) | -6 | % | ||||||||
| Average borrowing rate | 8.28 | % | 8.80 | % | (52) basis points | |||||||||||
Interest expense decreased by 11% in 2002 due to lower average debt outstanding and lower average interest rates. The decrease in borrowings related primarily to working capital reductions in the course of 2001, which were retained in 2002. The lower average borrowing rate in 2002 was due primarily to decreased rates on the Company’s revolving credit facility.
In accordance with the provision of Statement of Financial Accounting Standards No. 109 (“FAS 109”), “Accounting for Income Taxes,” the Company recorded no tax benefit for the 2003 net loss, because it 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. The effective tax rate for 2001 was 30.5%, which was less than the statutory rate due to the amortization of non-deductible goodwill and other non-deductible items. At December 31, 2003, subsidiaries of the Company had $25.6 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
The Company’sOur liquidity needs are primarily for working capital and capital expenditures. The Company’sOur primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of Senior Subordinated Notes.our senior subordinated notes. On July 30, 2003, the Companywe entered into a new four-year revolving credit agreement with a group of banks under which it may borrow up to $165.0 million subject to an asset based formula. The credit agreement is secured by substantially all the assets of the Company.banks. On November 5, 2003, this credit agreement was amended to provide a facility for the Company’sour subsidiaries in Canada and the United Kingdom. Borrowings fromOn 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, (“Credit Agreement”), which expires on July 30, 2007we 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 Credit Agreementrevolving credit agreement may be borrowed at the Company’s election at either (i) LIBOR plus 17575 – 250225 basis points or (ii) the bank’s prime lending rate. The LIBOR-based interest rate is dependent on the Company’s Debt Service Coveragedebt service coverage ratio, as defined in the Credit Agreement.revolving credit agreement. Under the Credit Agreement,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, 2003,2004, the Company had $101.0$120.6 million outstanding under the Credit Agreement,revolving credit agreement, and approximately $47.0$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 current cash requirements.requirements for the next twelve months and through 2010, when the revolving credit agreement matures. The future availability of bank borrowings under the Credit Agreementrevolving credit agreement is based on the Company’s ability to meet a Debt Service Ratiodebt 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:
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
| Net income (loss) | $ | 14,199 | $ | (11,821 | ) | $ | (61,152 | ) | $ | (25,953 | ) | $ | 518 | ||||||||
| Add back: | |||||||||||||||||||||
| Cumulative effect of accounting change | -0- | -0- | 48,799 | -0- | -0- | ||||||||||||||||
| Income taxes (benefit) | 3,400 | 904 | 897 | (11,400 | ) | 7,183 | |||||||||||||||
| Interest expense | 31,413 | 26,151 | 27,623 | 31,108 | 30,812 | ||||||||||||||||
| Depreciation and amortization | 15,385 | 15,562 | 16,307 | 19,911 | 20,048 | ||||||||||||||||
| Restructuring and impairment charges | -0- | 19,446 | 19,190 | 28,463 | -0- | ||||||||||||||||
| Non-operating items | -0- | -0- | -0- | 1,850 | 10,118 | ||||||||||||||||
| Miscellaneous | 335 | 319 | 580 | 507 | 205 | ||||||||||||||||
| EBITDA, as defined | $ | 64,732 | $ | 50,561 | $ | 52,244 | $ | 44,486 | $ | 68,884 | |||||||||||
At December 31, 2003,2004, the Company iswas in compliance with the Credit Agreement’s Debt Service Ratio covenant.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 versus 2.17 at December 31, 2002.2003. Working capital increased by $.7$20.9 million to $169.8 million at December 31, 2004 from $148.9 million at December 31, 20032003. 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 $148.2operating activities as compared to providing $13.3 million at December 31, 2002.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 mil-
17
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 iswas 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.
During 2001, the Company provided $23.8 million from operating activities as compared to providing $24.0 million in 2000. During 2001, the Company also invested $13.9 million in capital expenditures, used $14.7 million to pay down debt, and provided $6.1 million from a divestiture. These activities resulted in an increase in cash of $1.3 million for the year.
The Company doesWe do not have off-balance-sheet arrangements, financingsfinancing or other relationships with unconsolidated entities or other persons, also known as specialpersons. We enter into forward contracts on foreign currencies, primarily the euro, purely for the purpose entities. The Companyof 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 usesuse no other derivative instruments.
The following table summarizes our principal contractual obligations and other commercial commitments over various future periods:periods as of December 31, 2004:
| Payments due or Commitment Expiration Per | ||||||||||||||||||||||||||||||||||||||||||
| Payments due or Commitment Expiration Per Period | Period | |||||||||||||||||||||||||||||||||||||||||
| Less Than | Less Than | More than | ||||||||||||||||||||||||||||||||||||||||
| Total | 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||||
| Long-term debt obligations | Long-term debt obligations | $ | 310,225 | $ | 1,061 | $ | 3,088 | $ | 302,773 | $ | 4,364 | Long-term debt obligations | $ | 338,307 | $ | 2,931 | $ | 1,657 | $ | 1,363 | $ | 332,356 | ||||||||||||||||||||
| Capital lease obligations | Capital lease obligations | -0- | -0- | -0- | -0- | -0- | Capital lease obligations | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||||||||||||||||
| Operating lease obligations | Operating lease obligations | 20,495 | 7,178 | 10,132 | 3,185 | -0- | Operating lease obligations | 33,428 | 9,820 | 12,663 | 7,087 | 3,858 | ||||||||||||||||||||||||||||||
| Purchase obligations | Purchase obligations | 85,000 | 85,000 | -0- | -0- | -0- | Purchase obligations | 103,809 | 103,802 | 7 | -0- | -0- | ||||||||||||||||||||||||||||||
| Standby letters of credit | Standby letters of credit | 9,987 | 8,816 | 1,150 | 21 | -0- | Standby letters of credit | 10,618 | 7,212 | 3,370 | 36 | -0- | ||||||||||||||||||||||||||||||
| Total | $ | 425,707 | $ | 102,055 | $ | 14,370 | $ | 305,979 | $ | 4,364 | Total | $ | 486,162 | $ | 123,765 | $ | 17,697 | $ | 8,486 | $ | 336,214 | |||||||||||||||||||||
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Critical Accounting Policies
Preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)GAAP requires management to make certain estimates and assumptions which affect amounts reported in the Company’sour consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company doesWe 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:The Company recognizes We recognize more than 95%93% of itsour revenue when title is transferred to unaffiliated customers, typically upon shipment. The Company’sOur 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. The Company’sOur revenue recog-
18
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. The Company’sOur 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, over the past twelve months, 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 the Company considerswe consider these allowances adequate and proper, changes in economic conditions in specific markets in which the Company operateswe 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.statements included elsewhere herein.
Restructuring:The Company recognizes 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 the SEC Staff Accounting BulletinSAB 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:Through December 31, 2001, the Company amortized goodwill primarily over forty years using the straight-line method. The Company We adopted Financial Accounting Standard (“FAS”) No.FAS 142 “Goodwill and Other Intangible Assets” as of January 1, 2002. Under FAS 142, the Company no longer amortizes goodwill, but iswe are required to review goodwill for impairment annually or more frequently if impairment indicators arise.
The Company, with assistance of an outside consultant,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. The Company hasWe have also completed the annual impairment test as of October 1, 2004, 2003 and 2002 and hashave determined that no additional goodwill impairment existed as of those dates.
Deferred Income Tax Assets and Liabilities:The Company accounts 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,
19
At December 31, 2003,2004, the Company hashad net operating loss carryforwards for income tax purposes of approximately $35.7$47.7 million, which will expire inbetween 2021 or 2023and 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, 2003 since2004 because the Company is in a three yearthree-year cumulative loss position.
Pension and Other Postretirement Benefit Plans:The Company We and itsour 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 of the Company. The Company hasincome. We have evaluated itsour pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believes itsbelieve our assumptions are appropriate.
Stock-Based Compensation:The Company has 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 the Company’sour 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, the Company’sour net lossincome (loss) and diluted lossincome (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 2002,2002.
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 $.3 million ($.03 per share)establishes a fair-value measurement objective in 2001.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
The Company hasWe 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 whichthat provide for strict and, under certain circumstances, joint and several liability. The Company isWe are participating in the cost of certain clean-up efforts at several of these sites. However, the Company’sour share of such costs
20
The Company hasWe have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. The Company’sOur cost of defending such lawsuits has not been material to date and, based upon available information, our management of the Company does not expect the Company’sour future costs for asbestos-related lawsuits to have a material adverse effect on itsour results of operations, liquidity or financial condition. The Company cautions,We caution, however, that inherent in management’s estimates of the Company’sour exposure are expected trends in claims severity, frequency and other factors whichthat may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
The Company’sOur results of operations are typically stronger in the first six months rather 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.
20
The timing of orders placed by the Company’sour customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of the Company’sour 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. Certain statements in this Management’s DiscussionThe words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and Analysis of Financial Condition and Results of Operations containsimilar expressions are intended to identify forward-looking statements. These forward-looking statements including without limitation, discussion regarding the Company’s anticipated amounts of restructuring chargesinvolve known and its expected impact on profitability and cash flow, credit availability, levels and funding of capital expenditures and trends for 2004. Forward-looking statements are necessarily subject tounknown risks, uncertainties and other factors many of which are outsidethat may cause our control, which could cause actual results, performance and achievements, or industry results, to differbe 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 the 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 heavyheavy-duty truck industries;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
| Item 7A. | Quantitative and Qualitative Disclosure About Market Risk |
The Company isWe are exposed to market risk including changes in interest rates. The Company isWe are subject to interest rate risk on itsour floating rate revolving credit facility, which consisted of borrowings of $101$120.6 million at December 31, 2003.2004. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.0$1.2 million for the year ended December 31, 2003.2004.
The Company’sOur foreign subsidiaries generally conduct business in local currencies. During 2003, the Company2004, we recorded a favorable foreign currency translation adjustment of $3.6$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.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.
21 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
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
| Page | ||||
| Management’s Annual Report | ||||
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | 25 | |||
| Report of Independent Registered Public Accounting Firm | 26 | |||
| Consolidated Balance Sheets — December 31, | ||||
| Consolidated Statements of Operations — Years Ended December 31, 2004, 2003 | ||||
| Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2004, 2003 | ||||
| Consolidated Statements of Cash Flows — Years Ended December 31, 2004, 2003 | ||||
| Notes to Consolidated Financial Statements | ||||
| Supplementary Financial Data: | ||||
| Selected Quarterly Financial Data (Unaudited) — Years Ended December 31, | ||||
2223
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 ERNST & YOUNG LLP, INDEPENDENT AUDITORSREGISTERED 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.
| /s/ Ernst & Young LLP |
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, 20032004 and 2002,2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.2004. 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 auditing standards generally accepted inof the United States.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, 20032004 and 20022003 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20032004 in conformity with accounting principlesU.S. generally accepted in the United States.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
2326
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
| December 31 | December 31, | |||||||||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||
| Current Assets | Current Assets | Current Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 3,718 | $ | 8,812 | Cash and cash equivalents | $ | 7,157 | $ | 3,718 | |||||||||||||
| Accounts receivable, less allowances for doubtful accounts of $3,271 in 2003 and $3,313 in 2002. | 100,938 | 101,477 | Accounts receivable, less allowances for doubtful accounts of $3,976 in 2004 and $3,271 in 2003 | 145,475 | 100,938 | |||||||||||||||||
| Inventories | 149,075 | 156,067 | Inventories | 177,294 | 149,075 | |||||||||||||||||
| Other current assets | 10,780 | 8,626 | Other current assets | 14,593 | 10,780 | |||||||||||||||||
| Total Current Assets | 264,511 | 274,982 | Total Current Assets | 344,519 | 264,511 | |||||||||||||||||
| Property, Plant and Equipment | Property, Plant and Equipment | Property, Plant and Equipment | ||||||||||||||||||||
| Land and land improvements | 2,891 | 2,416 | Land and land improvements | 6,788 | 6,059 | |||||||||||||||||
| Buildings | 40,774 | 36,809 | Buildings | 36,217 | 37,606 | |||||||||||||||||
| Machinery and equipment | 182,045 | 188,201 | Machinery and equipment | 186,489 | 182,045 | |||||||||||||||||
| 225,710 | 227,426 | 229,494 | 225,710 | |||||||||||||||||||
| Less accumulated depreciation | 129,559 | 114,302 | Less accumulated depreciation | 118,821 | 129,559 | |||||||||||||||||
| 96,151 | 113,124 | 110,673 | 96,151 | |||||||||||||||||||
| Other Assets | Other Assets | Other Assets | ||||||||||||||||||||
| Goodwill | 82,278 | 81,464 | Goodwill | 82,565 | 82,278 | |||||||||||||||||
| Net assets held for sale | 2,321 | 19,205 | Net assets held for sale | 3,027 | 2,321 | |||||||||||||||||
| Other | 62,191 | 52,083 | Other | 69,238 | 62,191 | |||||||||||||||||
| $ | 507,452 | $ | 540,858 | $ | 610,022 | $ | 507,452 | |||||||||||||||
LIABILITIES and SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||
| Current Liabilities | Current Liabilities | Current Liabilities | ||||||||||||||||||||
| Trade accounts payable | $ | 66,158 | $ | 74,868 | Trade accounts payable | $ | 108,868 | $ | 66,158 | |||||||||||||
| Accrued expenses | 46,623 | 48,907 | Accrued expenses | 60,003 | 46,623 | |||||||||||||||||
| Current portion of long-term liabilities | 2,811 | 3,056 | Current portion of long-term liabilities | 5,812 | 2,811 | |||||||||||||||||
| Total Current Liabilities | 115,592 | 126,831 | Total Current Liabilities | 174,683 | 115,592 | |||||||||||||||||
| Long-Term Liabilities, less current portion 9.25% Senior Subordinated Notes due 2007 | 199,930 | 199,930 | ||||||||||||||||||||
| Long-Term Liabilities, less current portion | Long-Term Liabilities, less current portion | |||||||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 210,000 | -0- | ||||||||||||||||||||
| 9.25% Senior Subordinated Notes due 2007 | -0- | 199,930 | ||||||||||||||||||||
| Revolving credit | 101,000 | 114,000 | Revolving credit | 120,600 | 101,000 | |||||||||||||||||
| Other long-term debt | 8,234 | 9,886 | Other long-term debt | 4,776 | 8,234 | |||||||||||||||||
| Other postretirement benefits and other long-term liabilities | 26,671 | 27,312 | Other postretirement benefits and other long-term liabilities | 27,570 | 26,671 | |||||||||||||||||
| 335,835 | 351,128 | 362,946 | 335,835 | |||||||||||||||||||
| Shareholders’ Equity | Shareholders’ Equity | Shareholders’ Equity | ||||||||||||||||||||
| Capital stock, par value $1 per share | Capital stock, par value $1 per share | |||||||||||||||||||||
| Serial preferred stock: | Serial preferred stock: | |||||||||||||||||||||
| Authorized—632,470 shares; Issued and outstanding—none | -0- | -0- | Authorized — 632,470 shares; Issued and outstanding — none | -0- | -0- | |||||||||||||||||
| Common stock: | Common stock: | |||||||||||||||||||||
| Authorized—40,000,000 shares; Issued—11,288,195 shares in 2003 and 11,209,862 in 2002. | 11,288 | 11,210 | Authorized — 40,000,000 shares; Issued — 11,546,943 shares in 2004 and 11,288,195 in 2003 | 11,547 | 11,288 | |||||||||||||||||
| Additional paid-in capital | 55,858 | 56,135 | Additional paid-in capital | 56,530 | 55,858 | |||||||||||||||||
| Retained earnings | 1,007 | 12,828 | Retained earnings | 15,206 | 1,007 | |||||||||||||||||
| Treasury stock, at cost, 725,676 shares in 2003 and 713,671 in 2002 | (8,864 | ) | (9,092 | ) | Treasury stock, at cost, 725,676 shares in 2004 and 2003 | (8,864 | ) | (8,864 | ) | |||||||||||||
| Accumulated other comprehensive loss | (3,264 | ) | (8,096 | ) | Accumulated other comprehensive loss | (1,676 | ) | (3,264 | ) | |||||||||||||
| Unearned compensation—restricted stock awards | -0- | (86 | ) | Unearned compensation — restricted stock awards | (350 | ) | -0- | |||||||||||||||
| 56,025 | 62,899 | 72,393 | 56,025 | |||||||||||||||||||
| $ | 507,452 | $ | 540,858 | $ | 610,022 | $ | 507,452 | |||||||||||||||
See notes to consolidated financial statements.
2427
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Operations
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||||
| (Dollars in thousands, | (Dollars in thousands, | |||||||||||||||||||||||||||
| except per share data) | except per share data) | |||||||||||||||||||||||||||
| Net sales | Net sales | $ | 624,295 | $ | 634,455 | $ | 636,417 | Net sales | $ | 808,718 | $ | 624,295 | $ | 634,455 | ||||||||||||||
| Cost of products sold | Cost of products sold | 527,586 | 546,857 | 552,293 | Cost of products sold | 682,658 | 527,586 | 546,857 | ||||||||||||||||||||
| Gross profit | 96,709 | 87,598 | 84,124 | Gross profit | 126,060 | 96,709 | 87,598 | |||||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 62,667 | 57,830 | 66,623 | Selling, general and administrative expenses | 77,048 | 62,667 | 57,830 | ||||||||||||||||||||
| Amortization of goodwill | -0- | -0- | 3,733 | |||||||||||||||||||||||||
| Restructuring and impairment charges | Restructuring and impairment charges | 18,808 | 13,601 | 18,163 | Restructuring and impairment charges | -0- | 18,808 | 13,601 | ||||||||||||||||||||
| Operating income (loss) | 15,234 | 16,167 | (4,395 | ) | Operating income | 49,012 | 15,234 | 16,167 | ||||||||||||||||||||
| Non-operating items, net | -0- | -0- | 1,850 | |||||||||||||||||||||||||
| Interest expense | Interest expense | 26,151 | 27,623 | 31,108 | Interest expense | 31,413 | 26,151 | 27,623 | ||||||||||||||||||||
| Loss before income taxes and cumulative effect of accounting change | (10,917 | ) | (11,456 | ) | (37,353 | ) | Income (loss) before income taxes and cumulative effect of accounting change | 17,599 | (10,917 | ) | (11,456 | ) | ||||||||||||||||
| Income taxes (benefit) | 904 | 897 | (11,400 | ) | ||||||||||||||||||||||||
| Income taxes | Income taxes | 3,400 | 904 | 897 | ||||||||||||||||||||||||
| Loss before cumulative effect of accounting change | (11,821 | ) | (12,353 | ) | (25,953 | ) | Income (loss) before cumulative effect of accounting change | 14,199 | (11,821 | ) | (12,353 | ) | ||||||||||||||||
| Cumulative effect of accounting change | Cumulative effect of accounting change | -0- | (48,799 | ) | -0- | Cumulative effect of accounting change | -0- | -0- | (48,799 | ) | ||||||||||||||||||
| Net loss | $ | (11,821 | ) | $ | (61,152 | ) | $ | (25,953 | ) | Net income (loss) | $ | 14,199 | $ | (11,821 | ) | $ | (61,152 | ) | ||||||||||
| Amounts per common share (basic and diluted): | ||||||||||||||||||||||||||||
| Amounts per common share — basic: | Amounts per common share — basic: | |||||||||||||||||||||||||||
| Loss before cumulative effect of accounting change | $ | (1.13 | ) | $ | (1.18 | ) | $ | (2.49 | ) | Income (loss) before cumulative effect of accounting change | $ | 1.34 | $ | (1.13 | ) | $ | (1.18 | ) | ||||||||||
| Cumulative effect of accounting change | $ | —0- | $ | (4.68 | ) | $ | —0- | Cumulative effect of accounting change | $ | -0- | $ | -0- | $ | (4.68 | ) | |||||||||||||
| Net loss | $ | (1.13 | ) | $ | (5.86 | ) | $ | (2.49 | ) | Net income (loss) | $ | 1.34 | $ | (1.13 | ) | $ | (5.86 | ) | ||||||||||
| Amounts per common share — diluted: | Amounts per common share — diluted: | |||||||||||||||||||||||||||
| Income (loss) before cumulative effect of accounting change | $ | 1.27 | $ | (1.13 | ) | $ | (1.18 | ) | ||||||||||||||||||||
| Cumulative effect of accounting change | $ | -0- | $ | -0- | $ | (4.68 | ) | |||||||||||||||||||||
| Net income (loss) | $ | 1.27 | $ | (1.13 | ) | $ | (5.86 | ) | ||||||||||||||||||||
See notes to consolidated financial statements.
2528
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common | Paid-In | Retained | Treasury | Comprehensive | Unearned | Common | Paid-In | Retained | Treasury | Comprehensive | Unearned | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock | Capital | Earnings | Stock | Income (Loss) | Compensation | Total | Stock | Capital | Earnings | Stock | Income (Loss) | Compensation | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2001, as previously stated | $ | 11,210 | $ | 56,135 | $ | 97,192 | $ | (9,092 | ) | $ | (2,858 | ) | $ | (461 | ) | $ | 152,126 | |||||||||||||||||||||||||||||||||||||||||
| Adjustment for the cumulative effect on the prior years of applying retroactively the change in the method of accounting for inventories (See Note B) | 2,741 | 2,741 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2001, as restated | 11,210 | 56,135 | 99,933 | (9,092 | ) | (2,858 | ) | (461 | ) | 154,867 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2002 | Balance at January 1, 2002 | $ | 11,210 | $ | 56,135 | $ | 73,980 | $ | (9,092 | ) | $ | (4,252 | ) | $ | (273 | ) | $ | 127,708 | ||||||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | Amortization of restricted stock | 188 | 188 | Amortization of restricted stock | 187 | 187 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | Comprehensive income (loss): | Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | (25,953 | ) | (25,953 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (1,394 | ) | (1,394 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) | (27,347 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2001 | 11,210 | 56,135 | 73,980 | (9,092 | ) | (4,252 | ) | (273 | ) | 127,708 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | 187 | 187 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | (61,152 | ) | (61,152 | ) | Net loss | (61,152 | ) | (61,152 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 1,711 | 1,711 | Foreign currency translation adjustment | 1,711 | 1,711 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability | (5,555 | ) | (5,555 | ) | Minimum pension liability | (5,555 | ) | (5,555 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) | (64,996 | ) | Comprehensive (loss) | (64,996 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2002 | Balance at December 31, 2002 | 11,210 | 56,135 | 12,828 | (9,092 | ) | (8,096 | ) | (86 | ) | 62,899 | Balance at December 31, 2002 | 11,210 | 56,135 | 12,828 | (9,092 | ) | (8,096 | ) | (86 | ) | 62,899 | ||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | Amortization of restricted stock | 86 | 86 | Amortization of restricted stock | 86 | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss): | Comprehensive (loss): | Comprehensive (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | (11,821 | ) | (11,821 | ) | Net loss | (11,821 | ) | (11,821 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 3,632 | 3,632 | Foreign currency translation adjustment | 3,632 | 3,632 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability | 1,200 | 1,200 | Minimum pension liability | 1,200 | 1,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) | (6,989 | ) | Comprehensive (loss) | (6,989 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options (110,533 shares) | 78 | (277 | ) | 228 | 29 | Exercise of stock options (110,533 shares) | 78 | (277 | ) | 228 | 29 | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2003 | Balance at December 31, 2003 | $ | 11,288 | $ | 55,858 | $ | 1,007 | $ | (8,864 | ) | $ | (3,264 | ) | $ | -0- | $ | 56,025 | Balance at December 31, 2003 | 11,288 | 55,858 | 1,007 | (8,864 | ) | (3,264 | ) | -0- | 56,025 | |||||||||||||||||||||||||||||||
| Comprehensive income (loss): | Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 14,199 | 14,199 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 2,071 | 2,071 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minimum pension liability | (483 | ) | (483 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | 15,787 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock award | Restricted stock award | 28 | 405 | (433 | ) | -0- | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of restricted stock | Amortization of restricted stock | 83 | 83 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options (231,748 shares) | Exercise of stock options (231,748 shares) | 231 | 267 | 498 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2004 | Balance at December 31, 2004 | $ | 11,547 | $ | 56,530 | $ | 15,206 | $ | (8,864 | ) | $ | (1,676 | ) | $ | (350 | ) | $ | 72,393 | ||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
2629
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31 | Year Ended December 31, | ||||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | ||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||
| OPERATING ACTIVITIES | OPERATING ACTIVITIES | OPERATING ACTIVITIES | |||||||||||||||||||||||||
| Net loss | $ | (11,821 | ) | $ | (61,152 | ) | $ | (25,953 | ) | ||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 14,199 | $ | (11,821 | ) | $ | (61,152 | ) | ||||||||||||||||||
| Adjustments to reconcile net loss to net cash provided by operations: | Adjustments to reconcile net loss to net cash provided by operations: | Adjustments to reconcile net loss to net cash provided by operations: | |||||||||||||||||||||||||
| Cumulative effect of accounting change | -0- | 48,799 | -0- | Cumulative effect of accounting change | -0- | -0- | 48,799 | ||||||||||||||||||||
| Depreciation and amortization | 15,562 | 16,307 | 19,911 | Depreciation and amortization | 15,468 | 15,562 | 16,307 | ||||||||||||||||||||
| Restructuring and impairment charges | 18,641 | 10,399 | 16,362 | Restructuring and impairment charges | -0- | 18,641 | 10,399 | ||||||||||||||||||||
| Deferred income taxes | -0- | 1,951 | (6,473 | ) | Deferred income taxes | -0- | -0- | 1,951 | |||||||||||||||||||
| Changes in operating assets and liabilities excluding acquisitions of businesses: | Changes in operating assets and liabilities excluding acquisitions of businesses: | Changes in operating assets and liabilities excluding acquisitions of businesses: | |||||||||||||||||||||||||
| Accounts receivable | 539 | 4,652 | 16,257 | Accounts receivable | (35,606 | ) | 539 | 4,652 | |||||||||||||||||||
| Inventories | 6,991 | 4,682 | 34,327 | Inventories | (26,541 | ) | 6,991 | 4,682 | |||||||||||||||||||
| Accounts payable and accrued expenses | (11,984 | ) | 15,787 | (24,048 | ) | Accounts payable and accrued expenses | 39,419 | (11,984 | ) | 15,787 | |||||||||||||||||
| Other | (4,623 | ) | (12,847 | ) | (6,617 | ) | Other | (5,306 | ) | (4,623 | ) | (12,847 | ) | ||||||||||||||
| Net cash provided by operating activities | 13,305 | 28,578 | 23,766 | Net cash provided by operating activities | 1,633 | 13,305 | 28,578 | ||||||||||||||||||||
| INVESTING ACTIVITIES | INVESTING ACTIVITIES | INVESTING ACTIVITIES | |||||||||||||||||||||||||
| Purchases of property, plant and equipment, net | Purchases of property, plant and equipment, net | (10,869 | ) | (14,731 | ) | (13,923 | ) | Purchases of property, plant and equipment, net | (11,955 | ) | (10,869 | ) | (14,731 | ) | |||||||||||||
| Costs of acquisitions, net of cash acquired | Costs of acquisitions, net of cash acquired | -0- | (5,748 | ) | -0- | Costs of acquisitions, net of cash acquired | (9,997 | ) | -0- | (5,748 | ) | ||||||||||||||||
| Proceeds from the sale of business units | Proceeds from the sale of business units | 7,340 | 2,486 | 6,051 | Proceeds from the sale of business units | -0- | 7,340 | 2,486 | |||||||||||||||||||
| Net cash used by investing activities | (3,529 | ) | (17,993 | ) | (7,872 | ) | Net cash used by investing activities | (21,952 | ) | (3,529 | ) | (17,993 | ) | ||||||||||||||
| FINANCING ACTIVITIES | FINANCING ACTIVITIES | FINANCING ACTIVITIES | |||||||||||||||||||||||||
| Proceeds from financing arrangements | 112,000 | 6,749 | 19,000 | ||||||||||||||||||||||||
| Proceeds from bank arrangements, net | Proceeds from bank arrangements, net | 18,012 | 112,000 | 6,749 | |||||||||||||||||||||||
| Payments on long-term debt | Payments on long-term debt | (126,899 | ) | (12,394 | ) | (33,634 | ) | Payments on long-term debt | (199,930 | ) | (126,899 | ) | (12,394 | ) | |||||||||||||
| Issuance of 8.375% Senior Subordinated Notes, net of deferred financing costs | Issuance of 8.375% Senior Subordinated Notes, net of deferred financing costs | 205,178 | -0- | -0- | |||||||||||||||||||||||
| Issuance of common stock under stock option plan | Issuance of common stock under stock option plan | 29 | -0- | -0- | Issuance of common stock under stock option plan | 498 | 29 | -0- | |||||||||||||||||||
| Net cash used by financing activities | (14,870 | ) | (5,645 | ) | (14,634 | ) | Net cash provided (used) by financing activities | 23,758 | (14,870 | ) | (5,645 | ) | |||||||||||||||
| (Decrease) Increase in Cash and Cash equivalents | (5,094 | ) | 4,940 | 1,260 | Increase (decrease) in cash and cash equivalents | 3,439 | (5,094 | ) | 4,940 | ||||||||||||||||||
| Cash and Cash Equivalents at Beginning of Year | 8,812 | 3,872 | 2,612 | Cash and cash equivalents at beginning of year | 3,718 | 8,812 | 3,872 | ||||||||||||||||||||
| Cash and Cash Equivalents at End of Year | $ | 3,718 | $ | 8,812 | $ | 3,872 | Cash and cash equivalents at end of year | $ | 7,157 | $ | 3,718 | $ | 8,812 | ||||||||||||||
| Taxes refunded | $ | (1,038 | ) | $ | (4,817 | ) | $ | (3,346 | ) | ||||||||||||||||||
| Income taxes paid (refunded) | Income taxes paid (refunded) | $ | 3,370 | $ | (1,038 | ) | $ | (4,817 | ) | ||||||||||||||||||
| Interest paid | Interest paid | 25,213 | 25,880 | 28,554 | Interest paid | 28,891 | 25,213 | 25,880 | |||||||||||||||||||
See notes to consolidated financial statements.
2730
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
December 31, 2004, 2003 2002 and 20012002
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 $18,817$18,500 and $23,385$18,817 at December 31, 20032004 and 2002,2003, respectively.
Major Classes of Inventories
| December 31 | December 31, | |||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||
| In-process and finished goods | $ | 121,154 | $ | 136,430 | $ | 151,759 | $ | 121,154 | ||||||||
| Raw materials and supplies | 27,921 | 19,637 | 25,535 | 27,921 | ||||||||||||
| $ | 149,075 | $ | 156,067 | $ | 177,294 | $ | 149,075 | |||||||||
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 3-183-16 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 forty40 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:On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123” (“FAS 148”).
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
FAS 148 amends the Accounting for Stock-Based Compensation, to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provision of FAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Statement is effective for fiscal years beginning after December 15, 2002.
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 148.148”). 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 lossincome (loss) and diluted lossincome (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 and $311 ($.03 per share) to ($26,264) in 2001.2002.
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 2002 and 2001,2002, respectively: risk-free interest rates of 3.85%3.5%, 3.85% and 4.00%3.85%; zero dividend yield; expected volatility of 49%52%, 49% and 48%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 5%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, 2003,2004, the Company had uncollateralized receivables with sevensix customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $28,365,$44,522, which repre-
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
sentedrepresented approximately 27%31% of the Company’s trade accounts receivable. During 2003,2004, sales to these customers amounted to approximately $185,248,$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 whichthat 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 June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“FAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) 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).” FAS 146 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. Under EITF Issue 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. FAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002. FAS 146 has no effect on charges recorded for exit activities begun prior to 2003. The adoption of this statement did not have a material effect on the Company’s financial position or results of operation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has adopted the provisions of FIN 45 relating to initial recognition and measurements of guarantor liabilities, which are effective for qualifying guarantees entered into or modified after December 15, 2002. The adoption did not have a material impact on the consolidated financial statements.
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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 January 2004,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 FASB Staff Position (“FSP”) 106-1,FAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“the Act”).2003,” to
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
provide guidance on accounting for effects of this healthcare benefit legislation. The FSP permits a sponsortreats the effect of athe employer subsidy on the accumulated postretirement health care plan that provides a prescription drug 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 make a one-time election to defer accounting for thecurrent service. The effects of plan amendments adopted subsequent to the Act. Regardless of whether a sponsor elects that deferral, the FSP requires certain disclosures pending further considerationadoption of the underlying accounting issues.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 electedcompleted its assessment of the provisions of the Medicare Act on its postretirement healthcare plans. The effect of the Medicare Act is a reduction to deferthe 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 effects of the Act.repatriation provision. The Company is currently evaluatingreviewing the impactimplication 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 itsthe Company’s financial position, and results of operations.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 ($4.4 million),$4,400, increase deferred tax liabilities ($1.7 million)1,700), and increase shareholders’ equity ($2.7 million).$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).
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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, 20022003 and December 31, 2003.2004.
| Impairment Charge | Impairment Charge | |||||||||||||||||||||||
| Reporting | recorded effective | Goodwill at | Goodwill at | recorded effective | Goodwill at | Goodwill at | ||||||||||||||||||
| Segment | January 1, 2002 | December 31, 2002 | December 31, 2003 | January 1, 2002 | December 31, 2003 | December 31, 2004 | ||||||||||||||||||
| ILS | $ | 32,239 | $ | 64,949 | $ | 65,763 | $ | 32,239 | $ | 65,763 | $ | 66,050 | ||||||||||||
| Aluminum Products | 9,700 | 16,515 | 16,515 | 9,700 | 16,515 | 16,515 | ||||||||||||||||||
| Manufactured Products | 6,860 | -0- | -0- | 6,860 | -0- | -0- | ||||||||||||||||||
| $ | 48,799 | $ | 81,464 | $ | 82,278 | $ | 48,799 | $ | 82,278 | $ | 82,565 | |||||||||||||
The increase in the goodwill in the ILS segment during 2003 and 2004 results from foreign currency fluctuations.
In accordance with FAS 142, prior period amounts have not been restated. The following table summarizes the reported results for 2001, and the results that would have been reported had the non-amortization provisions of FAS 142 been in effect for that year.
| December 31 | ||||
| 2001 | ||||
| Reported net loss | $ | (25,953 | ) | |
| Amortization of goodwill adjustment, net of tax | 3,315 | |||
| Adjusted net loss | $ | (22,638 | ) | |
| Reported loss per share—basic and diluted | $ | (2.49 | ) | |
| Amortization of goodwill adjustment | .32 | |||
| Adjusted loss per share—basic and diluted | $ | (2.17 | ) | |
NOTE D — Acquisitions and Dispositions
During the first quarter of 2003,On August 23, 2004, the Company completed the sale ofacquired substantially all of the assets of Green Bearingthe Automotive Components Group (“Green”Amcast Components Group”) of Amcast Industrial Corporation. The purchase price was approximately $10,000 in cash and St. Louis Screw and Bolt (“St. Louis Screw”) for cashthe 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.
32 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
$7,300. No gain or loss was The tentative allocation of the purchase price is as follows:
| Cash acquisition price | $ | 10,000 | |||
| Assets | |||||
| Accounts receivable | (8,931 | ) | |||
| Inventories | (1,677 | ) | |||
| Property and equipment | (16,964 | ) | |||
| Other | (115 | ) | |||
| Liabilities | |||||
| Accounts payable | 4,041 | ||||
| Compensation accruals | 5,504 | ||||
| Other accruals | 8,142 | ||||
| Goodwill | $ | -0- | |||
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 on the sale. Greenaccruals for severance, exit and St. Louis Screw were non-core businessesrelocation costs in the ILS Segmentpurchase price allocation. A reconciliation of the beginning and Manufactured Products Segment, respectively, and had been identifiedending accrual balances is as businesses the Company was selling as part of its restructuring activities during 2002 and 2001.follows:
| Severance | Exit | Relocation | Total | |||||||||||||
| Balance at June 30, 2004 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
| Add: Accruals | 1,916 | 100 | 265 | 2,281 | ||||||||||||
| Less: Payments | 295 | -0- | 2 | 297 | ||||||||||||
| Balance at December 31, 2004 | $ | 1,621 | $ | 100 | $ | 263 | $ | 1,984 | ||||||||
On September 10, 2002,April 1, 2004, the Company acquired substantially allthe remaining 66% of the assetscommon stock of Japan Ajax Magnethermic CorporationCompany (“Ajax”Jamco”), a manufacturer for cash existing on the balance sheet of induction heating and melting equipment.Jamco at that date. No additional purchase price was paid by the Company. The purchase price of approximately $5,500 and the results of operations of AjaxJamco prior to its date of acquisition were not deemed significant as defined in Regulation S-X.
On April 26, 2002, the Company completed the sale of substantially all of the assets of Castle Rubber Company for cash of approximately $2,500. Castle Rubber, a non-core business in the Manufactured Products Segment, had been identified as a business the Company was discontinuing as part of its restructuring activities during 2001. No gain or loss was recorded on the sale.
On December 21, 2001, the Company completed the sale of substantially all of the assets of Cleveland City Forge for cash of approximately $6,100 and recorded a gain of approximately $100. Cleveland City Forge was a non-core business in the Manufactured Products Segment, producing clevises and turnbuckles for the construction industry.
NOTE E — Other Assets
Other assets consists of the following:
| December 31 | December 31, | |||||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||
| Pension assets | Pension assets | $ | 36,186 | $ | 32,816 | Pension assets | $ | 41,295 | $ | 36,186 | ||||||||
| Idle assets | Idle assets | 6,516 | -0- | Idle assets | 6,040 | 6,516 | ||||||||||||
| Deferred financing costs | Deferred financing costs | 5,774 | 4,636 | Deferred financing costs | 7,846 | 5,774 | ||||||||||||
| Tooling | Tooling | 4,222 | 4,213 | Tooling | 3,570 | 4,222 | ||||||||||||
| Software development costs | Software development costs | 3,947 | 4,118 | Software development costs | 3,390 | 3,947 | ||||||||||||
| Other | Other | 5,546 | 6,300 | Other | 7,097 | 5,546 | ||||||||||||
| Totals | $ | 62,191 | $ | 52,083 | Totals | $ | 69,238 | $ | 62,191 | |||||||||
NOTE F — Accrued Expenses
Accrued expenses include the following:
| December 31 | |||||||||
| 2003 | 2002 | ||||||||
| Accrued salaries, wages and benefits | $ | 9,484 | $ | 10,583 | |||||
| Advance billings | 8,496 | 6,594 | |||||||
| Warranty and installation accruals | 6,762 | 8,990 | |||||||
| Severance and exit costs | 2,535 | 4,045 | |||||||
| Interest payable | 2,055 | 3,529 | |||||||
| State and local taxes | 3,809 | 3,206 | |||||||
| Sundry | 13,482 | 11,960 | |||||||
| Totals | $ | 46,623 | $ | 48,907 | |||||
Substantially all advance billings and warranty and installation accruals relate to the Company’s capital equipment businesses.
3337
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE F — Accrued Expenses
Accrued expenses include the following:
| December 31, | |||||||||
| 2004 | 2003 | ||||||||
| Accrued salaries, wages and benefits | $ | 14,098 | $ | 9,484 | |||||
| Advance billings | 10,059 | 8,496 | |||||||
| Warranty, project and installation accruals | 5,660 | 6,762 | |||||||
| Severance and exit costs | 2,175 | 2,535 | |||||||
| Interest payable | 2,022 | 2,055 | |||||||
| State and local taxes | 4,553 | 3,809 | |||||||
| Sundry | 21,436 | 13,482 | |||||||
| Totals | $ | 60,003 | $ | 46,623 | |||||
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, 20032004 and 2002:2003:
| December 31 | December 31, | |||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||
| Balance at beginning of year | $ | 6,506 | $ | 997 | $ | 5,614 | $ | 6,506 | ||||||||
| Claims paid during the year | (2,399 | ) | (1,430 | ) | (4,708 | ) | (2,399 | ) | ||||||||
| Additional warranties issued during year | 1,139 | 1,858 | 2,874 | 1,139 | ||||||||||||
| Acquired warranty liabilities | -0- | 5,081 | 501 | -0- | ||||||||||||
| Other | 368 | -0- | -0- | 368 | ||||||||||||
| Balance at end of year | $ | 5,614 | $ | 6,506 | $ | 4,281 | $ | 5,614 | ||||||||
The acquired warranty liability during 20022004 reflects the warranty liability of Ajax,Jamco, which was acquired in September, 2002.April 2004.
NOTE G — Financing Arrangements
Long-term debt consists of the following:
| December 31 | December 31, | |||||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||
| 9.25% Senior Subordinated Notes due 2007. | $ | 199,930 | $ | 199,930 | ||||||||||||||
| Revolving credit maturing on June 30, 2004. | -0- | 114,000 | ||||||||||||||||
| Revolving credit maturing on July 30, 2007. | 101,000 | -0- | ||||||||||||||||
| 8.375% Senior Subordinated Notes due 2014 | 8.375% Senior Subordinated Notes due 2014 | $ | 210,000 | $ | -0- | |||||||||||||
| 9.25% Senior Subordinated Notes due 2007 | 9.25% Senior Subordinated Notes due 2007 | -0- | 199,930 | |||||||||||||||
| Revolving credit maturing on December 31, 2010 | Revolving credit maturing on December 31, 2010 | 120,600 | 101,000 | |||||||||||||||
| Industrial Development Revenue Bonds maturing in 2012 at interest rates from 2.00% to 4.15% | Industrial Development Revenue Bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 4,478 | 4,863 | Industrial Development Revenue Bonds maturing in 2012 at interest rates from 2.00% to 4.15% | 4,041 | 4,478 | ||||||||||||
| Other | Other | 4,817 | 6,329 | Other | 3,666 | 4,817 | ||||||||||||
| 310,225 | 325,122 | 338,307 | 310,225 | |||||||||||||||
| Less current maturities | Less current maturities | 1,061 | 1,306 | Less current maturities | 2,931 | 1,061 | ||||||||||||
| Total | $ | 309,164 | $ | 323,816 | Total | $ | 335,376 | $ | 309,164 | |||||||||
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Maturities of long-term debt during each of the five years following December 31, 20032004 are approximately $1,061 in 2004, $1,011$2,931 in 2005, $1,016$821 in 2006, $301,969$836 in 2007, $674 in 2008 and $804$689 in 2008.2009.
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 $165,000.$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 whichthat provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2003,2004, the Company had approximately $47,500$53,941 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (4.00%(5.25% at December 31, 2003)2004) or, at Park-Ohio’sthe Company’s election, at LIBOR plus 1.75%-2.50%.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, 2003,2004, in addition to amounts borrowed under the Credit Agreement, there is $7,900was $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 July 30, 2007December 31, 2010 and borrowings are secured by substantially all of the Company’s assets.
34 A foreign subsidiary of the Company had outstanding standby letters of credit of $1,485 at December 31, 2004 under its credit arrangement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 Senior Subordinated8.375% Notes and the revolving credit agreementCredit 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, 2003,2004, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 7.26%6.84% at December 31, 2003.2004.
The fair market value of the Senior Subordinated Notes based on published market prices was approximately $201,429 and $129,955 at December 31, 2003 and 2002, respectively. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and borrowings under the credit agreement and the senior subordinated notes approximate fair value at December 31, 20032004 and 2002.2003.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE H — Income Taxes
Income taxes consisted of the following:
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Current (refundable): | ||||||||||||||||||||||||||
| Current payable (refundable): | Current payable (refundable): | |||||||||||||||||||||||||
| Federal | $ | -0- | $ | (2,210 | ) | $ | (5,828 | ) | Federal | $ | (426 | ) | $ | -0- | $ | (2,210 | ) | |||||||||
| State | 16 | 387 | 369 | State | 23 | 16 | 387 | |||||||||||||||||||
| Foreign | 888 | 769 | 532 | Foreign | 3,245 | 888 | 769 | |||||||||||||||||||
| 904 | (1,054 | ) | (4,927 | ) | 2,842 | 904 | (1,054 | ) | ||||||||||||||||||
| Deferred: | Deferred: | Deferred: | ||||||||||||||||||||||||
| Federal | -0- | 1,951 | (6,135 | ) | Federal | -0- | -0- | 1,951 | ||||||||||||||||||
| State | -0- | -0- | (338 | ) | State | -0- | -0- | -0- | ||||||||||||||||||
| Foreign | 558 | -0- | -0- | |||||||||||||||||||||||
| -0- | 1,951 | (6,473 | ) | |||||||||||||||||||||||
| 558 | -0- | 1,951 | ||||||||||||||||||||||||
| Income taxes | Income taxes | $ | 904 | $ | 897 | $ | (11,400 | ) | Income taxes | $ | 3,400 | $ | 904 | $ | 897 | |||||||||||
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:
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
| Computed statutory amount | $ | (3,712 | ) | $ | (3,895 | ) | $ | (12,700 | ) | $ | 5,984 | $ | (3,712 | ) | $ | (3,895 | ) | |||||||
| Effect of state income taxes | 11 | 411 | 20 | 16 | 11 | 411 | ||||||||||||||||||
| Goodwill | -0- | -0- | 668 | |||||||||||||||||||||
| Foreign rate differences | 815 | 599 | 275 | 661 | 815 | 599 | ||||||||||||||||||
| Valuation allowance | 3,695 | 3,475 | -0- | (3,042 | ) | 3,695 | 3,475 | |||||||||||||||||
| Other, net | 95 | 307 | 337 | (219 | ) | 95 | 307 | |||||||||||||||||
| Income taxes (benefit) | $ | 904 | $ | 897 | $ | (11,400 | ) | $ | 3,400 | $ | 904 | $ | 897 | |||||||||||
3540
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| December 31 | December 31, | |||||||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||||
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||
| Postretirement benefit obligation | $ | 7,600 | $ | 8,100 | Postretirement benefit obligation | $ | 7,933 | $ | 7,600 | |||||||||||
| Inventory | 8,400 | 7,200 | Inventory | 11,277 | 8,400 | |||||||||||||||
| Net operating loss and tax credit carryforwards | 14,300 | 10,900 | Net operating loss and tax credit carryforwards | 20,384 | 14,300 | |||||||||||||||
| Goodwill | 6,800 | 6,800 | Other—net | 11,867 | 15,200 | |||||||||||||||
| Other—net | 8,400 | 2,600 | ||||||||||||||||||
| Total deferred tax assets | 51,461 | 45,500 | ||||||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||||||
| Total deferred tax assets | 45,500 | 35,600 | Tax over book depreciation | 15,492 | 13,900 | |||||||||||||||
| Deferred tax liabilities: | ||||||||||||||||||||
| Tax over book depreciation | 13,900 | 12,800 | Pension | 16,725 | 11,400 | |||||||||||||||
| Pension | 11,400 | 10,500 | Deductible goodwill | 1,087 | -0- | |||||||||||||||
| Total deferred tax liabilities | 25,300 | 23,300 | Total deferred tax liabilities | 33,304 | 25,300 | |||||||||||||||
| 20,200 | 12,300 | 18,157 | 20,200 | |||||||||||||||||
| Valuation reserves | Valuation reserves | (20,200 | ) | (12,300 | ) | Valuation reserves | (19,231 | ) | (20,200 | ) | ||||||||||
| Net deferred tax assets | $ | -0- | $ | -0- | ||||||||||||||||
| Net deferred tax liability | Net deferred tax liability | $ | (1,074 | ) | $ | -0- | ||||||||||||||
At December 31, 2003,2004, the Company has net operating loss carryforwards for income tax purposes of approximately $35,700,$47,700, which will expire between 2021 and 2023.2024. 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, 2003 since2004 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 whichthat 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.
During 2001, the Company completed a program (“the Option Offer Program”) whereby all outstanding options to purchase shares of Company common stock held by Company employees and directors were tendered to the Company. Existing options tendered to the Company were cancelled and, in return, participants were entitled to new options on a one for one basis at least six months and one day after the tendered options were cancelled. On November 30, 2001, the Company met its obligation with the issuance of new options to purchase 880,500 shares of Company common stock with exercise prices equal to the fair market value at the date of grant.
3641
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The following table reflects activity under all stock plansin option shares from January 1, 20002002 through December 31, 2003,2004, and the weighted average exercise prices:
| Weighted | |||||||||
| Number of | Average Price | ||||||||
| Shares | Per Share | ||||||||
| Outstanding, January 1, 2001. | 1,089,500 | $ | 13.61 | ||||||
| Granted | 1,220,700 | 1.91 | |||||||
| Cancelled under option offer program | (1,083,500 | ) | 13.61 | ||||||
| Forfeited | (6,000 | ) | 14.40 | ||||||
| Outstanding, December 31, 2001. | 1,220,700 | 1.91 | |||||||
| Granted | 38,000 | 4.07 | |||||||
| Outstanding, December 31, 2002. | 1,258,700 | 1.99 | |||||||
| Granted | 83,000 | 4.82 | |||||||
| Forfeited | (15,667 | ) | 1.91 | ||||||
| Exercised | (110,533 | ) | 1.91 | ||||||
| Outstanding, December 31, 2003. | 1,215,500 | $ | 2.19 | ||||||
| Weighted | |||||||||
| Number of | Average Price | ||||||||
| Shares | Per Share | ||||||||
| Outstanding, January 1, 2002 | 1,220,700 | $ | 1.91 | ||||||
| Granted | 38,000 | 4.07 | |||||||
| Outstanding, December 31, 2002 | 1,258,700 | 1.99 | |||||||
| Granted | 83,000 | 4.82 | |||||||
| Forfeited | (15,667 | ) | 1.91 | ||||||
| Exercised | (110,533 | ) | 1.91 | ||||||
| Outstanding, December 31, 2003 | 1,215,500 | 2.19 | |||||||
| Granted | 21,000 | 7.77 | |||||||
| Forfeited | (11,333 | ) | 7.08 | ||||||
| Exercised | (231,748 | ) | 2.15 | ||||||
| Outstanding, December 31, 2004 | 993,419 | $ | 2.25 | ||||||
The following table summarizes information about options outstanding as of December 31, 2003:2004:
| Options Outstanding | Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||||||||
| Number | Number | Weighted | Number | Number | Weighted | Number | ||||||||||||||||||||||||||||||
| Outstanding | Outstanding | Average | Weighted | Exercisable | Weighted | Outstanding | Average | Weighted | Exercisable | Weighted | ||||||||||||||||||||||||||
| as of | as of | Remaining | Average | as of | Average | as of | Remaining | Average | as of | Average | ||||||||||||||||||||||||||
| December 31, | December 31, | Contractual | Exercise | December 31, | Exercise | December 31, | Contractual | Exercise | December 31, | Exercise | ||||||||||||||||||||||||||
| 2003 | Life | Price | 2003 | Price | ||||||||||||||||||||||||||||||||
| 2004 | 2004 | Life | Price | 2004 | Price | |||||||||||||||||||||||||||||||
| 1,215,500 | 8.04 | $ | 2.19 | 1,035,500 | $ | 2.00 | 993,419 | 6.97 | $ | 2.25 | 951,082 | $ | 2.15 | |||||||||||||||||||||||
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.
3742
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, 20032004 and 2002:2003:
| Postretirement | Postretirement | |||||||||||||||||||||||||||||||
| Pension | Benefits | Pension | Benefits | |||||||||||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 52,481 | $ | 50,564 | $ | 24,869 | $ | 23,403 | $ | 53,075 | $ | 52,481 | $ | 27,366 | $ | 24,869 | ||||||||||||||||
| Service cost | 545 | 399 | 147 | 204 | 291 | 545 | 136 | 147 | ||||||||||||||||||||||||
| Curtailment and settlement | (208 | ) | 2,053 | -0- | -0- | -0- | (208 | ) | -0- | -0- | ||||||||||||||||||||||
| Interest cost | 3,498 | 3,556 | 1,701 | 1,712 | 3,320 | 3,498 | 1,532 | 1,701 | ||||||||||||||||||||||||
| Plan participants’ contributions | -0- | -0- | 247 | 135 | ||||||||||||||||||||||||||||
| Amendments | 566 | -0- | -0- | -0- | ||||||||||||||||||||||||||||
| Actuarial losses (gains) | 1,800 | 1,132 | 3,758 | 1,570 | 2,799 | 1,800 | (637 | ) | 3,758 | |||||||||||||||||||||||
| Benefits and expenses paid | (5,041 | ) | (5,223 | ) | (3,356 | ) | (2,155 | ) | ||||||||||||||||||||||||
| Benefits and expenses paid, net of contributions | (4,748 | ) | (5,041 | ) | (3,717 | ) | (3,109 | ) | ||||||||||||||||||||||||
| Benefit obligation at end of year | $ | 53,075 | $ | 52,481 | $ | 27,366 | $ | 24,869 | $ | 55,303 | $ | 53,075 | $ | 24,680 | $ | 27,366 | ||||||||||||||||
Change in plan assets | ||||||||||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 85,401 | $ | 100,498 | $ | -0- | $ | -0- | $ | 97,603 | $ | 85,401 | $ | -0- | $ | -0- | ||||||||||||||||
| Actual return on plan assets | 17,243 | (8,811 | ) | -0- | -0- | 11,093 | 17,243 | -0- | -0- | |||||||||||||||||||||||
| Settlement accounting | -0- | (1,063 | ) | -0- | -0- | |||||||||||||||||||||||||||
| Company contributions | -0- | -0- | 3,109 | 2,020 | -0- | -0- | 3,717 | 3,109 | ||||||||||||||||||||||||
| Plan participants’ contributions | -0- | -0- | 247 | 135 | ||||||||||||||||||||||||||||
| Benefits and expense paid | (5,041 | ) | (5,223 | ) | (3,356 | ) | (2,155 | ) | ||||||||||||||||||||||||
| Benefits and expenses paid, net of contributions | (4,748 | ) | (5,041 | ) | (3,717 | ) | (3,109 | ) | ||||||||||||||||||||||||
| Fair value of plan assets at end of year | $ | 97,603 | $ | 85,401 | $ | -0- | $ | -0- | $ | 103,948 | $ | 97,603 | $ | -0- | $ | -0- | ||||||||||||||||
| Funded (underfunded) status of the plan | $ | 44,528 | $ | 32,920 | $ | (27,366 | ) | $ | (24,869 | ) | $ | 48,645 | $ | 44,528 | $ | (24,680 | ) | $ | (27,366 | ) | ||||||||||||
| Unrecognized net transition obligation | (487 | ) | (536 | ) | -0- | -0- | (439 | ) | (487 | ) | -0- | -0- | ||||||||||||||||||||
| Unrecognized net actuarial (gain) loss | (7,235 | ) | 1,547 | 5,375 | (303 | ) | (6,929 | ) | (7,235 | ) | 4,639 | 5,375 | ||||||||||||||||||||
| Unrecognized prior service cost (benefit) | 773 | 1,198 | (327 | ) | (407 | ) | 1,210 | 773 | (247 | ) | (327 | ) | ||||||||||||||||||||
| Net amount recognized at year end | $ | 37,579 | $ | 35,129 | $ | (22,318 | ) | $ | (25,579 | ) | $ | 42,487 | $ | 37,579 | $ | (20,288 | ) | $ | (22,318 | ) | ||||||||||||
Amounts recognized in the consolidated balance sheets consists of:
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||
| Prepaid pension cost | Prepaid pension cost | $ | 36,186 | $ | 32,816 | Prepaid pension cost | $ | 41,295 | $ | 36,186 | ||||||||
| Accrued pension cost | Accrued pension cost | (2,962 | ) | (3,526 | ) | Accrued pension cost | (4,211 | ) | (2,962 | ) | ||||||||
| Intangible asset | Intangible asset | -0- | 284 | Intangible asset | 565 | -0- | ||||||||||||
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | 4,355 | 5,555 | Accumulated other comprehensive loss | 4,838 | 4,355 | ||||||||||||
| Net amount recognized at the end of year | $ | 37,579 | $ | 35,129 | Net amount recognized at the end of year | $ | 42,487 | $ | 37,579 | |||||||||
3843
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The pension plan weighted-average asset allocation at year ended 20032004 and 20022003 and target allocation for 2004 are as follows:
| Plan Assets | Plan Assets | |||||||||||||||||||||||
| Target 2004 | 2003 | 2002 | Target 2005 | 2004 | 2003 | |||||||||||||||||||
Asset Category | ||||||||||||||||||||||||
| Equity securities | 60-70 | % | 64.8 | % | 62.7 | % | 60-70 | % | 66.7 | % | 64.8 | % | ||||||||||||
| Debt securities | 25-30 | 26.0 | 28.7 | 20-30 | 20.5 | 26.0 | ||||||||||||||||||
| Other | 5-10 | 9.2 | 8.6 | 7-15 | 12.8 | 9.2 | ||||||||||||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
The Company recorded a minimum pension liability of $4,838 at December 31, 2004 and $4,355 at December 31, 2003, and $5,555 at December 31, 2002, 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 $16,336$17,458 at December 31, 20032004 ($15,57316,336 at December 31, 2002)2003), exceed the fair value of the underlying pension assets of $13,374$13,247 at December 31, 20032004 ($12,04713,374 at December 31, 2002)2003). Amounts were as follows:
| 2003 | 2002 | 2004 | 2003 | |||||||||||||
| Projected benefit obligation | $ | 16,336 | $ | 15,573 | $ | 17,458 | $ | 16,336 | ||||||||
| Accumulated benefit obligation | $ | 16,336 | $ | 15,573 | $ | 17,458 | $ | 16,336 | ||||||||
| Fair value of plan assets | $ | 13,374 | $ | 12,047 | $ | 13,247 | $ | 13,374 | ||||||||
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| Postretirement | Postretirement | |||||||||||||||||||||||||||||||||||||||
| Pension | Benefits | Pension | Benefits | |||||||||||||||||||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||
Weighted-Average assumptions as of December 31 | ||||||||||||||||||||||||||||||||||||||||
| Discount rate | 6.50 | % | 7.00 | % | 6.50 | % | 7.00 | % | 6.00 | % | 6.50 | % | 7.00 | % | 6.00 | % | 6.50 | % | 7.00 | % | ||||||||||||||||||||
| Expected return on plan assets | 8.75 | % | 8.75 | % | N/A | N/A | 8.75 | % | 8.75 | % | 8.75 | % | N/A | N/A | N/A | |||||||||||||||||||||||||
| Rate of compensation increase | 2.00 | % | 2.00 | % | N/A | N/A | N/A | 2.00 | % | 2.00 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||
In determining its expected return on plan assets assumption for the year ended December 31, 2003,2004, 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, 20032004 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.
The Company has elected to defer recognition of the potential effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 until authoritative guidance on the accounting for the federal subsidy is issued.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 2003.2004. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter.
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 291 | $ | 545 | $ | 399 | $ | 136 | $ | 147 | $ | 204 | ||||||||||||
| Interest costs | 3,320 | 3,498 | 3,556 | 1,532 | 1,701 | 1,712 | ||||||||||||||||||
| Expected return on plan assets | (8,313 | ) | (7,229 | ) | (8,394 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (49 | ) | (49 | ) | (49 | ) | -0- | -0- | -0- | |||||||||||||||
| Amortization of prior service cost | 129 | 257 | 319 | (80 | ) | (80 | ) | (79 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | (286 | ) | 361 | (1,055 | ) | 99 | 43 | 11 | ||||||||||||||||
| Benefit (income) costs | $ | (4,908 | ) | $ | (2,617 | ) | $ | (5,224 | ) | $ | 1,687 | $ | 1,811 | $ | 1,848 | |||||||||
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued 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:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Components of net periodic benefit cost | ||||||||||||||||||||||||
| Service costs | $ | 545 | $ | 399 | $ | 590 | $ | 147 | $ | 204 | $ | 179 | ||||||||||||
| Interest costs | 3,498 | 3,556 | 3,506 | 1,701 | 1,712 | 1,663 | ||||||||||||||||||
| Expected return on plan assets | (7,229 | ) | (8,394 | ) | (8,658 | ) | -0- | -0- | -0- | |||||||||||||||
| Transition obligation | (49 | ) | (49 | ) | (56 | ) | -0- | -0- | -0- | |||||||||||||||
| Amortization of prior service cost | 257 | 319 | 363 | (80 | ) | (79 | ) | (79 | ) | |||||||||||||||
| Recognized net actuarial (gain) loss | 361 | (1,055 | ) | (1,720 | ) | 43 | 11 | (28 | ) | |||||||||||||||
| Benefit (income) costs | $ | (2,617 | ) | $ | (5,224 | ) | $ | (5,975 | ) | $ | 1,811 | $ | 1,848 | $ | 1,735 | |||||||||
| Pension | Other | Payments due to | ||||||||||
| Benefits | Benefits | Medicare Subsidy | ||||||||||
| 2005 | $ | 4,512 | $ | 2,881 | $ | -0- | ||||||
| 2006 | 4,386 | 2,568 | 288 | |||||||||
| 2007 | 4,303 | 2,482 | 290 | |||||||||
| 2008 | 4,254 | 2,413 | 285 | |||||||||
| 2009 | 4,285 | 2,319 | 278 | |||||||||
| 2010 to 2014 | 20,567 | 9,875 | 1,199 | |||||||||
The Company recorded $167 of non-cash pension curtailment charges in 2003 and $2,700 in 2002 and $200 in 2001 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:
| 1-Percentage | 1-Percentage | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| Effect on total of service and interest cost components in 2003 | $ | 138 | $ | 104 | ||||
| Effect on post retirement benefit obligation as of December 31, 2003 | $ | 1,767 | $ | 1,545 | ||||
| 1-Percentage | 1-Percentage | |||||||
| Point | Point | |||||||
| Increase | Decrease | |||||||
| Effect on total of service and interest cost components in 2004 | $ | 129 | $ | 110 | ||||
| Effect on post retirement benefit obligation as of December 31, 2004 | $ | 1,797 | $ | 1,558 | ||||
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 and $1,382 in 2001.2002. The Company expects to have no contributioncontributions to its defined benefit plans in 2004.2005.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTE L — Leases
Rental expense for 2004, 2003 and 2002 was $10,588, $10,263 and 2001 was $10,263, $10,749, and $12,638, respectively. Future minimum lease commitments during each of the five years following December 31, 20032004 are as follows: $7,178 in 2004, $5,259$9,820 in 2005, $3,273$7,632 in 2006, $1,600$5,030 in 2007, $1,329$3,993 in 2008, $3,094 in 2009 and $1,856$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 manu-
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
facturingmanufacturing 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.
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Net sales: | Net sales: | Net sales: | ||||||||||||||||||||||||
| ILS | $ | 377,645 | $ | 398,141 | $ | 416,962 | ||||||||||||||||||||
| Aluminum products | 90,080 | 106,148 | 84,846 | |||||||||||||||||||||||
| Manufactured products | 156,570 | 130,166 | 134,609 | |||||||||||||||||||||||
| $ | 624,295 | $ | 634,455 | $ | 636,417 | |||||||||||||||||||||
| Income (loss) before income taxes and amortization of goodwill: | ||||||||||||||||||||||||||
| ILS | $ | 24,893 | $ | 17,467 | $ | 22,944 | ||||||||||||||||||||
| Aluminum products | 10,201 | 4,739 | (2,327 | ) | ||||||||||||||||||||||
| Manufactured products | (13,759 | ) | (1,342 | ) | (14,287 | ) | ||||||||||||||||||||
| $ | 21,335 | $ | 20,864 | $ | 6,330 | |||||||||||||||||||||
| Amortization of goodwill: | ||||||||||||||||||||||||||
| ILS | $ | -0- | $ | -0- | $ | 2,702 | ILS | $ | 453,223 | $ | 377,645 | $ | 398,141 | |||||||||||||
| Aluminum products | -0- | -0- | 745 | Aluminum products | 135,402 | 90,080 | 106,148 | |||||||||||||||||||
| Manufactured products | -0- | -0- | 286 | Manufactured products | 220,093 | 156,570 | 130,166 | |||||||||||||||||||
| $ | -0- | $ | -0- | $ | 3,733 | $ | 808,718 | $ | 624,295 | $ | 634,455 | |||||||||||||||
| Income (loss) before income taxes and change in accounting principle: | Income (loss) before income taxes and change in accounting principle: | Income (loss) before income taxes and change in accounting principle: | ||||||||||||||||||||||||
| ILS | $ | 24,893 | $ | 17,467 | $ | 20,242 | ILS | $ | 29,191 | $ | 24,893 | $ | 17,467 | |||||||||||||
| Aluminum products | 10,201 | 4,739 | (3,072 | ) | Aluminum products | 9,021 | 10,201 | 4,739 | ||||||||||||||||||
| Manufactured products | (13,759 | ) | (1,342 | ) | (14,573 | ) | Manufactured products | 18,890 | (13,759 | ) | (1,342 | ) | ||||||||||||||
| 21,335 | 20,864 | 2,597 | 57,102 | 21,335 | 20,864 | |||||||||||||||||||||
| Corporate costs | (6,101 | ) | (4,697 | ) | (6,992 | ) | Corporate costs | (8,090 | ) | (6,101 | ) | (4,697 | ) | |||||||||||||
| Interest expense | (26,151 | ) | (27,623 | ) | (31,108 | ) | Interest expense | (31,413 | ) | (26,151 | ) | (27,623 | ) | |||||||||||||
| Non-operating items, net | -0- | -0- | (1,850 | ) | ||||||||||||||||||||||
| $ | 17,599 | $ | (10,917 | ) | $ | (11,456 | ) | |||||||||||||||||||
| $ | (10,917 | ) | $ | (11,456 | ) | $ | (37,353 | ) | ||||||||||||||||||
4146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Identifiable assets: | Identifiable assets: | Identifiable assets: | ||||||||||||||||||||||||
| ILS | $ | 267,361 | $ | 273,442 | $ | 312,288 | ILS | $ | 297,002 | $ | 267,361 | $ | 273,442 | |||||||||||||
| Aluminum products | 88,031 | 79,797 | 95,033 | Aluminum products | 105,535 | 88,031 | 79,797 | |||||||||||||||||||
| Manufactured products | 121,331 | 151,880 | 141,774 | Manufactured products | 163,230 | 121,331 | 151,880 | |||||||||||||||||||
| General corporate | 30,729 | 35,739 | 44,022 | General corporate | 44,255 | 30,729 | 35,739 | |||||||||||||||||||
| $ | 507,452 | $ | 540,858 | $ | 593,117 | $ | 610,022 | $ | 507,452 | $ | 540,858 | |||||||||||||||
| Depreciation and amortization expense: | Depreciation and amortization expense: | Depreciation and amortization expense: | ||||||||||||||||||||||||
| ILS | $ | 4,868 | $ | 5,206 | $ | 8,441 | ILS | $ | 4,608 | $ | 4,868 | $ | 5,206 | |||||||||||||
| Aluminum products | 5,342 | 6,432 | 5,532 | Aluminum products | 5,858 | 5,342 | 6,432 | |||||||||||||||||||
| Manufactured products | 5,050 | 4,307 | 5,632 | Manufactured products | 4,728 | 5,050 | 4,307 | |||||||||||||||||||
| General corporate | 302 | 362 | 306 | General corporate | 274 | 302 | 362 | |||||||||||||||||||
| $ | 15,562 | $ | 16,307 | $ | 19,911 | $ | 15,468 | $ | 15,562 | $ | 16,307 | |||||||||||||||
| Capital expenditures: | Capital expenditures: | Capital expenditures: | ||||||||||||||||||||||||
| ILS | $ | 3,017 | $ | 1,603 | $ | 1,972 | ILS | $ | 3,691 | $ | 3,017 | $ | 1,603 | |||||||||||||
| Aluminum products | 1,878 | 5,927 | 3,160 | Aluminum products | 5,497 | 1,878 | 5,927 | |||||||||||||||||||
| Manufactured products | 5,867 | 6,355 | 8,352 | Manufactured products | 2,712 | 5,867 | 6,355 | |||||||||||||||||||
| General corporate | 107 | 846 | 439 | General corporate | 55 | 107 | 846 | |||||||||||||||||||
| $ | 10,869 | $ | 14,731 | $ | 13,923 | $ | 11,955 | $ | 10,869 | $ | 14,731 | |||||||||||||||
The Company had sales of $95,610 in 2004 and $68,238 in 2003 to NavistarInternational Truck, which represented approximately 12% and 11% of consolidated net sales.sales for each respective year. For 2002, and 2001, 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:
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31 | December 31, | |||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||
| United States | 83 | % | 80 | % | 88 | % | 74 | % | 83 | % | 80 | % | ||||||||||||
| Canada | 8 | % | 13 | % | 7 | % | 9 | % | 8 | % | 13 | % | ||||||||||||
| Other | 9 | % | 7 | % | 5 | % | 17 | % | 9 | % | 7 | % | ||||||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||
At December 31, 2003,2004, approximately 88%86% of the Company’s assets are maintained in the United States.
4247
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):
| Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||
| 2003 | 2002 | 2001 | 2004 | 2003 | 2002 | |||||||||||||||||||||
| NUMERATOR | NUMERATOR | NUMERATOR | ||||||||||||||||||||||||
| Loss before cumulative effect of accounting change | $ | (11,821 | ) | $ | (12,353 | ) | $ | (25,953 | ) | |||||||||||||||||
| Net income (loss) before cumulative effect of accounting change | Net income (loss) before cumulative effect of accounting change | $ | 14,199 | $ | (11,821 | ) | $ | (12,353 | ) | |||||||||||||||||
| Cumulative effect of accounting change | Cumulative effect of accounting change | $ | -0- | $ | (48,799 | ) | $ | -0- | Cumulative effect of accounting change | $ | -0- | $ | -0- | $ | (48,799 | ) | ||||||||||
| Net loss | $ | (11,821 | ) | $ | (61,152 | ) | $ | (25,953 | ) | |||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 14,199 | $ | (11,821 | ) | $ | (61,152 | ) | |||||||||||||||||
| DENOMINATOR | DENOMINATOR | DENOMINATOR | ||||||||||||||||||||||||
| Denominator for basic earnings per share-weighted average shares | Denominator for basic earnings per share-weighted average shares | 10,506 | 10,434 | 10,434 | Denominator for basic earnings per share-weighted average shares | 10,624 | 10,506 | 10,434 | ||||||||||||||||||
| Effect of dilutive securities: | Effect of dilutive securities: | Effect of dilutive securities: | ||||||||||||||||||||||||
| Employee stock options | (a | ) | (a | ) | (a | ) | Employee stock options | 561 | (a | ) | (a | ) | ||||||||||||||
| Denominator for diluted earnings per share-weighted-average shares and assumed conversions | Denominator for diluted earnings per share-weighted-average shares and assumed conversions | 10,506 | 10,434 | 10,434 | Denominator for diluted earnings per share-weighted-average shares and assumed conversions | 11,185 | 10,506 | 10,434 | ||||||||||||||||||
| Amounts per common share (basic and diluted): | ||||||||||||||||||||||||||
| Amounts per common share — basic: | Amounts per common share — basic: | |||||||||||||||||||||||||
| Loss before cumulative effect of accounting change | $ | (1.13 | ) | $ | (1.18 | ) | $ | (2.49 | ) | Income (loss) before cumulative effect of accounting change | $ | 1.34 | $ | (1.13 | ) | $ | (1.18 | ) | ||||||||
| Cumulative effect of accounting change | $ | -0- | $ | (4.68 | ) | $ | -0- | Cumulative effect of accounting change | $ | -0- | $ | -0- | $ | (4.68 | ) | |||||||||||
| Net loss | $ | (1.13 | ) | $ | (5.86 | ) | $ | (2.49 | ) | Net income (loss) | $ | 1.34 | $ | (1.13 | ) | $ | (5.86 | ) | ||||||||
| Amounts per common share — diluted: | Amounts per common share — diluted: | |||||||||||||||||||||||||
| Income (loss) before cumulative effect of accounting change | $ | 1.27 | $ | (1.13 | ) | $ | (1.18 | ) | ||||||||||||||||||
| Cumulative effect of accounting change | $ | -0- | $ | -0- | $ | (4.68 | ) | |||||||||||||||||||
| Net income (loss) | $ | 1.27 | $ | (1.13 | ) | $ | (5.86 | ) | ||||||||||||||||||
| (a) | The addition of 456 shares in 2003 and 291 shares in 2002 |
NOTE O — Accumulated Comprehensive Loss
The components of accumulated comprehensive loss at December 31, 20032004 and 20022003 are as follows:
| December 31 | December 31, | |||||||||||||||||
| 2003 | 2002 | 2004 | 2003 | |||||||||||||||
| Foreign currency translation adjustment | Foreign currency translation adjustment | $ | (1,091 | ) | $ | 2,541 | Foreign currency translation adjustment | $ | (3,162 | ) | $ | (1,091 | ) | |||||
| Minimum pension liability | Minimum pension liability | 4,355 | 5,555 | Minimum pension liability | 4,838 | 4,355 | ||||||||||||
| Total | $ | 3,264 | $ | 8,096 | Total | $ | 1,676 | $ | 3,264 | |||||||||
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
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 million 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.
| Cost of | Cost of | |||||||||||||||||||||||||||||||
| Products | Asset | Restructuring | Products | Asset | Restructuring | |||||||||||||||||||||||||||
| Sold | Impairment | & Severance | Total | Sold | Impairment | & Severance | Total | |||||||||||||||||||||||||
| Manufactured Products | $ | 8,599 | $ | 10,080 | $ | 2,030 | $ | 20,709 | $ | 8,599 | $ | 10,080 | $ | 2,030 | $ | 20,709 | ||||||||||||||||
| ILS | 1,700 | 600 | 4,070 | 6,370 | 1,700 | 600 | 4,070 | 6,370 | ||||||||||||||||||||||||
| Aluminum Products | -0- | -0- | 783 | 783 | -0- | -0- | 783 | 783 | ||||||||||||||||||||||||
| Corporate | -0- | 600 | -0- | 600 | -0- | 600 | -0- | 600 | ||||||||||||||||||||||||
| $ | 10,299 | $ | 11,280 | $ | 6,883 | $ | 28,462 | $ | 10,299 | $ | 11,280 | $ | 6,883 | $ | 28,462 | |||||||||||||||||
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.
| Cost of | Cost of | |||||||||||||||||||||||||||||||||||||||
| Products | Asset | Restructuring | Pension | Products | Asset | Restructuring | Pension | |||||||||||||||||||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | Sold | Impairment | & Severance | Curtailment | Total | |||||||||||||||||||||||||||||||
| ILS | $ | 4,500 | $ | -0- | $ | 2,534 | $ | 2,000 | $ | 9,034 | $ | 4,500 | $ | -0- | $ | 2,534 | $ | 2,000 | $ | 9,034 | ||||||||||||||||||||
| Manufactured Products | 1,128 | 2,103 | 2,628 | 700 | 6,559 | 1,128 | 2,103 | 2,628 | 700 | 6,559 | ||||||||||||||||||||||||||||||
| Aluminum Products | -0- | 3,160 | 437 | -0- | 3,597 | -0- | 3,160 | 437 | -0- | 3,597 | ||||||||||||||||||||||||||||||
| $ | 5,628 | $ | 5,263 | $ | 5,599 | $ | 2,700 | $ | 19,190 | $ | 5,628 | $ | 5,263 | $ | 5,599 | $ | 2,700 | $ | 19,190 | |||||||||||||||||||||
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
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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.
| Cost of | Cost of | |||||||||||||||||||||||||||||||||||||||
| Products | Asset | Restructuring | Pension | Products | Asset | Restructuring | Pension | |||||||||||||||||||||||||||||||||
| Sold | Impairment | & Severance | Curtailment | Total | Sold | Impairment | & Severance | Curtailment | Total | |||||||||||||||||||||||||||||||
| Manufactured Products | $ | 638 | $ | 16,051 | $ | 990 | $ | 1,600 | $ | 19,279 | $ | 638 | $ | 16,051 | $ | 990 | $ | 1,600 | $ | 19,279 | ||||||||||||||||||||
| Aluminum Products | -0- | -0- | -0- | 167 | 167 | -0- | -0- | -0- | 167 | 167 | ||||||||||||||||||||||||||||||
| $ | 638 | $ | 16,051 | $ | 990 | $ | 1,767 | $ | 19,446 | $ | 638 | $ | 16,051 | $ | 990 | $ | 1,767 | $ | 19,446 | |||||||||||||||||||||
The accrued liability for severance and exit costs and related cash payments consisted of:
| Severance and exit charges recorded in 2001 | $ | 6,883 | $ | 6,883 | ||||
| Cash payments made in 2001 | (2,731 | ) | (2,731 | ) | ||||
| Balance at December 31, 2001 | 4,152 | 4,152 | ||||||
| Severance and exit charges recorded in 2002 | 5,599 | 5,599 | ||||||
| Cash payments made in 2002 | (5,706 | ) | (5,706 | ) | ||||
| Balance at December 31, 2002 | 4,045 | 4,045 | ||||||
| Severance and exit charges recorded in 2003 | 990 | 990 | ||||||
| Cash payments made in 2003 | (2,500 | ) | (2,500 | ) | ||||
| Balance at December 31, 2003 | $ | 2,535 | ||||||
| Balance at December 31, 2004 | 2,535 | |||||||
| Severance and exit charges recorded in 2004 | -0- | |||||||
| Cash payments made in 2004 | (2,073 | ) | ||||||
| Balance at December 31, 2004 | $ | 462 | ||||||
As of December 31, 2003,2004, all of the 525 employees identified in 2001 and all but 5 of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan consisted of hourly and salarysalaried employees at various operating facilities due to either closure or consolidation. As of December 31, 2003,2004, the Company had an accrued liability of $2,535$462 for future estimated employee severance and plant closing payments.
Idle fixed assets of $6,516$6,040 were included in other assets as of December 31, 2003.2004. 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, 2003,2004, the Company’s balance sheet reflected assets held for sale at their estimated current value of $2,321$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, and $25,356 in 2001.2002. Operating income (loss), excluding restructuring and unusual charges for these entities were $ -0- in 2004, $(32) in 2003, and $(334) in 2002, and $703 in 2001.2002.
4550
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 $169 of foreign currency losses upon settlement of the forward contracts.
51
Supplementary Financial Data
Selected Quarterly Financial Data (Unaudited)
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||
| 2003 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||||||||||||||||||||
| 2004 | 2004 | March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||||
| Net sales | Net sales | $ | 154,850 | $ | 159,916 | $ | 146,830 | $ | 162,699 | Net sales | $ | 192,370 | $ | 200,908 | $ | 200,875 | $ | 214,565 | ||||||||||||||||
| Gross profit | Gross profit | 24,410 | 25,847 | 21,752 | 24,700 | Gross profit | 30,237 | 33,652 | 31,326 | 30,845 | ||||||||||||||||||||||||
| Restructuring and impairment charges | -0- | -0- | -0- | 18,808 | ||||||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 2,436 | $ | 2,697 | $ | 88 | $ | (17,042 | ) | Net income (loss) | $ | 5,814 | $ | 6,666 | $ | 3,991 | $ | (2,272 | ) | ||||||||||||||
| Amounts per common share: | Amounts per common share: | Amounts per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | .23 | $ | .26 | $ | .01 | $ | (1.62 | ) | Basic | $ | .55 | $ | .63 | $ | .38 | $ | (.21 | ) | |||||||||||||||
| Diluted | $ | .22 | $ | .25 | $ | .01 | $ | (1.62 | ) | Diluted | $ | .52 | $ | .60 | $ | .36 | $ | (.21 | ) | |||||||||||||||
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||
| 2002 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||||||||||||||||||||
| 2003 | 2003 | March 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | (Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||||
| Net sales | Net sales | $ | 153,843 | $ | 166,625 | $ | 157,832 | $ | 156,155 | Net sales | $ | 154,850 | $ | 159,916 | $ | 146,830 | $ | 162,699 | ||||||||||||||||
| Gross profit | Gross profit | 21,698 | 24,380 | 23,193 | 18,327 | Gross profit | 24,410 | 25,847 | 21,752 | 24,700 | ||||||||||||||||||||||||
| Restructuring and impairment charges | Restructuring and impairment charges | 622 | 3,635 | 1,006 | 8,338 | Restructuring and impairment charges | -0- | -0- | -0- | 18,808 | ||||||||||||||||||||||||
| Income (loss) before cumulative effect adjustment | 75 | (547 | ) | (242 | ) | (11,639 | ) | |||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | (48,724 | ) | $ | (547 | ) | $ | (242 | ) | $ | (11,639 | ) | Net income (loss) | $ | 2,436 | $ | 2,697 | $ | 88 | $ | (17,042 | ) | |||||||||||
| Amounts per common share (basic and diluted): | ||||||||||||||||||||||||||||||||||
| Amounts per common share: | Amounts per common share: | |||||||||||||||||||||||||||||||||
| Income (loss) before cumulative effect of accounting change | $ | .01 | $ | (.05 | ) | $ | (.02 | ) | $ | (1.12 | ) | Basic | $ | .23 | $ | .26 | $ | .01 | $ | (1.62 | ) | |||||||||||||
| Net income (loss) per share | $ | (4.67 | ) | $ | (.05 | ) | $ | (.02 | ) | $ | (1.12 | ) | Diluted | $ | .22 | $ | .25 | $ | .01 | $ | (1.62 | ) | ||||||||||||
Note 1 — | 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. | |
Note 2 — | In the | |
| certain operating liabilities. | ||
Note 3 — | ||
Item 9. Changes in and Disagreements with
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no changes in nor disagreements with Park-Ohio’sthe Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2003.
46
2004.
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2003,2004, management, including our chief executive officerChief Executive Officer and chief financial officer,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 officerChief Executive Officer and chief financial officerChief 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 Securities Exchange Act of 1934, as amended, 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 20032004 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.
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 underin 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 Item 5the Company’s equity compensation plan as of this Annual Report on Form 10-K.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) | ||||||||||
| Equity compensation plans approved by security holders(1) | 993,419 | $ | 2.25 | 228,700 | ||||||||
| Equity compensation plans not approved by security holders | -0- | -0- | -0- | |||||||||
| Total | 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 captioncaptions “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 registrant’s definitive 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”Committee — Independent Auditor Fee Information” in the registrant’s definitive proxy statement 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.Proxy Statement.
4754
Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are included in Part II, Item 8:
| Page | |||||
| Management’s Annual Report | |||||
| on Internal Control Over Financial | |||||
| 24 | |||||
| 25 | |||||
| 26 | |||||
| Consolidated | 27 | ||||
| 28 | |||||
| Consolidated Statements of Cash Flows — Years Ended December 31, 2004, 2003 and 2002 | 30 | ||||
| Notes to Consolidated Financial Statements | 31 | ||||
| Selected Quarterly Financial Data (Unaudited) — Years Ended December 31, 2004 and 2003 | 52 | ||||
(2) Financial Statement Schedules
| All |
(3) Exhibits:
| The |
On November 8, 2003, the Company furnished a current Form 8-K Report under Item 12 announcing its financial results for its third quarter ended September 30, 2003.
4855
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 29, 200414, 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 | ||
| * | 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 29, 2004
4914, 2005
| By: | /s/ ROBERT D. VILSACK |
| Robert D. Vilsack, Attorney-in-Fact |
5056
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 20032004
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 | ||
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| 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 |
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