We believe that we are one of the few aluminum component suppliers that has the capability to provide a wide range of high-volume, high-quality products utilizing a broad range of processes, including gravity and low pressure permanent mold, die-cast and lost-foam, as well as emerging alternative casting technologies. Our ability to offer our customers this comprehensive range of capabilities at a low cost
Our Manufactured Products segment operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems, rubber products and forged and machined products. We manufacture these products in eleven domestic facilities and ten international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, China and Japan. In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”). In December 2005, we acquired substantially all of the assets of Lectrotherm, Inc. (“Lectrotherm”), which is primarily a provider of field service and spare parts for induction heating and melting systems, located in Canton, Ohio.
Supply Technologies markets its products and services in the United States, Mexico, Canada, Western and Eastern Europe and East and South Asia primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and improving existing products. Aluminum Products primarily markets and sells its products in North America through internal sales personnel and independent sales representatives. Manufactured Products primarily markets and sells its products in North America through both internal sales personnel and independent sales representatives. Induction heating and pipe threading equipment is also marketed and sold in Europe, Asia, Latin America and Africa through both internal sales personnel and independent sales representatives. In some instances, the internal engineering staff assists in the sales and marketing effort through joint design and applications-engineering efforts with major customers.
Supply Technologies purchases substantially all of its production components from third-party suppliers. Supply Technologies has multiple sources of supply for its products. An increasing portion of Supply Technologies’ delivered components are purchased from suppliers in foreign countries, primarily Canada, Taiwan, China, South Korea, Singapore, India and multiple European countries. We are dependent upon the ability of such suppliers to meet stringent quality and performance standards and to conform to delivery schedules. Aluminum Products and Manufactured Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Most raw materials required by Aluminum Products and Manufactured Products are commodity products available from several domestic suppliers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources.
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The historical financial information is not directly comparable on ayear-to-year basis, primarily due to a goodwill impairment charge in 2008, recording of a tax valuation allowance in 2008, restructuring and unusual charges in 2009, 2008, 20062007 and 2005,2006, reversal of a tax valuation allowance in 2007 and acquisitions during the three years ended December 31, 2008.in 2008 and 2006.
Executive Overview
We are an industrial Total Supply Managementtm and diversified manufacturing business, operating in three segments: Supply Technologies, Aluminum Products and Manufactured Products. In November 2007, our ILS business changed its name to Supply Technologies to better reflect its breadth of services and focus on driving efficiencies throughout the total supply management process. Our Supply Technologies business provides our customers with Total Supply Managementtm, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Managementtm includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time andpoint-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, and appliance industries. Aluminum Products casts and machines aluminum engine, transmission, brake, suspension and other components such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment OEMs, primarily on a sole-source basis. Aluminum Products also provides value-added services such as design and engineering and assembly. Manufactured Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products including induction heating and melting systems, pipe threading systems, industrial oven systems, injection molded rubber components, and forged and machined products. Manufactured Products also produces and provides services and spare parts for the equipment it manufactures. The principal customers of Manufactured Products are OEMs,sub-assemblers and end users in the steel, coatings, forging, foundry, heavy-duty truck, construction equipment, bottling, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense industries. Sales, earnings and other relevant financial data for these three segments are provided in Note B to the consolidated financial statements.
During the years 2004 through 2007,On March 8, 2010, we refinanced both of our major sources of borrowed funds: senior subordinated notes and our revolving credit facility. In November 2004, we sold $210.0 million of 8.375% senior subordinated notes due 2014. We have amended our revolving credit facility most recently in June 2007, to, among other things, extend its maturity to December 2010, increaseJune, 2013 and reduce the credit limit toloan commitment from $270.0 million subject to $210.0 million, including the borrowing under a term loan A for $28.0 million, which is secured by real estate and machinery and equipment, and an asset-based formula and provide lower interest rate levels.unsecured term loan B for $12.0 million. See Note G.
In October 2006, we acquired all of the capital stock of NABS for $21.2 million in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS had 14 international operations in China, India, Taiwan, Singapore, Ireland, Hungary, Scotland and Mexico plus five locations in the United States.
In January 2006, we completed the acquisition of all of the capital stock of Foundry Service for approximately $3.2 million in cash, which resulted in additional goodwill of $2.3 million. The acquisition was funded with borrowings from foreign subsidiaries of the Company.
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In December 2005, we acquired substantially all of the assets of Lectrotherm, which is primarily a provider of field service and spare parts for induction heating and melting systems, located in Canton,
20
Ohio, for $5.1 million cash funded with borrowings under our revolving credit facility. This acquisition augments our existing, high-margin aftermarket induction business.
In July 2005, we acquired substantially all the assets of PPG, a provider of supply chain management services for a broad range of production components for $7.0 million cash funded with borrowings from our revolving credit facility, $.5 million in a short-term note payable and the assumption of approximately $13.3 million of trade liabilities. This acquisition added significantly to the customer and supplier bases, and expanded our geographic presence of our Supply Technologies segment.
The domestic and international automotive markets were significantly impacted in 2008, which adversely affected our business units serving those markets. During the third quarter of 2008, the Company recorded asset impairment charges associated with the recent volume declines and volatility in the automotive markets. The charges were composed of $.6 million of inventory impairment included in Cost of Products Sold and $17.5 million for impairment of property and equipment and other long-term assets. See Note O to the consolidated financial statements included in this annual report onForm 10-K.
During the fourth quarter of 2008, the Company recorded a non-cash goodwill impairment charge of $95.8 million and restructuring and asset impairment charges of $13.4 million associated with the decision to exit its relationship with its largest customer, Navistar, along with the general economic downturn. The charges were composed of $5.0 million of inventory impairment included in Cost of Products Sold and $8.4 million for impairment of property and equipment, loss on disposal of a foreign subsidiary and severance costs. Impairment charges were offset by a gain of $.6 million recorded in the Aluminum Products segment relating to the sale of certain facilities that were previously written off.
During the fourth quarter of 2009, the Company recorded $7.0 million of asset impairment charges associated with general weakness in the economy including the railroad industry. The charges were composed of $1.8 million of inventory impairment included in Cost of Products Sold and $5.2 million for impairment of property and equipment
In 2009, the Company recorded a gain of $6.3 million on the purchase of $15.2 million principal amount of Park-Ohio Industries, Inc. 8.375% senior subordinated notes due 2014 (the “8.375% Notes”). In 2008, the Company recorded a gain of $6.2 million on the purchase of $11.0 million principal amount of the 8.375% Notes.
Approximately 20% of the Company’s consolidated net sales are to the automotive markets. The recent deterioration in the global economy and global credit markets continues to negatively impact the automotive markets. General Motors, Ford and Chrsyler have encountered severe financial difficulty, which could ultimately resultresulted in the bankruptcy of Chrysler and General Motors and could result in one orbankruptcy for more of these domestic automobile manufacturers and their suppliers such as the bankruptcy of Metaldyne, which in turn, would adversely affect the financial condition of the Company��sCompany’s automobile OEM customers. In 2009, the Company recorded a charge of $4.2 million to fully reserve for the account receivable from Metaldyne. In 2010, the Company expects that its business, results of operations and financial condition will continue to be negatively impacted by the performance of the automotive markets.
Accounting Changes and Goodwill
On December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”). FAS 158 required the Company to recognize the funded status ( i.e. , the difference between the Company’s fair value of plan assets and the benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of FAS 87 and FAS 106, all of which were previously netted against the postretirement benefit plans’ funded status in the Company’s Consolidated Balance Sheet in accordance with the provisions of FAS 87 and FAS 106. These amounts will be subsequently recognized as net periodic benefit cost in accordance with the Company’s historical accounting policy for amortizing these amounts. In addition, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of FAS 158.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 123 (revised), “Share-Based Payment” (“FAS 123R”). FAS 123R requires that the
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costResults of Operations
2009 versus 2008
Net Sales by Segment:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2009 | | | 2008 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Supply Technologies | | $ | 328.8 | | | $ | 521.3 | | | $ | (192.5 | ) | | | (37 | )% |
| Aluminum Products | | | 111.4 | | | | 156.3 | | | | (44.9 | ) | | | (29 | )% |
| Manufactured Products | | | 260.8 | | | | 391.2 | | | | (130.4 | ) | | | (33 | )% |
| | | | | | | | | | | | | | | | | |
| Consolidated Net Sales | | $ | 701.0 | | | $ | 1,068.8 | | | $ | (367.8 | ) | | | (34 | )% |
| | | | | | | | | | | | | | | | | |
Consolidated net sales declined $367.8 million to $701.0 million compared to $1,068.8 million in 2008 as the Company experienced volume declines in each segment resulting from all share-based payment transactions be recognizedthe challenging global economic downturn. Supply Technologies sales decreased 37% primarily due to volume reductions in the financial statements and establishes a fair-value measurement objective in determining the valueheavy-duty truck industry, of such a cost. FAS 123R was effective as of January 1, 2006. FAS 123R is a revision of FAS 123 and supersedes APB 25. The adoption of fair-value recognition provisions for stock options increasedwhich $83.0 million resulted from the Company’s fiscaldecision to exit its relationship with its largest customer in the fourth quarter of 2008. The remaining sales reductions were due to the overall declining demand from customers in most end-markets partially offset by the addition of new customers. Aluminum Products sales decreased 29% as the general decline in auto industry sales volumes exceeded additional sales from new contracts starting productionramp-up. Manufactured Products sales decreased 33% primarily from the declining business environment in each of its business reporting units. Approximately 20% of the Company’s consolidated net sales are to the automotive markets. Net sales to the automotive markets as a percentage of sales by segment were approximately 8%, 83% and 5% for the Supply Technologies, Aluminum Products and Manufactured Products Segments, respectively for the year ended December 31, 2009.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2009 | | | 2008 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Consolidated cost of products sold | | $ | 597.2 | | | $ | 919.3 | | | $ | (322.1 | ) | | | (35 | )% |
| | | | | | | | | | | | | | | | | |
| Consolidated gross profit | | $ | 103.8 | | | $ | 149.5 | | | $ | (45.7 | ) | | | (31 | )% |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 14.8 | % | | | 14.0 | % | | | | | | | | |
Cost of products sold decreased $322.1 million in 2009 to $597.2 million compared to $919.3 million in 2008, 2007primarily due to reduction in sales volume, while gross margin increased to 14.8% in 2009 from 14.0% in the same period of 2008.
Supply Technologies gross margin remained unchanged from the prior year, as increased product profitability improvements were offset by volume declines. Aluminum Products gross margin increased primarily due to cost cutting measures, a plant closure and 2006 compensationimproved efficiencies at another plant location. Gross margin in the Manufactured Products segment remained essentially unchanged from the prior year.
Selling, General & Administrative (“SG&A”) Expenses:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | |
| | | December 31, | | | | Percent
|
| | | 2009 | | 2008 | | Change | | Change |
| | | (Dollars in millions) |
| |
| Consolidated SG&A expenses | | $ | 87.8 | | | $ | 105.5 | | | $ | (17.7 | ) | | | (17 | )% |
| SG&A percent | | | 12.5 | % | | | 9.9 | % | | | | | | | | |
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Consolidated SG&A expenses decreased $17.7 million to $87.8 million in 2009 compared to $105.5 million in 2008 representing a 260 basis point increase in SG&A expenses as a percent of sales. SG&A expenses decreased on a dollar basis in 2009 compared to 2008 primarily due to employee workforce reductions, salary cuts, suspension of the Company’s voluntary contribution to its 401(k) defined contribution plan, less business travel and a reduction in volume of business offset by a reduction in pension income. SG&A expenses benefited in 2009 from a reduction of $3.6 million resulting from a second quarter change in our vacation benefit, which is now earned throughout the calendar year rather than earned in full at the beginning of the year, but was offset by a $4.2 million charge to fully reserve for an account receivable from a customer in bankruptcy.
Interest Expense:
| | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | |
| | | December 31, | | | | Percent
|
| | | 2009 | | 2008 | | Change | | Change |
| | | (Dollars in millions) |
| |
| Interest expense | | $ | 23.2 | | | $ | 27.9 | | | $ | (4.7 | ) | | (17)% |
| Average outstanding borrowings | | $ | 363.9 | | | $ | 385.8 | | | $ | (21.9 | ) | | (6)% |
| Average borrowing rate | | | 6.38 | % | | | 7.23 | % | | | (85 | ) | | basis points |
Interest expense by $0.4decreased $4.7 million $0.4in 2009 compared to 2008, primarily due to a lower average borrowing rate during 2009, lower average borrowings and the effect of the purchase of the 8.375% Notes. The decrease in average borrowings in 2009 resulted primarily from the reduction in working capital requirements. The lower average borrowing rate in 2009 was due primarily to decreased interest rates under our revolving credit facility compared to 2008.
Impairment Charges:
During 2009, the Company recorded asset impairment charges totaling $5.2 million associated with general weakness in the economy, including the railroad industry.
During 2008, the Company recorded goodwill impairment charges of $95.8 million. The Company also recorded asset impairment charges of $25.3 million associated with the volume declines and $0.3 million (before tax), respectively.volatility in the automotive markets, loss from the disposal of a foreign subsidiary and restructuring expenses associated with the Company’s exit from its relationship with its largest customer, Navistar, along with realignment of its distribution network.
Gain on Purchase of 8.375% Senior Subordinated Notes:
In accordance with Statement2009, the Company recorded a gain of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), we review goodwill annually$6.3 million on the purchase of $15.2 million aggregate principal amount of the 8.375% Notes due in 2014.
In 2008, the Company purchased $11.0 million aggregate principal amount of the 8.375% Notes for potential impairment. This review was performed as of October 1, 2007 and 2006, using forecasted discounted cash flows, and it was determined that no impairment is required. At December 31, 2007, our balance sheet reflected $101.0$4.7 million. After writing off $.1 million of goodwill. deferred financing costs, the Company recorded a net gain of $6.2 million. The 8.375% Notes were not contributed to Park-Ohio Industries, Inc. in 2008 but were held by Holdings. During the fourth quarter of 2009, these notes were sold to a wholly-owned foreign subsidiary of Park-Ohio Industries, Inc.
Income Taxes:
| | | | | | | | | |
| | | Year-Ended
| |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in millions) | |
| |
| Income before income taxes | | $ | (6.0 | ) | | $ | (98.8 | ) |
| | | | | | | | | |
| Income tax (benefit) expense | | $ | (.8 | ) | | $ | 21.0 | |
| | | | | | | | | |
| Effective income tax rate | | | 13 | % | | | (21 | )% |
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In the fourth quarter of 2009, the Company released $1.8 million of the valuation allowance attributable to continuing operations. In the fourth quarter of 2008, this review was performed as of October 1the Company recorded a $33.6 million valuation allowance against its net U.S. and updated ascertain foreign deferred tax assets. As of December 31, 2009 and 2008, the Company determined that a non-cash goodwill impairment chargeit was not more likely than not that its net U.S. and certain foreign deferred tax assets would be realized.
The provision for income taxes was $(.8) million in 2009 compared to $21.0 million in 2008. The effective income tax rate was 13% in 2009, compared to (21)% in 2008.
The Company’s net operating loss carryforward precluded the payment of $95.8 million related to our Supply Technologiesmost federal income taxes in both 2009 and Aluminum Products segments was required. As of2008, and should similarly preclude such payments in 2010. At December 31, 2008, after2009, the impact of the $95.8 million impairment charge, weCompany had goodwill remaining of $4.1 million.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accountingnet operating loss carryforwards for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“FAS 109”), and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertainfederal income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax positionpurposes of approximately $38.5 million, which will not be recognized if it has a 50% or less likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interestexpire between 2022 and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of January 1, 2007. See Note H to the consolidated financial statements for the impact on the Company’s financial statements and related disclosures.
Results of Operations2029.
2008 versus 2007
Net Sales by Segment:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Supply Technologies | | $ | 521.3 | | | $ | 531.4 | | | $ | (10.1 | ) | | | (2 | )% |
| Aluminum Products | | | 156.3 | | | | 169.1 | | | | (12.8 | ) | | | (8 | )% |
| Manufactured Products | | | 391.2 | | | | 370.9 | | | | 20.3 | | | | 5 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated Net Sales | | $ | 1,068.8 | | | $ | 1,071.4 | | | $ | (2.6 | ) | | | 0 | % |
| | | | | | | | | | | | | | | | | |
Consolidated net sales were essentially flat in 2008 compared to the same period in 2007 as growth in Manufactured Products segment nearly offset declines in Aluminum Products sales resulting from reduced automotive sales and Supply Technologies sales resulting from reduced sales to the semiconductor, lawn and garden, auto, plumbing and heavy-duty truck markets. Supply Technologies sales decreased 2% primarily due to volume reductions in the heavy-duty truck industry, partially offset by the addition of new customers and increases in product range to existing customers. Aluminum Products sales decreased 8% as the general decline in auto industry sales volumes exceeded additional sales from new contracts starting productionramp-up. Manufactured Products sales increased 5% primarily in the induction, pipe threading equipment and forging businesses, due largely to worldwide strength in the steel, oil & gas, aerospace and rail industries. Approximately 20% of the Company’s consolidated net sales are to the automotive markets. Net sales to the automotive markets as a percentage of sales by segment were
22
approximately 13%, 79% and 5% for the Supply Technologies, Aluminum Products and Manufactured Products Segments, respectively.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2008 | | | 2007 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Consolidated cost of products sold | | $ | 919.3 | | | $ | 912.3 | | | $ | 7.0 | | | | 1 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated gross profit | | $ | 149.5 | | | $ | 159.1 | | | $ | (9.6 | ) | | | (6 | )% |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 14.0 | % | | | 14.8 | % | | | | | | | | |
Cost of products sold increased $7.0 million in 2008 compared to the same period in 2007, while gross margin decreased to 14.0% in 2008 from 14.8% in the same period of 2007.
Supply Technologies gross margin decreased slightly, as the effect of reduced heavy-duty truck sales volume and restructuring charges outweighed the margin benefit from new sales. Aluminum Products gross margin decreased primarily due to both the costs associated with starting up new contracts and
24
reduced volume. Gross margin in the Manufactured Products segment increased in 2008 compared to 2007 primarily due to increased volume in the induction, pipe threading equipment and forging businesses.
Selling, General & Administrative (“SG&A”) Expenses:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | |
| | | December 31, | | | | Percent
|
| | | 2008 | | 2007 | | Change | | Change |
| | | (Dollars in millions) |
| |
| Consolidated SG&A expenses | | $ | 105.5 | | | $ | 98.7 | | | $ | 6.8 | | | | 7 | % |
| SG&A percent | | | 9.9 | % | | | 9.2 | % | | | | | | | | |
Consolidated SG&A expenses increased $6.8 million in 2008 compared to 2007 representing a .7% increase in SG&A expenses as a percent of sales. SG&A expenses increased primarily due to higher professional fees in the Supply Technologies and Manufactured Products segments, expenses related to a new office building and other one-time charges at the corporate office consisting of losses on the sales of securities, severance costs and legal and professional fees, partially offset by a $.6 million increase in net pension credits and a reversal of year end bonus accruals.
Interest Expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | Year-Ended
| | | | |
| | | December 31, | | | | Percent
| | December 31, | | | | Percent
|
| | | 2008 | | 2007 | | Change | | Change | | 2008 | | 2007 | | Change | | Change |
| | | (Dollars in millions) | | (Dollars in millions) |
| |
| Interest expense | | $ | 27.9 | | | $ | 31.6 | | | $ | (3.7 | ) | | (12)% | | $ | 27.9 | | | $ | 31.6 | | | $ | (3.7 | ) | | | (12 | )% |
| Average outstanding borrowings | | $ | 385.8 | | | $ | 383.6 | | | $ | 2.2 | | | 1% | | $ | 385.8 | | | $ | 383.6 | | | $ | 2.2 | | | | 1 | % |
| Average borrowing rate | | | 7.23 | % | | | 8.23 | % | | | 101 | | | basis points | | | 7.23 | % | | | 8.23 | % | | | 100 | | | | basis points | |
Interest expense decreased $3.7 million in 2008 compared to 2007, primarily due to a lower average borrowing rate during 2008 offset by slightly higher average borrowings. The increase in average borrowings in 2008 resulted primarily from decreased cash flow and increased working capital. The lower average borrowing rate in 2008 was due primarily to decreased interest rates under our revolving credit facility compared to 2007.
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Impairment Charges:
During 2008, the Company recorded goodwill impairment charges of $95.8 million. The Company also recorded asset impairment charges of $25.3 million associated with the recent volume declines and volatility in the automotive markets, loss from the disposal of a foreign subsidiary and restructuring expenses associated with the Company’s exit from its relationship with its largest customer, Navistar, Inc., along with realignment of its distribution network.
Gain on Purchase of 8.375% Senior Subordinated Notes:
In 2008, Park Ohio-Holdings Corp.Holdings purchased $11.0 million aggregate principal amount of the 8.375% Notes which were issued by Park-Ohio Industries, Inc., for $4.7 million. After writing off $.1 million of deferred financing costs, the Company recorded a net gain of $6.2 million. The 8.375% Notes were not contributed to Park-Ohio Industries, Inc. but arewere held by Park-Ohio Holdings Corp.Holdings.
25
Income Taxes:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | Year-Ended
| |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2008 | | 2007 | |
| | | (Dollars in millions) | | | (Dollars in millions) | |
| |
| (Loss) income before income taxes | | $ | (98.8 | ) | | $ | 31.2 | | | $ | (98.8 | ) | | $ | 31.2 | |
| | | | | | | | | | | |
| Income taxes | | $ | 21.0 | | | $ | 10.0 | | | $ | 21.0 | | | $ | 10.0 | |
| Tax valuation allowance-effective tax rate impact | | | (33.6 | ) | | | 0.0 | | |
| | | | | | | |
| Income taxes excluding tax valuation allowance | | $ | (12.6 | ) | | $ | 10.0 | | |
| | | | | | | | | | | |
| Effective income tax rate | | | (21 | )% | | | 32 | % | | | (21 | )% | | | 32 | % |
| Effective income tax rate, excluding tax valuation allowance (Non-GAAP) | | | 13 | % | | | 32 | % | |
In the fourth quarter of 2008, the Company recorded a $33.6 million valuation allowance against its net U.S. and certain foreign deferred tax assets. As of December 31, 2008, the Company was in a cumulative three-year loss position and determined that it was not more likely than not that its net U.S. and certain foreign deferred tax assetassets would be realized.
The provision for income taxes was $21.0 million in 2008 compared to $10.0 million in 2007. The effective income tax rate was (21)% in 2008, compared to 32% in 2007.
The Company’s net operating loss carryforward precluded the payment of most cash federal income taxes in both 2008 and 2007, and should similarly preclude such payments in 2009. At December 31, 2008, the Company had net operating loss carryforwards for federal income tax purposes of approximately $42.1 million, which will expire between 2022 and 2028.
2007 versus 2006
Net Sales by Segment:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | | | Acquired/
| |
| | | December 31, | | | | | | Percent
| | | (Divested)
| |
| | | 2007 | | | 2006 | | | Change | | | Change | | | Sales | |
| | | (Dollars in millions) | |
| |
| Supply Technologies | | $ | 531.4 | | | $ | 598.2 | | | $ | (66.8 | ) | | | (11 | )% | | $ | 29.5 | |
| Aluminum Products | | | 169.1 | | | | 154.6 | | | | 14.5 | | | | 9 | % | | | 0.0 | |
| Manufactured Products | | | 370.9 | | | | 303.4 | | | | 67.5 | | | | 22 | % | | | 0.0 | |
| | | | | | | | | | | | | | | | | | | | | |
| Consolidated Net Sales | | $ | 1,071.4 | | | $ | 1,056.2 | | | $ | 15.2 | | | | 1 | % | | $ | 29.5 | |
| | | | | | | | | | | | | | | | | | | | | |
Consolidated net sales increased by 1% in 2007 compared to 2006, as growth in the Manufactured Products segment and new customers in the Supply Technologies and Aluminum Products segments exceeded declines in Supply Technologies segment sales to the heavy-duty truck market caused by the
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introduction of new environmental standards at the beginning of 2007. Supply Technologies sales decreased 11% primarily due to volume reductions in the heavy-duty truck industry, partially offset by $29.5 million of additional sales from the October 2006 acquisition of NABS, the addition of new customers and increases in product range to existing customers. New customers in the Supply Technologies segment came from organic sales, while new sales in the Aluminum Products segment primarily reflect sales to new customers. Aluminum Products sales increased 9% as the sales volumes from new contracts starting productionramp-up exceeded the end of production of other parts and the general decline in auto industry sales volumes. Manufactured Products sales increased 22%, primarily in the induction equipment, pipe threading equipment and forging businesses, due largely to worldwide strength in the steel, oil and gas, aerospace and rail industries. At the end of fourth quarter 2007, the Company adjusted downward the amount initially recorded for revenue by approximately $18.0 million to reflect the exclusion of certain costs from suppliers and subcontractors from the percentage of completion calculation that is used to account for long-term industrial equipment contracts. See Selected Quarterly Financial Data (Unaudited) on page 63 for additional information.
Cost of Products Sold & Gross Profit:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2007 | | | 2006 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Consolidated cost of products sold | | $ | 912.3 | | | $ | 908.1 | | | $ | 4.2 | | | | 0 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated gross profit | | $ | 159.1 | | | $ | 148.1 | | | $ | 11.0 | | | | 7 | % |
| | | | | | | | | | | | | | | | | |
| Gross margin | | | 14.8 | % | | | 14.0 | % | | | | | | | | |
Cost of products sold was relatively flat in 2007 compared to 2006, while gross margin increased to 14.8% from 14.0% in 2006. Supply Technologies gross margin increased slightly, as the margin benefit from sales from the NABS acquisition and new customers outweighed the effect of reduced heavy-truck sales volume and higher restructuring charges in 2007. Supply Technologies 2006 and 2007 cost of products sold included $.8 million and $2.2 million, respectively of inventory related restructuring charges associated with the closure of a manufacturing plant. Aluminum Products gross margin decreased primarily due to the costs associated with starting up new contracts and the slowramp-up of new contract volume. Gross margin in the Manufactured Products segment increased primarily due to increased sales volume.
SG&A Expenses:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2007 | | | 2006 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Consolidated SG&A expenses | | $ | 98.7 | | | $ | 90.3 | | | $ | 8.4 | | | | 9 | % |
| SG&A percent | | | 9.2 | % | | | 8.5 | % | | | | | | | | |
Consolidated SG&A expenses increased $8.4 million in 2007 compared to 2006, representing a .7% increase in SG&A expenses as a percent of sales. SG&A increased approximately $5.3 million due to the acquisition of NABS. SG&A increased further primarily due to increased expenses related to stock options and restricted stock, the new office building, legal and professional fees and franchise taxes, partially offset by a $1.1 million increase in net pension credits, reflecting higher return on pension plan assets.
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Interest Expense:
| | | | | | | | | | | | | | | | | |
| | | Year-Ended
| | | | | | | |
| | | December 31, | | | | | | Percent
| |
| | | 2007 | | | 2006 | | | Change | | | Change | |
| | | (Dollars in millions) | |
| |
| Interest expense | | $ | 31.6 | | | $ | 31.3 | | | $ | 0.3 | | | | 1 | % |
| Average outstanding borrowings | | $ | 383.6 | | | $ | 376.5 | | | $ | 7.1 | | | | 2 | % |
| Average borrowing rate | | | 8.23 | % | | | 8.31 | % | | | 8 | | | | basis points | |
Interest expense increased $.3 million in 2007 compared to 2006, due to higher average outstanding borrowings, partially offset by lower average interest rates during 2007. The increase in average borrowings in 2007 resulted primarily from higher working capital and the purchase of NABS in October 2006. The lower average borrowing rate in 2007 was due primarily to decreased interest rates under our revolving credit facility compared to 2006, which increased as a result of actions by the Federal Reserve.
Income Taxes:
| | | | | | | | | |
| | | Year-Ended
| |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (Dollars in millions | |
| |
| Income before income taxes | | $ | 31.2 | | | $ | 27.4 | |
| Income taxes | | $ | 10.0 | | | $ | 3.2 | |
| Reversal of tax valuation allowance included in income | | | 0.0 | | | | (5.0 | ) |
| | | | | | | | | |
| Income taxes excluding reversal of tax valuation allowance | | $ | 10.0 | | | $ | 8.2 | |
| | | | | | | | | |
| Effective income tax rate | | | 32 | % | | | 12 | % |
| Effective income tax rate excluding reversal of tax valuation allowance (Non-GAAP) | | | 32 | % | | | 30 | % |
In the fourth quarter of 2006, the Company reversed $5.0 million of its deferred tax asset valuation allowance, increasing net income for that year and substantially eliminating this reserve. Based on strong recent and projected earnings, the Company determined that it was more likely than not that its deferred tax asset would be realized.
The provision for income taxes was $10.0 million in 2007 compared to $3.2 million in 2006, which was reduced by the $5.0 million reversal of our deferred tax asset valuation allowance. The effective income tax rate was 32% in 2007, compared to 12% in 2006. Excluding the reversal of the tax valuation allowance in 2006, the Company provided $8.2 million of income taxes, a 30% effective income tax rate. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
The Company’s net operating loss carryforward precluded the payment of most cash federal income taxes in both 2007 and 2006, and should similarly preclude such payments in 2008 and substantially reduce them in 2009. At December 31, 2007, the Company had net operating loss carryforwards for federal income tax purposes of approximately $41.6 million, which will expire between 2021 and 2027.
Liquidity and Sources of Capital
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of our senior subordinated notes. In 2003, we entered into a revolving credit facility with a group of banks which, as subsequently amended, matures at December 31, 2010June 30, 2013 and provides for availability of up to $270$170 million subject to an asset-based formula. We have the option to increase the availability under the revolving loan portion of the credit facility by $25 million. The revolving credit facility is secured by substantially all our assets in the United States Canada and the United Kingdom.Canada. Borrowings from this revolving credit facility will be used for general corporate purposes.
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As of December 31, 2009, the Company had $141.2 million outstanding under the revolving credit facility, and approximately $34.2 million of unused borrowing availability.
On March 8, 2010, the revolving credit facility was amended and restated to, among other things, extend its maturity date to June 30, 2013, reduce the loan commitment from $270.0 million to $210.0 million which includes a term loan A for $28.0 million that is secured by real estate and machinery and equipment and an unsecured term loan B for $12.0 million. Amounts borrowed under the revolving credit facility may be borrowed at the Company’s election at either (i) LIBOR plus .75%3% to 1.75%4% or (ii) the bank’s prime lending rate.rate plus 1%, at the Company’s election. The LIBOR-based interest rate is dependent on the Company’s debt service coverage ratio, as defined in the revolving credit facility. Under the revolving credit facility, a detailed borrowing base formula provides borrowing availability to the Company based on percentages of eligible accounts receivable inventory and fixed assets. Asinventory. Interest on the term loan A is at either (i) LIBOR plus 4% to 5% or (ii) the bank’s prime lending rate plus 2%, at the Company’s election. Interest on the term loan B is at either (i) LIBOR plus 6% to 7% or (ii) the bank’s prime lending rate plus 4.5%, at the Company’s election. The term loan A is amortized based on a ten-year schedule with the balance due at maturity. The term loan B is amortized over a two-year period plus 50% of December 31, 2008, the Company had $164.6 million outstanding under the revolving credit facility, and approximately $47.1 million of unused borrowing availability.debt service coverage excess capped at $3.5 million.
Current financial resources (working capital and available bank borrowing arrangements) and anticipated funds from operations are expected to be adequate to meet current cash requirements for at least the next twelve months. The future availability of bank borrowings under the revolving loan portion of the credit facility is based on the Company’s ability to meet a debt service ratio covenant, which could be materially impacted by negative economic trends. Failure to meet the debt service ratio could materially impact the availability and interest rate of future borrowings.
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In 2008, Park-Ohio Holdings Corp.2009, the Company purchased $11.0$15.2 million aggregate principal amount of the 8.375% Notes which were issued byPark-Ohio Industries, Inc. for $4.7$8.9 million. After writing off $.1 million of deferred financing costs, the Company recorded a net gain of $6.2$6.3 million. The 8.375% Notes were not contributed to Park-Ohio Industries Inc. but are held by Park-Ohio Holdings Corp.
The Company may from time to time seek to retire or purchase its outstanding debt through cash purchasesand/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. It may also repurchase shares of its outstanding common stock. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Disruptions, uncertainty or volatility in the credit markets may adversely impact the availability of credit already arranged and the availability and cost of credit in the future. These market conditions may limit the Company’s ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain its business. Accordingly, the Company may be forced to delay raising capital issue shorter tenors than the Company prefers or pay unattractive interest rates, which could increase its interest expense, decrease its profitability and significantly reduce its financial flexibility. There can be no assurances that government responses to the disruptions in the financial markets will stabilize the markets or increase liquidity and the availability of credit.
At December 31, 2008,2009, the Company was in compliance with the debt service ratio covenant and other covenants contained in the revolving credit facility. While we expect to remain in compliance throughout 2009,2010, further declines in demand in the automotive industry and in sales volumes in 20092010 could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by the declines in demand in the automotive industry or the economy in general, they may not be able to pay their accounts payable to us on a timely basis or at all, which would make those accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base.
The ratio of current assets to current liabilities was 2.90 at December 31, 2009 versus 2.22 at December 31, 2008 versus 2.40 at December 31, 2007.2008. Working capital decreased by $18.0$23.6 million to $229.3 million at December 31, 2009 from $252.9 million at December 31, 2008 from $270.9 million at December 31, 2007.2008. Accounts receivable decreased $6.6$61.1 million to $104.6 million in 2009 from $165.8 million in 2008 from $172.42008. Inventory decreased by $46.7 million in 2007. Inventory increased by $13.42009 to $182.1 million from $228.8 million in 2008 to $228.8 million from $215.4 million in 2007 while accrued expenses increaseddecreased by $7.4$35.3 million to $74.4$39.1 million in 20082009 from $67.0$74.4 in 20072008 and accounts payable remained essentiallydecreased $46.9 million to $75.1 million in 2009 from $122.0 million in 2008.
During 2009, the same for each year.Company provided $43.9 million from operating activities as compared to providing $8.5 million in 2008. The increase in cash provision of $35.4 million was primarily the result of a decrease in net operating assets in 2009 compared to an increase in 2008 ($30.7 million compared to $(9.6) million, respectively) and a decrease in net loss of $114.6 million. The decrease in net loss was partially offset by approximately $5.2 million of noncash restructuring and impairment charges in 2009. During 2009, the Company also invested $5.6 million in capital expenditures, reduced its bank and other debt by $34.4 million, and purchased $.2 million of its common stock.
During 2008, the Company provided $8.5 million from operating activities as compared to $31.5 million from operating activities in 2007. The decrease in cash provision of $23.0 million was primarily the result of a slightly greater increasedecrease in net operating assets in 2008 compared to 2007 ($22.6(9.6) million compared to $19.0$(19.0) million), a net income in 2007 of $21.2 million compared to a net loss of $119.8 million in 2008 offset by non-cash restructuring and impairment charges of $121.1 million in 2008 compared to $2.2 million in 2007.
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currencies, primarily the euro, purely for the purpose of hedging exposure to changes in the value of accounts receivable in those currencies against the U.S. dollar. At December 31, 2008,2009, none were outstanding. We currently have no other derivative instruments.
The following table summarizes our principal contractual obligations and other commercial commitments over various future periods as of December 31, 2008:2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due or Commitment Expiration Per Period | | | | | Payments Due or Commitment Expiration Per Period | |
| | | | | Less Than
| | | | | | More than
| | | | | Less Than
| | | | | | More than
| |
(In Thousands) | | Total | | 1 Year | | 1-3 Years | | 4-5 Years | | 5 Years | | |
(In thousands) | | | Total | | 1 Year | | 1-3 Years | | 4-5 Years | | 5 Years | |
| |
Long-term debt obligations | | $ | 374,646 | | | $ | 8,778 | | | $ | 166,883 | | | $ | -0- | | | $ | 198,985 | | | $ | 333,792 | | | $ | 10,689 | | | $ | 13,936 | | | $ | 306,358 | | | $ | 2,809 | |
| Interest obligations(1) | | | 97,907 | | | | 16,665 | | | | 33,330 | | | | 33,330 | | | | 14,582 | | |
| Capital lease obligations | | | 342 | | | | 167 | | | | 175 | | | | -0- | | | | -0- | | | | 205 | | | | 205 | | | | -0- | | | | -0- | | | | -0- | |
| Interest obligations(2) | | | | 75,056 | | | | 15,396 | | | | 30,792 | | | | 28,868 | | | | -0- | |
| Operating lease obligations | | | 48,511 | | | | 13,581 | | | | 17,764 | | | | 8,738 | | | | 8,428 | | | | 36,815 | | | | 12,477 | | | | 14,955 | | | | 5,785 | | | | 3,598 | |
| Purchase obligations | | | 123,368 | | | | 121,331 | | | | 2,037 | | | | -0- | | | | -0- | | | | 90,218 | | | | 84,238 | | | | 5,980 | | | | -0- | | | | -0- | |
Postretirement obligations(2)(3) | | | 20,236 | | | | 2,497 | | | | 4,803 | | | | 4,266 | | | | 8,670 | | | | 19,059 | | | | 2,434 | | | | 4,543 | | | | 4,086 | | | | 7,996 | |
| Standby letters of credit | | | 22,713 | | | | 20,091 | | | | 2,588 | | | | -0- | | | | 34 | | |
| Standby letters of credit and bank guarantees | | | | 19,461 | | | | 13,114 | | | | 5,530 | | | | -0- | | | | 817 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 687,723 | | | $ | 183,110 | | | $ | 227,580 | | | $ | 46,334 | | | $ | 230,699 | | | $ | 574,606 | | | $ | 138,553 | | | $ | 75,736 | | | $ | 345,097 | | | $ | 15,220 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Maturities on long-term debt obligations consider the March 8, 2010 amendment to the credit agreement. |
|
| (2) | | Interest obligations are included on the 8.375% senior subordinated notes due 2014Notes only and assume the notes are paid at maturity. The calculation of interest on debt outstanding under our revolving credit facility and other variable rate debt ($5.12.0 million based on 3.12%1.43% average interest rate and outstanding borrowings of $164.6$141.2 million at December 31, 2008)2009) is not included above due to the subjectivity and estimation required. |
| |
(2)(3) | | Postretirement obligations include projected postretirement benefit payments to participants only through 2017.2019. |
The table above excludes the liability for unrecognized income tax benefits disclosed in Note H to the consolidated financial statements, since the Company cannot predict with reasonable reliability, the timing of potential cash settlements with the respective taxing authorities.
We expect that funds provided by operations plus available borrowings under our revolving credit facility to be adequate to meet our cash requirements for at least the next twelve months.
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Critical Accounting Policies
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Revenue Recognition: 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 (approximately 16%10% 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
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policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
Allowance for Doubtful Accounts: Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. Allowances are developed by the individual operating units based on historical losses, adjusting for economic conditions. Our policy is to identify and reserve for specific collectibility concerns based on customers’ financial condition and payment history. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Writeoffs of accounts receivable have historically been low.
Allowance for Obsolete and Slow Moving Inventory: Inventories are stated at the lower of cost or market value and have been reduced by an allowance for obsolete and slow-moving inventories. The estimated allowance is based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on reserve allowances required.
Impairment of Long-Lived Assets: Long-livedIn accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, management performs impairment tests of long-lived assets, areincluding property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. We reviewed by managementour long-lived assets for indicators of impairment whenever eventssuch as a decision to idle certain facilities and consolidate certain operations, a current-period operating or changescash flow loss or a forecast that demonstrates continuing losses associated with the use of a long-lived asset and the expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life especially in circumstances indicatelight of the recent volume declines and volatility in the automotive markets along with the general economic downturn and our goodwill impairment. When we identified impairment indicators, we determined whether the carrying amount may not be recoverable.of our long-lived assets was recoverable by comparing the carrying value to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. We considered whether impairments existed at the lowest level of independent identifiable cash flows within a reporting unit (for example, plant location, program level or asset level). If the carrying value of the assets exceeded the expected cash flows, the Company estimated the fair value of these assets by using appraisals or recent selling experience in selling similar assets or for certain assets with reasonably predicable cash flows by performing discounted cash flow analysis using the same discount rate used as the weighted average cost of capital in the respective goodwill impairment analysis to estimate fair value when market information wasn’t available to determine whether an impairment existed. Certain assets were abandoned and written down to scrap or appraised value. During 2008, 2005 and 2003, the Company decided to exit certain under-performing product lines and to close or consolidate certain operating facilities and, accordingly, recorded restructuring andasset impairment charges as discussed aboveof approximately $23.0 million, of which approximately $13.8 million was determined based on appraisals or scrap value and approximately $9.2 million was based on discounted cash flow analysis. The impact of a one percentage point change in the discount rate used in performing the discounted cash flow analysis would have been less than $1.0 million with respect to the asset impairment charges. In 2009, the Company recorded $7.0 million of asset impairment charges of which $5.2 million was based on appraisals and $1.8 million was based on other valuation methods. See Note O to the consolidated financial statements included elsewhere herein.statements.
Restructuring: We recognize costs in accordance with Emerging Issues Task Force IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)”(“EITF 94-3”), and SAB No. 100, “Restructuring and Impairment Charges,” for charges prior to 2003.ASC 420, “Exit or Disposal Cost Obligations”. 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.
The Company adopted Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), which nullifiedEITF 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at the fair value only when the liability is incurred. FAS 146 has no effect on charges recorded for exit activities begun prior to 2002.
Goodwill: We adopted FAS 142As required by ASC 350, “Intangibles — Goodwill and Other”, (“ASC 350”) management performs impairment testing of goodwill at least annually as of JanuaryOctober 1 2002. Under FAS 142, we are required to review goodwill for impairment annuallyof each year or more frequently if impairment indicators arise. We have completed
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In accordance with ASC 350, management tests goodwill for impairment at the reporting unit level. A reporting unit is a reportable operating segment pursuant to ASC 280 “Segment Reporting”, or one level below the reportable operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of a reportable operating segment having similar economic characteristics. Prior to our 2008 impairment analysis, we had four reporting units with recorded goodwill including Supply Technologies (included in the Supply Technologies Segment) with $64.6 million of goodwill, Engineered Specialty Products (included in the Supply Technology Segment) with $14.7 million of goodwill, Aluminum Products with $16.5 million of goodwill and Capital Equipment (included in the Manufactured Products segment) with $4.1 million of goodwill. At the time of goodwill impairment testing, management determined fair value of the reporting units through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated fair value is less than the carrying value, impairment of the reporting unit may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing in the absence of available domestic and international transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the weighted average cost of capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as company-specific risk factors for each reporting unity in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit, which ranged from 12% to 18%, is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and company-specific historical and projected data, develops growth rates and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. The projections developed for the 2008 impairment test reflected managements’ view considering the significant market downturn during the fourth quarter of 2008. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow model, the aggregate fair value of all reporting units is reconciled to the market capitalization of the Company, which had a significant decline in the fourth quarter of 2008. We have completed the annual impairment test as of October 1, 2007, 2006 2005 and 20042005 and have determined that no goodwill impairment existed as of those dates. We completed the annual impairment tests as of October 1, 2008 and updated these tests, as necessary, as of December 31, 2008. See Note D toWe concluded that all of the consolidated financial statements.goodwill in three of the reporting units for a total of $95.8 million was impaired and written off in the fourth quarter of 2008. At December 31, 2008 the Company had remaining goodwill of $4.1 million in the Capital Equipment reporting unit. We completed the annual impairment tests as of October 1, 2009 and concluded that no goodwill impairment existed for the remaining goodwill in the Capital Equipment reporting unit.
Income Taxes: We accountIn accordance with ASC 740, “Income Taxes”, (“ASC 740”) the Company accounts for income taxes under the asset and 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 realizingSpecifically, we measure gross deferred tax assets taking into consideration factors including historicalfor deductible temporary differences and carryforwards, such as operating results, cumulative earningslosses and losses, expectations of future earningstax credits, using the applicable enacted tax rates and taxable income andapply the extended period of time over which the postretirement benefits will be paid and accordingly records a tax valuation allowance if, based on the weight of available evidence it is more likely than not measurement criterion.
ASC 740 provides that some portionfuture realization of the tax benefit of an existing deductible temporary difference or allcarryforward ultimately depends on the existence of oursufficient taxable income of the appropriate character within the carryback, carryforward period available under the tax law. The Company analyzed the four possible sources of taxable income as set forth in ASC 740 and concluded that the only relevant sources of taxable income is the reversal of its existing taxable temporary differences. The Company reviewed the projected timing of the reversal of its taxable temporary differences and determined that such reversals will offset the Company’s deferred tax assets will not be realized as required by FAS 109. We made significant estimates and judgments in orderprior to determine the extent thattheir expiration.
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Accordingly, a valuation allowance should be providedreserve was established against the Company’s domestic deferred tax assets.assets net of its deferred tax liabilities (taxable temporary differences).
Pension and Other Postretirement Benefit Plans: We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.
Stock-Based Compensation:
In December 2004, the FASB issued FAS 123R. FAS 123RASC 718 “Compensation-Stock Compensation” requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes a fair-value measurement objective in determining the value of such a cost. FAS 123Rcost and was effective as of January 1, 2006. FAS 123R is a revision of FAS 123 and supersedes APB 25. The adoption of fair-value recognition provisions for stock options increased the Company’s 2009, 2008 2007 and 20062007 compensation expense by $.4 million, $.4 million and $.3 million (before-tax), respectively.
Recent Accounting Changes:Pronouncements
In May 2005,June 2009, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and Statement of Financial168, “The FASB Accounting Standards No. 3, “ReportingCodification and Hierarchy of Generally Accepted Accounting Changes in Interim Financial Statements.”Principles”. The statement changesmakes the requirements forASC the single source of authoritative U.S. accounting and reporting of a change in accounting principle and is applicable to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement if that pronouncementstandards, but it does not include specific transition provisions. The statement requires retrospective application to prior periods’ financial statements of changes in accounting principle unless it is impractical to determine the period specific effects or the cumulative effect of the change. The correction of an error by the restatement of previously issued financial statements is also addressed by the statement.change U.S. GAAP. The Company adopted thisthe statement effective January 1, 2006 as prescribedof September 30, 2009. Accordingly, the financial statements for the interim period ending September 30, 2009, and its adoption did not have anythe financial statements for future interim and annual periods will reflect the ASC references. The statement has no impact on the Company’s results of operations, financial condition or financial condition.liquidity.
Recent Accounting PronouncementsIn December 2007, the FASB issued new guidance that modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and pre-acquisition contingencies will generally be accounted for in purchase accounting at fair value. The new guidance was adopted prospectively by the Company, effective January 1, 2009.
In December 2008, the FASB issued Financial Staff Position (“FSP”) 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” FSP 132(R)-1 providesnew guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the categories of plan assets and fair value measurements of plan assets. This staff position is effective forThe new guidance was adopted by the Company ineffective January 1, 2009 and will havehad no effect on its consolidated financial position or results of operations.
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In MarchEffective January 1, 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. The requirements of FAS 161 are effective for interim and annual periods beginning after November 15, 2008. The Company is currently evaluating the impact of FAS 161 on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 modifies the reporting for noncontrolling interests in the balance sheet and minority interest income (expense) in the income statement. The pronouncement also requires that increases and decreases in the noncontrolling ownership interest amount be accounted for as equity transactions. FAS 160 is required to be adopted prospectively, with limited exceptions, effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the effect the adoption of FAS 160 will have on its financial position, results of operations and related disclosures.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“FAS 141R”). FAS 141R modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and preacquisition contingencies will generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset and the requirements of Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting. FAS 141R is required to be adopted prospectively effective for fiscal years beginning after December 15, 2008.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The pronouncement also establishes presentation and disclosure requirements to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to measure its financial instruments or any other items at fair value as permitted by FAS 159. Therefore, the adoption of FAS 159 did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of FAS 157 apply under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years formeasures financial assets and liabilities and for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities.at fair value in three levels of inputs. The adoption of FAS 157 for financial assets and liabilities did not have a material effect onthree-tier fair value hierarchy, which prioritizes the Company’s financial position or results of operations.inputs used in the valuation methodologies, is:
As of December 31, 2008, the Company’s financial assets subject to FAS 157 consisted of marketable equity securities and other investments totaling $.9 million and $5.2 million respectively. The marketable securities are classified as having Level 1 inputs, as the fair value is— Valuations based on quoted prices for identical assets and liabilities in active markets. The other investments are classified as having
Level 2 inputs, as the fair value is— Valuations based on observable inputs other than quoted prices included withinin Level 1, that are observable for the asset, either directly or indirectly, includingsuch as quoted prices for similar assets and liabilities in active markets;markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
31
similar assets in marketsIn April 2009, the FASB issued new guidance that areif an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not active; inputs other thanorderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. This new guidance is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance for its quarter ended June 30, 2009. There was no impact on the consolidated financial statements. In April 2009, the FASB issued guidance which requires that publicly traded companies include the fair value disclosures in their interim financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance at June 30, 2009. At December 31, 2009 the approximate fair value of Park-Ohio Industries, Inc 8.375% senior subordinated notes due 2014 was $144.3 million based on Level 1 inputs. The company had other investments having Level 2 inputs totaling $6.8 million.
In May 2009, the FASB issued guidance which addresses the types and timing of events that should be reported in the financial statements for events occurring between the balance sheet date and the date the financial statements are observableissued or available to be issued. This guidance was effective for the asset; and inputs that are derived principally fromCompany on June 30, 2009. The adoption of this guidance did not impact the Company’s’ consolidated financial position or corroborated by observable market data by correlation or other means.results of operations. Refer to Note P to the consolidated financial statements for information on subsequent events.
Environmental
We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certainclean-up efforts at several of these sites. However, our share of such costs has not been material and based on available information, our management does not expect our exposure at any of these locations to have a material adverse effect on itsour results of operations, liquidity or financial condition.
We have been named as one of many defendants in a number of asbestos-related personal injury lawsuits. Our cost of defending such lawsuits has not been material to date and, based upon available information, our management does not expect our future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial condition. We caution, however, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved.
Seasonality; Variability of Operating Results
Our results of operations are typically stronger in the first six months than the last six months of each calendar year due to scheduled plant maintenance in the third quarter to coincide with customer plant shutdowns and due to holidays in the fourth quarter.
The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations in the operations of our business units. Such variability is particularly evident at the capital equipment businesses, included in the Manufactured Products segment, which typically ship a few large systems per year.
Forward-Looking Statements
This annual report onForm 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown
32
risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, but are not limited to the following: our substantial indebtedness; continuation of the current negative global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; raw material availability and pricing; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government policies, laws and regulations, including the uncertainties related to the currentrecent global financial crisis; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in the agreements governing our revolving credit facility and the indenture governing the 8.375% senior subordinated notes due 2014;indebtedness; disruptions, uncertaintyuncertainties or volatility in the credit markets that may limit our
32
access to capital; increasingly stringent domestic and foreign governmental regulations, including those affecting the environment; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims, including, without limitation asbestos claims; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending, which could be lower due to the effects of the current financial crisis; our ability to negotiate acceptable contracts with labor unions; our dependence on key management; our dependence on information systems; and the otherrisk factors we describe under the “Item 1A. Risk Factors”. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.
33
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk including changes in interest rates. We are subject to interest rate risk on our floating rate revolving credit facility, which consisted of borrowings of $164.6$141.2 million at December 31, 2008.2009. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.6$1.4 million for the year ended December 31, 2008.2009.
Our foreign subsidiaries generally conduct business in local currencies. During 2008,2009, we recorded an unfavorable foreign currency translation adjustment of $8.7$3.0 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the U.S. dollar in relation to the Canadian dollar. Our foreign operations are also subject to other customary risks of operating in a global environment, such as unstable political situations, the effect of local laws and taxes, tariff increases and regulations and requirements for export licenses, the potential imposition of trade or foreign exchange restrictions and transportation delays.
Our largest exposures to commodity prices relate to steel and natural gas prices, which have fluctuated widely in recent years. We do not have any commodity swap agreements, forward purchase or hedge contracts for steel but have entered into forward purchase contracts for a portion of our anticipated natural gas usage through April 2008.2010.
| |
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Financial Data
| | | | | |
| | | Page |
| |
| | | 3435 | |
| | | 3536 | |
| | | 3637 | |
| | | 3738 | |
| | | 3839 | |
| | | 3940 | |
| | | 4041 | |
| | | 62 | |
| | | 62 | |
| | | 6364 | |
3334
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Park-Ohio Holdings Corp.
We have audited the accompanying consolidated balance sheets of Park-Ohio Holdings Corp. and subsidiaries as of December 31, 20082009 and 2007,2008, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008.2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Holdings Corp. and subsidiaries at December 31, 20082009 and 20072008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note H to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Incomes Taxes”, effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Park-Ohio Holdings Corp. and subsidiaries internal control over financial reporting as of December 31, 2008,2009, 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 12, 200915, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 200915, 2010
3435
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Park-Ohio Holdings Corp.
We have audited Park-Ohio Holding Corp.’s and subsidiaries internal control over financial reporting as of December 31, 2008,2009, 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 included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Park-Ohio Holdings Corp. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park-Ohio Holdings Corp. and subsidiaries as of December 31, 20082009 and 2007,2008, and the related consolidated statements of consolidated operations, shareholders’ equity, and cash flows for each of the three years in the period ended DeceberDecember 31, 20082009 of Park-Ohio Holdings Corp. and subsidiaries and our report dated March 12, 200915, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 12, 2009
35
Park-Ohio Holdings Corp. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
ASSETS |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 17,825 | | | $ | 14,512 | |
| Accounts receivable, less allowances for doubtful accounts of $3,044 in 2008 and $3,724 in 2007 | | | 165,779 | | | | 172,357 | |
| Inventories | | | 228,817 | | | | 215,409 | |
| Deferred tax assets | | | 9,446 | | | | 21,897 | |
| Unbilled contract revenue | | | 25,602 | | | | 24,817 | |
| Other current assets | | | 12,818 | | | | 15,232 | |
| | | | | | | | | |
| Total Current Assets | | | 460,287 | | | | 464,224 | |
| Property, plant and equipment: | | | | | | | | |
| Land and land improvements | | | 3,723 | | | | 3,452 | |
| Buildings | | | 42,464 | | | | 41,437 | |
| Machinery and equipment | | | 202,287 | | | | 221,333 | |
| | | | | | | | | |
| | | | 248,474 | | | | 266,222 | |
| Less accumulated depreciation | | | 157,832 | | | | 160,665 | |
| | | | | | | | | |
| | | | 90,642 | | | | 105,557 | |
| Other Assets: | | | | | | | | |
| Goodwill | | | 4,109 | | | | 100,997 | |
| Net assets held for sale | | | -0- | | | | 3,330 | |
| Other | | | 64,182 | | | | 95,081 | |
| | | | | | | | | |
| | | $ | 619,220 | | | $ | 769,189 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current Liabilities | | | | | | | | |
| Trade accounts payable | | $ | 121,995 | | | $ | 121,875 | |
| Accrued expenses | | | 74,351 | | | | 67,007 | |
| Current portion of long-term debt | | | 8,778 | | | | 2,362 | |
| Current portion of other postretirement benefits | | | 2,290 | | | | 2,041 | |
| | | | | | | | | |
| Total Current Liabilities | | | 207,414 | | | | 193,285 | |
| Long-Term Liabilities, less current portion | | | | | | | | |
| 8.375% senior subordinated notes due 2014 | | | 198,985 | | | | 210,000 | |
| Revolving credit | | | 164,600 | | | | 145,400 | |
| Other long-term debt | | | 2,283 | | | | 2,287 | |
| Deferred tax liability | | | 9,090 | | | | 22,722 | |
| Other postretirement benefits and other long-term liabilities | | | 24,093 | | | | 24,017 | |
| | | | | | | | | |
| | | | 399,051 | | | | 404,426 | |
| Shareholders’ Equity | | | | | | | | |
| Capital stock, par value $1 per share | | | | | | | | |
| Serial preferred stock: | | | | | | | | |
| Authorized — 632,470 shares; Issued and outstanding — none | | | -0- | | | | -0- | |
| Common stock: | | | | | | | | |
| Authorized — 40,000,000 shares; Issued — 12,237,392 shares in 2008 and 12,232,859 in 2007 | | | 12,237 | | | | 12,233 | |
| Additional paid-in capital | | | 64,212 | | | | 61,956 | |
| Retained (deficit) earnings | | | (29,021 | ) | | | 90,782 | |
| Treasury stock, at cost, 1,443,524 shares in 2008 and 828,661 shares in 2007 | | | (17,192 | ) | | | (11,255 | ) |
| Accumulated other comprehensive (loss) income | | | (17,481 | ) | | | 17,762 | |
| | | | | | | | | |
| | | | 12,755 | | | | 171,478 | |
| | | | | | | | | |
| | | $ | 619,220 | | | $ | 769,189 | |
| | | | | | | | | |
See notes to consolidated financial statements.15, 2010
36
Park-Ohio Holdings Corp. and Subsidiaries
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands,
| |
| | | except per share data) | |
| |
| Net sales | | $ | 1,068,757 | | | $ | 1,071,441 | | | $ | 1,056,246 | |
| Cost of products sold | | | 919,297 | | | | 912,337 | | | | 908,095 | |
| | | | | | | | | | | | | |
| Gross profit | | | 149,460 | | | | 159,104 | | | | 148,151 | |
| Selling, general and administrative expenses | | | 105,546 | | | | 98,679 | | | | 90,296 | |
| Goodwill impairment charge | | | 95,763 | | | | -0- | | | | -0- | |
| Restructuring and impairment charges (credits) | | | 25,331 | | | | -0- | | | | (809 | ) |
| Gain on purchase of 8.375% senior subordinated notes | | | (6,232 | ) | | | -0- | | | | -0- | |
| Gain on sale of assets held for sale | | | -0- | | | | (2,299 | ) | | | -0- | |
| | | | | | | | | | | | | |
| Operating (loss) income | | | (70,948 | ) | | | 62,724 | | | | 58,664 | |
| Interest expense | | | 27,869 | | | | 31,551 | | | | 31,267 | |
| | | | | | | | | | | | | |
| (Loss) income before income taxes | | | (98,817 | ) | | | 31,173 | | | | 27,397 | |
| Income taxes | | | 20,986 | | | | 9,976 | | | | 3,218 | |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (119,803 | ) | | $ | 21,197 | | | $ | 24,179 | |
| | | | | | | | | | | | | |
| Amounts per common share: | | | | | | | | | | | | |
| Basic | | $ | (10.88 | ) | | $ | 1.91 | | | $ | 2.20 | |
| | | | | | | | | | | | | |
| Diluted | | $ | (10.88 | ) | | $ | 1.82 | | | $ | 2.11 | |
| | | | | | | | | | | | | |
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
ASSETS |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 23,098 | | | $ | 17,825 | |
| Accounts receivable, less allowances for doubtful accounts of $8,388 in 2009 and $3,044 in 2008 | | | 104,643 | | | | 165,779 | |
| Inventories | | | 182,116 | | | | 228,817 | |
| Deferred tax assets | | | 8,104 | | | | 9,446 | |
| Unbilled contract revenue | | | 19,411 | | | | 25,602 | |
| Other current assets | | | 12,700 | | | | 12,818 | |
| | | | | | | | | |
| Total Current Assets | | | 350,072 | | | | 460,287 | |
| Property, plant and equipment: | | | | | | | | |
| Land and land improvements | | | 3,948 | | | | 3,723 | |
| Buildings | | | 46,181 | | | | 42,464 | |
| Machinery and equipment | | | 195,111 | | | | 202,287 | |
| | | | | | | | | |
| | | | 245,240 | | | | 248,474 | |
| Less accumulated depreciation | | | 168,609 | | | | 157,832 | |
| | | | | | | | | |
| | | | 76,631 | | | | 90,642 | |
| Other Assets: | | | | | | | | |
| Goodwill | | | 4,155 | | | | 4,109 | |
| Other | | | 71,410 | | | | 64,182 | |
| | | | | | | | | |
| | | $ | 502,268 | | | $ | 619,220 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current Liabilities | | | | | | | | |
| Trade accounts payable | | $ | 75,083 | | | $ | 121,995 | |
| Accrued expenses | | | 39,150 | | | | 74,351 | |
| Current portion of long-term debt | | | 10,894 | | | | 8,778 | |
| Current portion of other postretirement benefits | | | 2,197 | | | | 2,290 | |
| | | | | | | | | |
| Total Current Liabilities | | | 127,324 | | | | 207,414 | |
| Long-Term Liabilities, less current portion | | | | | | | | |
| 8.375% senior subordinated notes due 2014 | | | 183,835 | | | | 198,985 | |
| Revolving credit | | | 134,600 | | | | 164,600 | |
| Other long-term debt | | | 4,668 | | | | 2,283 | |
| Deferred tax liability | | | 7,200 | | | | 9,090 | |
| Other postretirement benefits and other long-term liabilities | | | 21,831 | | | | 24,093 | |
| | | | | | | | | |
| | | | 352,134 | | | | 399,051 | |
| Shareholders’ Equity | | | | | | | | |
| Capital stock, par value $1 per share | | | | | | | | |
| Serial preferred stock: | | | | | | | | |
| Authorized — 632,470 shares; Issued and outstanding — none | | | -0- | | | | -0- | |
| Common stock: | | | | | | | | |
| Authorized — 40,000,000 shares; Issued — 13,273,842 shares in 2009 and 12,237,392 in 2008 | | | 13,274 | | | | 12,237 | |
| Additional paid-in capital | | | 66,323 | | | | 64,212 | |
| Retained (deficit) | | | (34,230 | ) | | | (29,021 | ) |
| Treasury stock, at cost, 1,473,969 shares in 2009 and 1,443,524 shares in 2008 | | | (17,443 | ) | | | (17,192 | ) |
| Accumulated other comprehensive (loss) | | | (5,114 | ) | | | (17,481 | ) |
| | | | | | | | | |
| | | | 22,810 | | | | 12,755 | |
| | | | | | | | | |
| | | $ | 502,268 | | | $ | 619,220 | |
| | | | | | | | | |
See notes to consolidated financial statements.
37
Park-Ohio Holdings Corp. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | Additional
| | | Retained
| | | | | | Other
| | | | | | | |
| | | Common
| | | Paid-In
| | | Earnings
| | | Treasury
| | | Comprehensive
| | | Unearned
| | | | |
| | | Stock | | | Capital | | | (Deficit) | | | Stock | | | Income (Loss) | | | Compensation | | | Total | |
| | | (Dollars in thousands) | |
| |
| Balance at January 1, 2006 | | $ | 11,703 | | | $ | 57,508 | | | $ | 46,014 | | | $ | (9,009 | ) | | $ | (2,102 | ) | | $ | (593 | ) | | $ | 103,521 | |
| Reclassification at January 1, 2006 | | | | | | | (593 | ) | | | | | | | | | | | | | | | 593 | | | | -0- | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 24,179 | | | | | | | | | | | | | | | | 24,179 | |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 2,128 | | | | | | | | 2,128 | |
| Minimum pension liability | | | | | | | | | | | | | | | | | | | 5,358 | | | | | | | | 5,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 31,665 | |
| Adjustment recognized upon adoption of FAS 158 (net of income tax of $404) | | | | | | | | | | | | | | | | | | | 440 | | | | | | | | 440 | |
| Restricted stock award | | | 340 | | | | (340 | ) | | | | | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 787 | | | | | | | | | | | | | | | | | | | | 787 | |
| Share-based compensation | | | | | | | 299 | | | | | | | | | | | | | | | | | | | | 299 | |
| Tax valuation allowance reversal | | | | | | | 1,889 | | | | | | | | | | | | | | | | | | | | 1,889 | |
| Purchase of treasury stock | | | | | | | | | | | | | | | (57 | ) | | | | | | | | | | | (57 | ) |
| Exercise of stock options (69,364 shares) | | | 67 | | | | 126 | | | | | | | | | | | | | | | | | | | | 193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | 12,110 | | | | 59,676 | | | | 70,193 | | | | (9,066 | ) | | | 5,824 | | | | -0- | | | | 138,737 | |
| Adjustment relating to adoption of FIN 48 | | | | | | | | | | | (608 | ) | | | | | | | | | | | | | | | (608 | ) |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 21,197 | | | | | | | | | | | | | | | | 21,197 | |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 7,328 | | | | | | | | 7,328 | |
| Unrealized loss on marketable securities, net of income tax of $182 | | | | | | | | | | | | | | | | | | | (323 | ) | | | | | | | (323 | ) |
| Pension and postretirement benefit adjustments, net of income tax of $2,834 | | | | | | | | | | | | | | | | | | | 4,933 | | | | | | | | 4,933 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 33,135 | |
| Restricted stock award | | | 17 | | | | (17 | ) | | | | | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 1,651 | | | | | | | | | | | | | | | | | | | | 1,651 | |
| Purchase of treasury stock (92,253 shares) | | | | | | | | | | | | | | | (2,189 | ) | | | | | | | | | | | (2,189 | ) |
| Exercise of stock options (106,084 shares) | | | 106 | | | | 234 | | | | | | | | | | | | | | | | | | | | 340 | |
| Share-based compensation | | | | | | | 412 | | | | | | | | | | | | | | | | | | | | 412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 12,233 | | | | 61,956 | | | | 90,782 | | | | (11,255 | ) | | | 17,762 | | | | -0- | | | | 171,478 | |
| Comprehensive (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (119,803 | ) | | | | | | | | | | | | | | | (119,803 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (8,730 | ) | | | | | | | (8,730 | ) |
| Unrealized loss on marketable securities, net of income tax of $-0- | | | | | | | | | | | | | | | | | | | (90 | ) | | | | | | | (90 | ) |
| Pension and postretirement benefit adjustments, net of income tax of $13,460 | | | | | | | | | | | | | | | | | | | (26,423 | ) | | | | | | | (26,423 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | (155,046 | ) |
| Restricted stock award | | | 23 | | | | (23 | ) | | | | | | | | | | | | | | | | | | | -0- | |
| Restricted stock exchange for restricted share units | | | (62 | ) | | | 62 | | | | | | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 1,677 | | | | | | | | | | | | | | | | | | | | 1,677 | |
| Purchase of treasury stock (614,863 shares) | | | | | | | | | | | | | | | (5,937 | ) | | | | | | | | | | | (5,937 | ) |
| Exercise of stock options (43,003 shares) | | | 43 | | | | 104 | | | | | | | | | | | | | | | | | | | | 147 | |
| Share-based compensation | | | | | | | 436 | | | | | | | | | | | | | | | | | | | | 436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | $ | 12,237 | | | $ | 64,212 | | | $ | (29,021 | ) | | $ | (17,192 | ) | | $ | (17,481 | ) | | $ | -0- | | | $ | 12,755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands,
| |
| | | except per share data) | |
| |
| Net sales | | $ | 701,047 | | | $ | 1,068,757 | | | $ | 1,071,441 | |
| Cost of products sold | | | 597,200 | | | | 919,297 | | | | 912,337 | |
| | | | | | | | | | | | | |
| Gross profit | | | 103,847 | | | | 149,460 | | | | 159,104 | |
| Selling, general and administrative expenses | | | 87,786 | | | | 105,546 | | | | 98,679 | |
| Goodwill impairment charge | | | -0- | | | | 95,763 | | | | -0- | |
| Gain on sale of assets held for sale | | | -0- | | | | -0- | | | | (2,299 | ) |
| Restructuring and impairment charges | | | 5,206 | | | | 25,331 | | | | -0- | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | 10,855 | | | | (77,180 | ) | | | 62,724 | |
| Gain on purchase of 8.375% senior subordinated notes | | | (6,297 | ) | | | (6,232 | ) | | | -0- | |
| Interest expense | | | 23,189 | | | | 27,869 | | | | 31,551 | |
| | | | | | | | | | | | | |
| (Loss) income before income taxes | | | (6,037 | ) | | | (98,817 | ) | | | 31,173 | |
| Income tax (benefit) expense | | | (828 | ) | | | 20,986 | | | | 9,976 | |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (5,209 | ) | | $ | (119,803 | ) | | $ | 21,197 | |
| | | | | | | | | | | | | |
| Amounts per common share: | | | | | | | | | | | | |
| Basic | | $ | (.47 | ) | | $ | (10.88 | ) | | $ | 1.91 | |
| | | | | | | | | | | | | |
| Diluted | | $ | (.47 | ) | | $ | (10.88 | ) | | $ | 1.82 | |
| | | | | | | | | | | | | |
See notes to consolidated financial statements.
38
Park-Ohio Holdings Corp. and Subsidiaries
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Dollars in thousands) | |
| |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net (loss) income | | $ | (119,803 | ) | | $ | 21,197 | | | $ | 24,179 | |
| Adjustments to reconcile net (loss) income to net cash provided by operations: | | | | | | | | | | | | |
| Depreciation and amortization | | | 20,933 | | | | 20,611 | | | | 20,140 | |
| Restructuring and impairment charges (credits) | | | 121,094 | | | | 2,214 | | | | (9 | ) |
| Gain on purchase of 8.375% senior subordinated notes | | | (6,232 | ) | | | -0- | | | | -0- | |
| Deferred income taxes | | | -0- | | | | 4,342 | | | | (4,361 | ) |
| Stock based compensation expense | | | 2,113 | | | | 2,063 | | | | 1,086 | |
| Changes in operating assets and liabilities excluding acquisitions of businesses: | | | | | | | | | | | | |
| Accounts receivable | | | 6,578 | | | | 9,536 | | | | (16,219 | ) |
| Inventories | | | (12,547 | ) | | | 8,527 | | | | (28,443 | ) |
| Accounts payable and accrued expenses | | | 7,247 | | | | (22,246 | ) | | | 16,956 | |
| Other | | | (10,836 | ) | | | (14,778 | ) | | | (7,266 | ) |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 8,547 | | | | 31,466 | | | | 6,063 | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | | (17,466 | ) | | | (21,876 | ) | | | (20,756 | ) |
| Business acquisitions, net of cash acquired | | | (5,322 | ) | | | -0- | | | | (23,271 | ) |
| Proceeds from sale-leaseback transactions | | | -0- | | | | -0- | | | | 9,420 | |
| Purchases of marketable securities | | | (853 | ) | | | (5,142 | ) | | | -0- | |
| Sales of marketable securities | | | 2,983 | | | | 662 | | | | -0- | |
| Proceeds from the sale of assets held for sale | | | 260 | | | | 4,365 | | | | 3,200 | |
| | | | | | | | | | | | | |
| Net cash used by investing activities | | | (20,398 | ) | | | (21,991 | ) | | | (31,407 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Proceeds from bank arrangements, net | | | 25,612 | | | | -0- | | | | 28,150 | |
| Payments on bank arrangements, net | | | -0- | | | | (14,751 | ) | | | -0- | |
| Purchase of 8.375% senior subordinated notes | | | (4,658 | ) | | | -0- | | | | -0- | |
| Issuance of common stock under stock option plan | | | 147 | | | | 340 | | | | 193 | |
| Purchase of treasury stock | | | (5,937 | ) | | | (2,189 | ) | | | (58 | ) |
| | | | | | | | | | | | | |
| Net cash provided (used) by financing activities | | | 15,164 | | | | (16,600 | ) | | | 28,285 | |
| Increase (decrease) in cash and cash equivalents | | | 3,313 | | | | (7,125 | ) | | | 2,941 | |
| Cash and cash equivalents at beginning of year | | | 14,512 | | | | 21,637 | | | | 18,696 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 17,825 | | | $ | 14,512 | | | $ | 21,637 | |
| | | | | | | | | | | | | |
| Income taxes paid | | $ | 6,847 | | | $ | 6,170 | | | $ | 5,291 | |
| Interest paid | | | 26,115 | | | | 30,194 | | | | 28,997 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | | Additional
| | | Retained
| | | | | | Other
| | | | |
| | | Common
| | | Paid-In
| | | Earnings
| | | Treasury
| | | Comprehensive
| | | | |
| | | Stock | | | Capital | | | (Deficit) | | | Stock | | | Income (Loss) | | | Total | |
| | | (Dollars in thousands) | |
| |
| Balance at January 1, 2007 | | $ | 12,110 | | | $ | 59,676 | | | $ | 70,193 | | | $ | (9,066 | ) | | $ | 5,824 | | | $ | 138,737 | |
| Adjustment relating to adoption of FIN 48 | | | | | | | | | | | (608 | ) | | | | | | | | | | | (608 | ) |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 21,197 | | | | | | | | | | | | 21,197 | |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 7,328 | | | | 7,328 | |
| Unrealized loss on marketable securities, net of income tax of $182 | | | | | | | | | | | | | | | | | | | (323 | ) | | | (323 | ) |
| Pension and postretirement benefit adjustments, net of income tax of $2,834 | | | | | | | | | | | | | | | | | | | 4,933 | | | | 4,933 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 33,135 | |
| Restricted stock award | | | 17 | | | | (17 | ) | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 1,651 | | | | | | | | | | | | | | | | 1,651 | |
| Purchase of treasury stock (92,253 shares) | | | | | | | | | | | | | | | (2,189 | ) | | | | | | | (2,189 | ) |
| Exercise of stock options (106,084 shares) | | | 106 | | | | 234 | | | | | | | | | | | | | | | | 340 | |
| Share-based compensation | | | | | | | 412 | | | | | | | | | | | | | | | | 412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 12,233 | | | | 61,956 | | | | 90,782 | | | | (11,255 | ) | | | 17,762 | | | | 171,478 | |
| Comprehensive (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (119,803 | ) | | | | | | | | | | | (119,803 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (8,730 | ) | | | (8,730 | ) |
| Unrealized loss on marketable securities, net of income tax of $-0- | | | | | | | | | | | | | | | | | | | (90 | ) | | | (90 | ) |
| Pension and postretirement benefit adjustments, net of income tax of $13,460 | | | | | | | | | | | | | | | | | | | (26,423 | ) | | | (26,423 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | (155,046 | ) |
| Restricted stock award | | | 23 | | | | (23 | ) | | | | | | | | | | | | | | | -0- | |
| Restricted stock exchange for restricted share units | | | (62 | ) | | | 62 | | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 1,677 | | | | | | | | | | | | | | | | 1,677 | |
| Purchase of treasury stock (614,863 shares) | | | | | | | | | | | | | | | (5,937 | ) | | | | | | | (5,937 | ) |
| Exercise of stock options (43,003 shares) | | | 43 | | | | 104 | | | | | | | | | | | | | | | | 147 | |
| Share-based compensation | | | | | | | 436 | | | | | | | | | | | | | | | | 436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | 12,237 | | | | 64,212 | | | | (29,021 | ) | | | (17,192 | ) | | | (17,481 | ) | | | 12,755 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (5,209 | ) | | | | | | | | | | | (5,209 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 2,968 | | | | 2,968 | |
| Unrealized loss on marketable securities, net of income tax of $182 | | | | | | | | | | | | | | | | | | | 413 | | | | 413 | |
| Pension and postretirement benefit adjustments, net of income tax of $1,179 | | | | | | | | | | | | | | | | | | | 8,986 | | | | 8,986 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 7,158 | |
| Restricted stock award, net of forfeiture | | | 627 | | | | (627 | ) | | | | | | | | | | | | | | | -0- | |
| Amortization of restricted stock | | | | | | | 1,969 | | | | | | | | | | | | | | | | 1,969 | |
| Purchase of treasury stock (30,445 shares) | | | | | | | | | | | | | | | (251 | ) | | | | | | | (251 | ) |
| Exercise of stock options (410,000 shares) | | | 410 | | | | 373 | | | | | | | | | | | | | | | | 783 | |
| Share-based compensation | | | | | | | 396 | | | | | | | | | | | | | | | | 396 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | $ | 13,274 | | | $ | 66,323 | | | $ | (34,230 | ) | | $ | (17,443 | ) | | $ | (5,114 | ) | | $ | 22,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
39
Park-Ohio Holdings Corp. and Subsidiaries
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net (loss) income | | $ | (5,209 | ) | | $ | (119,803 | ) | | $ | 21,197 | |
| Adjustments to reconcile net (loss) income to net cash provided by operations: | | | | | | | | | | | | |
| Depreciation and amortization | | | 18,918 | | | | 20,933 | | | | 20,611 | |
| Restructuring and impairment charges | | | 5,206 | | | | 121,094 | | | | 2,214 | |
| Gain on purchase of 8.375% senior subordinated notes | | | (6,297 | ) | | | (6,232 | ) | | | -0- | |
| Deferred income taxes | | | (1,842 | ) | | | -0- | | | | 4,342 | |
| Stock based compensation expense | | | 2,365 | | | | 2,113 | | | | 2,063 | |
| Changes in operating assets and liabilities excluding acquisitions of businesses: | | | | | | | | | | | | |
| Accounts receivable | | | 61,136 | | | | 6,578 | | | | 9,536 | |
| Inventories | | | 46,701 | | | | (12,547 | ) | | | 8,527 | |
| Accounts payable and accrued expenses | | | (82,113 | ) | | | 7,247 | | | | (22,246 | ) |
| Other | | | 5,000 | | | | (10,836 | ) | | | (14,778 | ) |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 43,865 | | | | 8,547 | | | | 31,466 | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| Purchases of property, plant and equipment | | | (5,575 | ) | | | (17,466 | ) | | | (21,876 | ) |
| Business acquisitions, net of cash acquired | | | -0- | | | | (5,322 | ) | | | -0- | |
| Purchases of marketable securities | | | (62 | ) | | | (853 | ) | | | (5,142 | ) |
| Sales of marketable securities | | | 865 | | | | 2,983 | | | | 662 | |
| Proceeds from the sale of assets held for sale | | | -0- | | | | 260 | | | | 4,365 | |
| | | | | | | | | | | | | |
| Net cash used by investing activities | | | (4,772 | ) | | | (20,398 | ) | | | (21,991 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| (Payments) proceeds on bank arrangements, net | | | (25,499 | ) | | | 25,612 | | | | (14,751 | ) |
| Purchase of 8.375% senior subordinated notes | | | (8,853 | ) | | | (4,658 | ) | | | -0- | |
| Issuance of common stock under stock option plan | | | 783 | | | | 147 | | | | 340 | |
| Purchase of treasury stock | | | (251 | ) | | | (5,937 | ) | | | (2,189 | ) |
| | | | | | | | | | | | | |
| Net cash (used) provided by financing activities | | | (33,820 | ) | | | 15,164 | | | | (16,600 | ) |
| Increase (decrease) in cash and cash equivalents | | | 5,273 | | | | 3,313 | | | | (7,125 | ) |
| Cash and cash equivalents at beginning of year | | | 17,825 | | | | 14,512 | | | | 21,637 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 23,098 | | | $ | 17,825 | | | $ | 14,512 | |
| | | | | | | | | | | | | |
| Income taxes paid | | $ | 3,146 | | | $ | 6,847 | | | $ | 6,170 | |
| Interest paid | | | 23,018 | | | | 26,115 | | | | 30,194 | |
See notes to consolidated financial statements.
40
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
December 31, 2009, 2008 2007 and 20062007
(Dollars in thousands, except per share data)
| |
NOTE A — | Summary of Significant Accounting Policies |
NOTE A — Summary of Significant Accounting Policies
Consolidation and Basis of Presentation: 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. The Company does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties as described in Note L. Transactions with related parties are in the ordinary course of business, are conducted on an arm’s-length basis, and are not material to the Company’s financial position, results of operations or cash flows.
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.
Marketable Securities: Marketable securities which consist of equity securities are classified as available for sale and are included in other current assets. The securities are carried at their fair value and net unrealized holding gains and losses, net of tax, are carried as a component of accumulated other comprehensive earnings (loss).
Inventories: Inventories are stated at the lower offirst-in, first-out (“FIFO”) cost or market value. Inventory reserves were $22,312$21,456 and $20,432$22,312 at December 31, 2009 and 2008, respectively. Inventory consigned to others was $3,160 and 2007,$5,025 at December 31, 2009 and 2008, respectively.
Major Classes of Inventories
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| |
| Finished goods | | $ | 129,939 | | | $ | 129,074 | | | $ | 100,309 | | | $ | 129,939 | |
| Work in process | | | 29,648 | | | | 26,249 | | | | 26,778 | | | | 29,648 | |
| Raw materials and supplies | | | 69,230 | | | | 60,086 | | | | 55,029 | | | | 69,230 | |
| | | | | | | | | | | |
| | | $ | 228,817 | | | $ | 215,409 | | | $ | 182,116 | | | $ | 228,817 | |
| | | | | | | | | | | |
Property, Plant and Equipment: Property, plant and equipment are carried at cost. Additions and associated interest costs are capitalized and 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 to 60 years for buildings, and 3 to 20 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 O.
Impairment of Long-Lived AssetsAssets:
We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with finite useful lives, whenever events or changes in circumstances indicate that we may not be able to recover the assets’ carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future undiscounted cash flows to be generated by that asset, or, for identifiable intangibles with finite useful lives, by determining
40
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with finite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset,
41
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
which is generally determined, based on projected discounted future cash flows or appraised values. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed.
Goodwill and Other Intangible Assets: In accordance with Statement of Financial Accounting Standards Codification (“SFAS”ASC”) No. 142, “Goodwill350 “Intangibles — Goodwill and Other Intangible Assets”Other” (“FAS 142”ASC 350”), the Company does not amortize goodwill recorded in connection with business acquisitions. The Company completed the annual impairment tests required by FAS 142ASC 350 as of October 1, 2008 and updated these tests as necessary as of December 31, 2008. See Note D for the results of this testing.2009. Other intangible assets, which consist primarily of non-contractual customer relationships, are amortized over their estimated useful lives.
We use an income approach and other valuation techniques to estimate the fair value of our reporting units. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use ofusing this methodmethodology provides reasonable estimates of a reporting unit’s fair value. The income approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach is based on a reporting unit’s projection of operating results and cash flows that is discounted using a weighted-average cost of capital. The projection is based upon our best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements based on management projections. There are inherent uncertainties, however, related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that this method provides a reasonable approach to estimate the fair value of our reporting units.
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, See Note D for the Company has two unfunded postretirement benefit plans. For the defined benefit plans, benefits are based on the employee’s yearsresults of service. For the defined contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation.this testing.
Stock-Based Compensation: Effective January 1, 2006,The Company follows the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”provisions of ASC 718 “Compensation — Stock Compensation,” (“FAS 123(R)”ASC 718”), using the “modified prospective” method. Under this method, compensation cost is recognized beginning with the effective date (a) based on the requirements of FAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of FAS 123 for all awards granted to employees prior to the effective date of FAS 123(R) that remain unvested on the effective date.
FAS 123(R) was issued on December 16, 2004 and is a revision of FAS 123, “Accounting for Stock-Based Compensation.” FAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion 25”) and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in FAS 123(R) is similar to the approach described in FAS 123. However, FAS 123(R)which 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
41
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
alternative.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
alternative. The adoption of fair value recognition provisions for share-based awards increased the Company’s fiscal 2008, 2007 and 2006 compensation expense by $436, $412 and $299 (before tax), respectively.
As permitted by FAS 123, the Company previously accounted for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. FAS 123(R)ASC 718 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 previous accounting guidance. 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 was 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.
The fair value of stock options is estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the following fiscal years:
| | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2008 | | | 2007 | |
| |
| Risk — free interest rate | | | 3.33 | % | | | 4.62 | % |
| Expected life of option in years | | | 6.0 | | | | 6.0 | |
| Expected dividend yield | | | 0 | % | | | 0 | % |
| Expected stock volatility | | | 53 | % | | | 57 | % |
The weighted average fair market value of options issued for the fiscal year ended December 31, 2008 and 2007 was estimated to be $7.48 and $12.92 per share, respectively. There were no options issued for the year ended December 31, 2006.
Additional information regarding our share-based compensation program is provided in Note I.
Accounting for Asset Retirement Obligations: In accordance with FIN No. 47, “Accounting for Conditional AssetASC 410 “Asset Retirement Obligations — an interpretation of FASB Statement No. 143”, “Accounting for Asset Retirementand Environmental Obligations”, the Company has identified certain conditional asset retirement obligations at various current manufacturing facilities. These obligations relate primarily to asbestos abatement. Using investigative, remediation, and disposal methods that are currently available to the Company, the estimated cost of these obligations is not significant and management does not believe that any potential liability ultimately attributed to the Company for its conditional asset retirement obligations will have a material adverse effect on the Company’s financial condition, liquidity, or cash flow due to the extended period of time during which investigation and remediation takes place. An estimate of the potential impact on the Company’s operations cannot be made due to the aforementioned uncertainties. Management expects these contingent asset retirement obligations to be resolved over an extended period of time. Management is
42
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unable to provide a more specific time frame due to the indefinite amount of time to conduct investigation activities at any site, the indefinite amount of time to obtain governmental agency approval, as necessary, with respect to investigation and remediation activities, and the indefinite amount of time necessary to conduct remediation activities.
Income Taxes: The Company accounts for income taxes under the asset and 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, cumulative earnings and
42
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
losses, expectations of future earnings, taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records valuation allowances if, based on the weight of available evidence it is more likely than not that some portion or all of our deferred tax assets will not be realized as required by SFAS No. 109ASC 740 “Income Taxes” (“FAS 109”ASC 740”), “Accounting for Income Taxes.”.
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 (approximately 16%10% 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 unbilled contract revenues in the accompanying consolidated balance sheet. The Company’s revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are recorded at net realizable value. 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. On November 16, 2007, the Company entered into a five-year Accounts Receivable Purchase Agreement whereby one specific customer’s accounts receivable may be sold without recourse to a third-party financial institution on a revolving basis. During 20082009 and 2007,2008, we sold approximately $33,814$20,832 and $10,400,$33,814, respectively, of accounts receivable to mitigate accounts receivable concentration risk and to provide additional financing capacity. In compliance with SFAS No. 140, “Accounting for TransfersASC 860, “Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“FAS 140”)Servicing”, sales of accounts receivable are reflected as a reduction of accounts receivable in the Consolidated Balance Sheets and the proceeds are included in the cash flows from operating activities in the Consolidated Statements of Cash flows. In 20082009 and 2007,2008, a loss in the amount of $200$86 and $84,$200, respectively, related to the sale of accounts receivable is recorded in the Consolidated Statements of Income.Operations. These losses represented implicit interest on the transactions.
Software Development Costs: Software development costs incurred subsequent to establishing feasibility through the general release of the software products are capitalized and included in other assets in the consolidated balance sheet. Technological feasibility is demonstrated by the completion of a working model. All costs prior to the development of the working model are expensed as incurred. Capitalized costs are amortized on a straight-line basis over five years, which is the estimated useful life of the software product. Amortization expense was $1,454, $1,288 and $1,287 in 2009, 2008 and 2007, respectively.
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. As of December 31, 2008,2009, the Company had uncollateralized receivables with fivesix customers in the automotive and heavy-duty truck industries,industry, each with several locations, aggregating $22,241,$17,363, which represented approximately 13%16% of the Company’s trade accounts receivable. During 2008,2009, sales to these customers amounted to approximately $170,740,$77,297, which represented approximately 16%11% of the Company’s net sales.
43
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Shipping and Handling Costs: All shipping and handling costs are included in cost of products sold in the Consolidated Income Statements.Statements of Operations.
Environmental: The Company accrues environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or mitigate or prevent future environmental contamination are
43
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
capitalized. The Company records a liability when environmental assessmentsand/or remedial 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 U.S. 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 accumulated comprehensive income (loss) in shareholders’ equity.
Recent Accounting Pronouncements
In December 2008,June 2009, the Financial Accounting Standards Board (“FASB”) issued FSP 132(R)-1, “Employers Disclosures about Post Retirement Benefit Plan Assets.” FSP 132(R)-1 providesStatement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles”. The statement makes the ASC the single source of authoritative U.S. accounting and reporting standards, but it does not change U.S. GAAP. The Company adopted the statement as of September 30, 2009. Accordingly, the financial statements for the interim period ending September 30, 2009, and the financial statements for future interim and annual periods will reflect the ASC references. The statement has no impact on the Company’s results of operations, financial condition or liquidity.
In December 2007, the FASB issued new guidance that modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value, contingent consideration arrangements be recorded at fair value on the date of the acquisition and pre-acquisition contingencies will generally be accounted for in purchase accounting at fair value. The new guidance was adopted prospectively by the Company, effective January 1, 2009.
In December 2008, the FASB issued new guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance addresses disclosures related to the categories of plan assets and fair value measurements of plan assets. This Staff Position is effective forThe new guidance was adopted by the Company ineffective January 1, 2009 and will havehad no effect on its consolidated financial position or results of operations.
In MarchEffective January 1, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The pronouncement also requires the cross-referencing of derivative disclosures within theCompany measures financial statements and notes thereto. The requirements of FAS 161 are effective for the Company in 2009. The adoption of FAS 161 will not have an impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 modifies the reporting for noncontrolling interests in the balance sheet and minority interest income (expense) in the income statement. The pronouncement also requires that increases and decreases in the noncontrolling ownership interest amount be accounted for as equity transactions. FAS 160 is required to be adopted prospectively, with limited exceptions, effective for the Company in 2009.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”). FAS 141R modifies the accounting for business combinations by requiring that acquired assets and assumed liabilities be recorded at fair value contingent consideration arrangements be recorded atin three levels of inputs. The three-tier fair value onhierarchy, which prioritizes the date ofinputs used in the acquisition and preacquisition contingencies will generally be accounted for in purchase accounting at fair value. The pronouncement also requires that transaction costs be expensed as incurred, acquired research and development be capitalized as an indefinite-lived intangible asset and the requirements of Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” be met at the acquisition date in order to accrue for a restructuring plan in purchase accounting. FAS 141R is required to be adopted prospectively effective for fiscal years beginning after December 15, 2008.valuation methodologies, is:
In February 2007, the FASB issued SFAS No. 159, “The Fair Value OptionLevel 1 —Valuations based on quoted prices for Financial Assetsidentical assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instrumentsliabilities in active markets.
Level 2 —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and certain other items at fair valueliabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not currently required toactive, or other inputs that are observable or can be measured at fair value. The pronouncement also establishes presentation and disclosure requirements to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.corroborated by observable market data.
Level 3 —Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
44
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FAS 159In April 2009, the FASB issued new guidance that if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. This new guidance is to be applied prospectively and is effective for fiscal years beginninginterim and annual periods ending after NovemberJune 15, 2007.2009 with early adoption permitted for periods ending after March 15, 2009. The Company did not elect to measureadopted this guidance for its quarter ended June 30, 2009. There was no impact on the consolidated financial instruments or any other items atstatements. In April 2009, the FASB issued guidance which requires that publicly traded companies include the fair value as permitted by FAS 159.disclosures in their interim financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance at June 30, 2009. At December 31, 2009 the approximate fair value of Park-Ohio Industries, Inc 8.375% senior subordinated notes due 2014 was $144,310 based on Level 1 inputs. The Company had other investments having Level 2 inputs totaling $6,809.
In September 2006,May 2009, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“FAS 157”)guidance which defines fair value, establishesaddresses the framework for measuring fair value under U.S. GAAPtypes and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position157-2, Effective Datetiming of FASB Statement No. 157,events that delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair valueshould be reported in the financial statements for events occurring between the balance sheet date and the date the financial statements are issued or available to be issued. This guidance was effective for the Company on a recurring basis, to fiscal years beginning after November 15, 2008. We adopted the non-deferred portionJune 30, 2009. The adoption of FAS 157 on January 1, 2008, and such adoptionthis guidance did not have an impact on ourthe Company’s’ consolidated financial statements. We are evaluatingposition or results of operations. Refer to Note P to the effect that adoption of the deferred portion of FAS 157 will have on ourconsolidated financial statements in 2009, specifically in the areas of measuring fair value in business combinations and goodwill.
As of December 31, 2008, the Company’s financial assets subject to FAS 157 consisted of marketable equity securities and other investments totaling $921 and $5,239, respectively. The marketable securities are classified as having Level 1 inputs, as the fair value is basedfor information on quoted prices in active markets. The other investments are classified as having Level 2 inputs, as the fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly, including quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are not active; inputs other than quoted prices that are observable for the asset; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.subsequent events.
| |
| NOTE B — | Industry Segments |
The Company operates through three segments: Supply Technologies, Aluminum Products and Manufactured Products. In November 2007, our Integrated Logistics Solutions segment changed its name to Supply Technologies to better reflect its breadth of services and focus on driving efficiencies throughout the total supply management process. Supply Technologies provides our customers with Total Supply Managementtm services for a broad range of high-volume, specialty production components. Total Supply Managementtm manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation and includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking,just-in-time andpoint-of-use delivery, electronic billing services and ongoing technical support. The principal customers of Supply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, and appliance industries. Aluminum Products manufactures cast aluminum components for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment industries. Aluminum Products also provides value-added services such as design and engineering, machining and assembly. Manufactured Products operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of high quality products engineered for specific customer applications. The principal customers of Manufactured Products are original equipment manufacturers and end users in the steel, coatings, forging, foundry, heavy-duty truck, construction equipment, bottling, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense 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
45
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Net sales: | | | | | | | | | | | | |
| Supply Technologies | | $ | 521,270 | | | $ | 531,417 | | | $ | 598,228 | |
| Aluminum Products | | | 156,269 | | | | 169,118 | | | | 154,639 | |
| Manufactured Products | | | 391,218 | | | | 370,906 | | | | 303,379 | |
| | | | | | | | | | | | | |
| | | $ | 1,068,757 | | | $ | 1,071,441 | | | $ | 1,056,246 | |
| | | | | | | | | | | | | |
| Income before income taxes: | | | | | | | | | | | | |
| Supply Technologies | | $ | (74,884 | ) | | $ | 27,175 | | | $ | 38,383 | |
| Aluminum Products | | | (36,042 | ) | | | 3,020 | | | | 3,921 | |
| Manufactured Products | | | 50,534 | | | | 45,798 | | | | 28,991 | |
| | | | | | | | | | | | | |
| | | | (60,392 | ) | | | 75,993 | | | | 71,295 | |
| Corporate costs | | | (10,556 | ) | | | (13,269 | ) | | | (12,631 | ) |
| Interest expense | | | (27,869 | ) | | | (31,551 | ) | | | (31,267 | ) |
| | | | | | | | | | | | | |
| | | $ | (98,817 | ) | | $ | 31,173 | | | $ | 27,397 | |
| | | | | | | | | | | | | |
| Identifiable assets: | | | | | | | | | | | | |
| Supply Technologies | | $ | 256,161 | | | $ | 354,165 | | | $ | 382,101 | |
| Aluminum Products | | | 87,215 | | | | 98,524 | | | | 98,041 | |
| Manufactured Products | | | 242,057 | | | | 231,459 | | | | 205,698 | |
| General corporate | | | 33,787 | | | | 85,041 | | | | 97,911 | |
| | | | | | | | | | | | | |
| | | $ | 619,220 | | | $ | 769,189 | | | $ | 783,751 | |
| | | | | | | | | | | | | |
| Depreciation and amortization expense: | | | | | | | | | | | | |
| Supply Technologies | | $ | 5,153 | | | $ | 4,832 | | | $ | 4,365 | |
| Aluminum Products | | | 8,564 | | | | 8,563 | | | | 7,892 | |
| Manufactured Products | | | 6,586 | | | | 6,723 | | | | 6,960 | |
| General corporate | | | 630 | | | | 493 | | | | 923 | |
| | | | | | | | | | | | | |
| | | $ | 20,933 | | | $ | 20,611 | | | $ | 20,140 | |
| | | | | | | | | | | | | |
| Capital expenditures: | | | | | | | | | | | | |
| Supply Technologies | | $ | 931 | | | $ | 7,751 | | | $ | 2,447 | |
| Aluminum Products | | | 7,750 | | | | 4,775 | | | | 5,528 | |
| Manufactured Products | | | 8,101 | | | | 6,534 | | | | 12,548 | |
| General corporate | | | 684 | | | | 2,816 | | | | 233 | |
| | | | | | | | | | | | | |
| | | $ | 17,466 | | | $ | 21,876 | | | $ | 20,756 | |
| | | | | | | | | | | | | |
45
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Net sales: | | | | | | | | | | | | |
| Supply Technologies | | $ | 328,805 | | | $ | 521,270 | | | $ | 531,417 | |
| Aluminum Products | | | 111,388 | | | | 156,269 | | | | 169,118 | |
| Manufactured Products | | | 260,854 | | | | 391,218 | | | | 370,906 | |
| | | | | | | | | | | | | |
| | | $ | 701,047 | | | $ | 1,068,757 | | | $ | 1,071,441 | |
| | | | | | | | | | | | | |
| Income before income taxes: | | | | | | | | | | | | |
| Supply Technologies | | $ | 6,325 | | | $ | (74,884 | ) | | $ | 27,175 | |
| Aluminum Products | | | (5,155 | ) | | | (36,042 | ) | | | 3,020 | |
| Manufactured Products | | | 23,472 | | | | 50,534 | | | | 45,798 | |
| | | | | | | | | | | | | |
| | | | 24,642 | | | | (60,392 | ) | | | 75,993 | |
| Corporate costs | | | (7,490 | ) | | | (10,556 | ) | | | (13,269 | ) |
| Interest expense | | | (23,189 | ) | | | (27,869 | ) | | | (31,551 | ) |
| | | | | | | | | | | | | |
| | | $ | (6,037 | ) | | $ | (98,817 | ) | | $ | 31,173 | |
| | | | | | | | | | | | | |
| Identifiable assets: | | | | | | | | | | | | |
| Supply Technologies | | $ | 207,729 | | | $ | 256,161 | | | $ | 354,165 | |
| Aluminum Products | | | 76,443 | | | | 87,215 | | | | 98,524 | |
| Manufactured Products | | | 178,715 | | | | 242,057 | | | | 231,459 | |
| General corporate | | | 39,381 | | | | 33,787 | | | | 85,041 | |
| | | | | | | | | | | | | |
| | | $ | 502,268 | | | $ | 619,220 | | | $ | 769,189 | |
| | | | | | | | | | | | | |
| Depreciation and amortization expense: | | | | | | | | | | | | |
| Supply Technologies | | $ | 4,812 | | | $ | 5,153 | | | $ | 4,832 | |
| Aluminum Products | | | 7,556 | | | | 8,564 | | | | 8,563 | |
| Manufactured Products | | | 6,022 | | | | 6,586 | | | | 6,723 | |
| General corporate | | | 528 | | | | 630 | | | | 493 | |
| | | | | | | | | | | | | |
| | | $ | 18,918 | | | $ | 20,933 | | | $ | 20,611 | |
| | | | | | | | | | | | | |
| Capital expenditures: | | | | | | | | | | | | |
| Supply Technologies | | $ | 2,380 | | | $ | 931 | | | $ | 7,751 | |
| Aluminum Products | | | 1,385 | | | | 7,750 | | | | 4,775 | |
| Manufactured Products | | | 2,006 | | | | 8,101 | | | | 6,534 | |
| General corporate | | | (196 | ) | | | 684 | | | | 2,816 | |
| | | | | | | | | | | | | |
| | | $ | 5,575 | | | $ | 17,466 | | | $ | 21,876 | |
| | | | | | | | | | | | | |
46
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had sales of $88,222 in 2008, $77,389 in 2007 and $146,849 in 2006 to Navistar, Inc. (“Navistar”), which represented approximately 8%, 7% and 14% of consolidated net sales for each respective year.
The Company’s approximate percentage of net sales by geographic region were as follows:
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended
| | | Year Ended
| |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| United States | | | 68 | % | | | 70 | % | | | 76 | % | | | 73 | % | | | 68 | % | | | 70 | % |
| Asia | | | 11 | % | | | 9 | % | | | 5 | % | | | 9 | % | | | 11 | % | | | 9 | % |
| Canada | | | 6 | % | | | 5 | % | | | 9 | % | | | 6 | % | | | 6 | % | | | 5 | % |
| Mexico | | | 6 | % | | | 6 | % | | | 4 | % | | | 2 | % | | | 6 | % | | | 6 | % |
| Europe | | | 6 | % | | | 6 | % | | | 4 | % | | | 9 | % | | | 6 | % | | | 6 | % |
| Other | | | 3 | % | | | 4 | % | | | 2 | % | | | 1 | % | | | 3 | % | | | 4 | % |
| | | | | | | | | | | | | | | |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | |
At December 31, 2009, 2008 and 2007, approximately 77%, 81% and 2006, approximately 81%, 85% and 90%, respectively, of the Company’s assets were maintained in the United States.
During 2008, the Company purchased certain assets of two companies for a total cost of $5,322. These acquisitions were funded with borrowings under the Company’s revolving credit facility. These acquisitions were not deemed significant as defined inRegulation S-X.
In October 2006, the Company acquired all of the capital stock of NABS, Inc. (“NABS”) for $21,201 in cash. NABS is a premier international supply chain manager of production components, providing services to high technology companies in the computer, electronics, and consumer products industries. NABS has 19 operations across Europe, Asia, Mexico and the United States. The acquisition was funded with borrowings under the Company’s revolving credit facility.
The purchase price and results of operations of NABS prior to its date of acquisition were not deemed significant as defined inRegulation S-X. The results of operations for NABS have been included in the Supply Technologies segment since October 18, 2006. The final allocation of the purchase price has been
47
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
performed based on the assignments of fair values to assets acquired and liabilities assumed. The final allocation of the purchase price is as follows:
| | | | | |
| Cash acquisition price, less cash acquired | | $ | 20,053 | |
| Assets | | | | |
| Accounts receivable | | | (11,460 | ) |
| Inventories | | | (4,326 | ) |
| Other current assets | | | (201 | ) |
| Equipment | | | (365 | ) |
| Intangible assets subject to amortization | | | (8,020 | ) |
| Other assets | | | (724 | ) |
| Liabilities | | | | |
| Accounts payable | | | 9,905 | |
| Accrued expenses and other current liabilities | | | 4,701 | |
| Deferred tax liability | | | 3,128 | |
| | | | | |
| Goodwill | | $ | 12,691 | |
| | | | | |
In January 2006, the Company completed the acquisition of all of the capital stock of Foundry Service GmbH (“Foundry Service”) for approximately $3,219, which resulted in additional goodwill of $2,313. The acquisition was funded with borrowings from foreign subsidiaries of the Company. The acquisition was not deemed significant as defined inRegulation S-X.
| |
| NOTE D — | FAS 142, “GoodwillGoodwill and Other Intangible Assets”Assets |
FAS 142, “Goodwill and Other Intangibles”,ASC 350, requires that our annual, and any interim, impairment assessment be performed at the “reporting unit” level. At October 1, 2008, the Company had four reporting units that had goodwill. Under the provisions of FASB Statement No. 142,ASC 350, these four reporting units were tested for impairment as of October 1, 2008 and updated as of December 31, 2008, as necessary. During the fourth quarter of 2008, indicators of potential impairment caused us to update our impairment tests. Those indicators included the following: a significant decrease in market capitalization; a decline in recent operating results; and a decline in our business outlook primarily due to the macroeconomic environment. In accordance with FAS 142,ASC 350, we completed an impairment analysis and concluded that all of the goodwill in three of the reporting units for a total of $95,763 was impaired and written off in the fourth quarter of 2008.
The following table summarizeschanges in the carrying amount of goodwill by reportable segment for the years ended December 31, 2009 and 2008 and December 31, 2007 by reporting segment.were as follows:
| | | | | | | | | |
| | | Goodwill at
| | | Goodwill at
| |
Reporting Segment | | December 31, 2008 | | | December 31, 2007 | |
| |
| Supply Technologies | | $ | -0- | | | $ | 80,249 | |
| Aluminum Products | | | -0- | | | | 16,515 | |
| Manufactured Products | | | 4,109 | | | | 4,233 | |
| | | | | | | | | |
| | | $ | 4,109 | | | $ | 100,997 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Supply
| | | | | | Manufactured
| | | | |
| | | Technologies | | | Aluminum | | | Products | | | Total | |
| |
| Balance at January 1, 2008 | | $ | 80,249 | | | $ | 16,515 | | | $ | 4,233 | | | $ | 100,997 | |
| Foreign Currency Translation | | | (1,001 | ) | | | -0- | | | | (124 | ) | | | (1,125 | ) |
| Impairment Charge | | | (79,248 | ) | | | (16,515 | ) | | | -0- | | | | (95,763 | ) |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | -0- | | | | -0- | | | | 4109 | | | | 4,109 | |
| Foreign Currency Translation | | | -0- | | | | -0- | | | | 46 | | | | 46 | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | $ | -0- | | | $ | -0- | | | $ | 4,155 | | | $ | 4,155 | |
| | | | | | | | | | | | | | | | | |
The decrease in the goodwill in the Manufactured Products segment and in the Supply Technologies segment prior to the impairment charge during 2008 results from foreign currency fluctuations.
4847
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other intangible assets were acquired in connection with the acquisition of NABS.NABS, Inc. Information regarding other intangible assets as of December 31, 2009 and 2008 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2009 | | | | | | 2008 | | | |
| | | Acquisition
| | Accumulated
| | | | | Acquisition
| | Accumulated
| | | | Acquisition
| | Accumulated
| | | |
| | | Costs | | Amortization | | Net | | | Costs | | Amortization | | Net | | Costs | | Amortization | | Net | |
| |
| Non-contractual customer relationships | | $ | 7,200 | | | $ | 1,200 | | | $ | 6,000 | | | $ | 7,200 | | | $ | 1,800 | | | $ | 5,400 | | | $ | 7,200 | | | $ | 1,200 | | | $ | 6,000 | |
| Other | | | 820 | | | | 248 | | | | 572 | | | | 820 | | | | 372 | | | | 448 | | | | 820 | | | | 248 | | | | 572 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 8,020 | | | $ | 1,448 | | | $ | 6,572 | | | $ | 8,020 | | | $ | 2,172 | | | $ | 5,848 | | | $ | 8,020 | | | $ | 1,448 | | | $ | 6,572 | |
| | | | | | | | | | | | | | | | | | | | | |
Amortization of other intangible assets was $724 for each of the years ended December 31, 20082009 and 2007, respectively.2008. Amortization expense for each of the five years following December 31, 2009 is approximately $724 in 2010, $724 in 2011 and $600 for each of the three subsequent years thereafter.
Other assets consists of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| |
| Pension assets | | $ | 38,985 | | | $ | 70,558 | | | $ | 49,435 | | | $ | 38,985 | |
| Deferred financing costs, net | | | 2,951 | | | | 4,225 | | | | 1,345 | | | | 2,951 | |
| Tooling | | | 139 | | | | 543 | | | | 384 | | | | 139 | |
| Software development costs | | | 4,096 | | | | 3,461 | | | | 3,893 | | | | 4,096 | |
| Intangible assets subject to amortization | | | 7,513 | | | | 7,954 | | | | 5,848 | | | | 6,572 | |
| Other | | | 10,498 | | | | 8,340 | | | | 10,505 | | | | 11,439 | |
| | | | | | | | | | | |
| Totals | | $ | 64,182 | | | $ | 95,081 | | | $ | 71,410 | | | $ | 64,182 | |
| | | | | | | | | | | |
Accrued expenses include the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| |
| Accrued salaries, wages and benefits | | $ | 13,173 | | | $ | 17,399 | | | $ | 8,978 | | | $ | 13,173 | |
| Advance billings | | | 28,412 | | | | 16,387 | | | | 14,189 | | | | 28,412 | |
| Warranty and project accruals | | | 6,686 | | | | 7,322 | | |
| Warranty accrual | | | | 2,760 | | | | 5,402 | |
| Interest payable | | | 2,837 | | | | 2,683 | | | | 2,191 | | | | 2,837 | |
| Taxes | | | 6,386 | | | | 5,607 | | | | 1,788 | | | | 6,386 | |
| Other | | | 16,857 | | | | 17,609 | | | | 9,244 | | | | 18,141 | |
| | | | | | | | | | | |
| Totals | | $ | 74,351 | | | $ | 67,007 | | | $ | 39,150 | | | $ | 74,351 | |
| | | | | | | | | | | |
Substantially all advance billings warranty and projectwarranty accruals relate to the Company’s capital equipment businesses.
4948
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 2009, 2008 2007 and 2006:2007:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| Balance at beginning of year | | $ | 5,799 | | | $ | 3,557 | | | $ | 3,566 | | | $ | 5,402 | | | $ | 5,799 | | | $ | 3,557 | |
| Claims paid during the year | | | (3,944 | ) | | | (2,402 | ) | | | (2,984 | ) | | | (3,367 | ) | | | (3,944 | ) | | | (2,402 | ) |
| Warranty expense | | | 4,202 | | | | 4,526 | | | | 2,797 | | | | 704 | | | | 4,202 | | | | 4,526 | |
| Other | | | (655 | ) | | | 118 | | | | 178 | | | | 21 | | | | (655 | ) | | | 118 | |
| | | | | | | | | | | | | | | |
| Balance at end of year | | $ | 5,402 | | | $ | 5,799 | | | $ | 3,557 | | | $ | 2,760 | | | $ | 5,402 | | | $ | 5,799 | |
| | | | | | | | | | | | | | | |
| |
| NOTE G — | Financing Arrangements |
Long-term debt consists of the following:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| |
| 8.375% senior subordinated notes due 2014 | | $ | 198,985 | | | $ | 210,000 | | | $ | 183,835 | | | $ | 198,985 | |
| Revolving credit facility maturing on December 31, 2010 | | | 164,600 | | | | 145,400 | | |
| Revolving credit facility maturing on June 30, 2013 | | | | 141,200 | | | | 164,600 | |
| Other | | | 11,061 | | | | 4,649 | | | | 8,962 | | | | 11,061 | |
| | | | | | | | | | | |
| | | | 374,646 | | | | 360,049 | | | | 333,997 | | | | 374,646 | |
| Less current maturities | | | 8,778 | | | | 2,362 | | | | 10,894 | | | | 8,778 | |
| | | | | | | | | | | |
| Total | | $ | 365,868 | | | $ | 357,687 | | | $ | 323,103 | | | $ | 365,868 | |
| | | | | | | | | | | |
Maturities of long-term debt during each of the five years following December 31, 2008 are approximately $8,778 in 2009, $166,859 in 2010, $24 in 2011, $-0- in 2012 and $-0- in 2013.
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 $270,000. The credit agreement, as amended, provides lower interest rate brackets and modified certain covenants to provide greater flexibility.$270,000 at December 31, 2009. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2008,2009, the Company had approximately $47,070$34,172 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (3.25% at December 31, 2008) or, at the Company’s election, at LIBOR plus .75% to 1.75%. The Company’s ability to elect LIBOR-based interest rates 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 $40,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2008,2009, in addition to amounts borrowed under the Credit Agreement, there was $10,519$8,552 outstanding primarily for standby letters of credit. An annual fee of .25%.75% is imposed by the bank on the unused portion of available borrowings. The
On March 8, 2010, the Credit Agreement expireswas amended and restated to, among other things, extend its maturity date to June 30, 2013, reduce the loan commitment from $270,000 to $210,000, which includes a term loan A for $28,000 that is secured by real estate and machinery and equipment and an unsecured term loan B for $12,000. Amounts borrowed under the revolving credit facility may be borrowed at either (i) LIBOR plus 3% to 4% or (ii) the bank’s prime lending rate plus 1% at the Company’s election. The LIBOR-based interest rate is dependent on the Company’s debt service coverage ratio, as defined in the Credit Agreement. Under the Credit Agreement, a detailed borrowing base formula provides borrowing availability to the Company based on percentages of eligible accounts receivable and inventory. Interest on the term loan A is at either (i) LIBOR plus 4% to 5% or (ii) the bank’s prime lending rate plus 2% at the Company’s election. Interest on the term loan B is at either (i) LIBOR plus 6% to 7% or (ii) the bank’s prime lending rate plus 4.5%, at the Company’s election. The term loan A is amortized based on a ten year schedule with the balance due at maturity. The term loan B is amortized over a two-year period plus 50% of debt service coverage excess capped at $3,500.
49
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Considering the amendment of the Credit Agreement on March 8, 2010, maturities of long-term debt during each of the five years following December 31, 2009 are approximately $10,894 in 2010, $9,136 in 2011, $4,800 in 2012, $122,000 in 2013 and borrowings are secured by substantially all of the Company’s assets.$523 in 2014.
Foreign subsidiaries of the Company had borrowings of $10,319$3,787 and $3,688$10,319 at December 31, 20082009 and 2007,2008, respectively and outstanding standby lettersbank guarantees of credit of $12,194$10,909 at December 31, 20082009 under their credit arrangements.
The 8.375% senior subordinated notes due 2014 (“8.375% Notes”) are general unsecured senior subordinated obligations of the Company and are fully and unconditionally guaranteed on a joint and several basis by all material domestic subsidiaries of the Company. Provisions of the indenture governing
50
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the 8.375% Notes and the Credit Agreement contain restrictions on the Company’s ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets or to merge or consolidate with an unaffiliated entity. At December 31, 2008,2009, the Company was in compliance with all financial covenants of the Credit Agreement.
The weighted average interest rate on all debt was 5.98%5.26% at December 31, 2008.2009.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Credit Agreement approximate fair value at December 31, 20082009 and 2007.2008. The approximate fair value of the 8.375% Notes was $79,594$144,310 and $189,000$79,594 at December 31, 20082009 and 2007,2008, respectively.
In 2009, a foreign subsidiary of the Company purchased $15,150 aggregate principal amount of the 8.375% Notes for $8,853. After writing off $147 of deferred financing costs, the Company recorded a net gain of $6,297.
In 2008, Park-Ohio Holdings Corp.the Company purchased $11,015 aggregate principal amount of the 8.375% Notes which were issued byPark-Ohio Industries, Inc. for $4,658. After writing off $125 of deferred financing costs, the Company recorded a net gain of $6,232. The 8.375% Notes were not contributed to Park-Ohio Industries, Inc. in 2008 but arewere held by Park-Ohio Holdings Corp. During the fourth quarter of 2009, these notes were sold to a wholly-owned subsidiary of Park-Ohio Industries, Inc.
Income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| Current payable (benefit): | | | | | | | | | | | | | |
| Current expense (benefit): | | | | | | | | | | | | | |
| Federal | | $ | 229 | | | $ | (9 | ) | | $ | 2,355 | | | $ | (147 | ) | | $ | 229 | | | $ | (9 | ) |
| State | | | 1,518 | | | | 299 | | | | 432 | | | | 179 | | | | 1,518 | | | | 299 | |
| Foreign | | | 6,156 | | | | 5,344 | | | | 4,792 | | | | 982 | | | | 6,156 | | | | 5,344 | |
| | | | | | | | | | | | | | | |
| | | | 7,903 | | | | 5,634 | | | | 7,579 | | | | 1,014 | | | | 7,903 | | | | 5,634 | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | 12,421 | | | | 3,639 | | | | (1,093 | ) | | | (1,231 | ) | | | 12,421 | | | | 3,639 | |
| State | | | 923 | | | | 198 | | | | (1,521 | ) | | | (39 | ) | | | 923 | | | | 198 | |
| Foreign | | | (261 | ) | | | 505 | | | | (1,747 | ) | | | (572 | ) | | | (261 | ) | | | 505 | |
| | | | | | | | | | | | | | | |
| | | | 13,083 | | | | 4,342 | | | | (4,361 | ) | | | (1,842 | ) | | | 13,083 | | | | 4,342 | |
| | | | | | | | | | | | | | | |
| Income taxes | | $ | 20,986 | | | $ | 9,976 | | | $ | 3,218 | | |
| Income tax (benefit) expense | | | $ | (828 | ) | | $ | 20,986 | | | $ | 9,976 | |
| | | | | | | | | | | | | | | |
50
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Rate Reconciliation | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| Tax at statutory rate | | $ | (34,586 | ) | | $ | 10,911 | | | $ | 9,571 | | | $ | (2,113 | ) | | $ | (34,586 | ) | | $ | 10,911 | |
| Effect of state income taxes, net | | | (1,834 | ) | | | 266 | | | | (1,240 | ) | | | (161 | ) | | | (1,834 | ) | | | 266 | |
| Effect of foreign operations | | | 293 | | | | (1,082 | ) | | | (1,441 | ) | | | 1,247 | | | | 293 | | | | (1,082 | ) |
| Goodwill | | | 23,241 | | | | -0- | | | | -0- | | | | -0- | | | | 23,241 | | | | -0- | |
| Valuation allowance | | | 33,625 | | | | 238 | | | | (4,806 | ) | | | (1,815 | ) | | | 33,625 | | | | 238 | |
| Equity compensation | | | | 148 | | | | 18 | | | | 51 | |
| Tax credits | | | | (192 | ) | | | (240 | ) | | | (207 | ) |
| Prior year adjustments | | | | 141 | | | | (304 | ) | | | 504 | |
| Non-deductable items | | | | 735 | | | | 802 | | | | 572 | |
| Other, net | | | 247 | | | | (357 | ) | | | 1,134 | | | | 1,182 | | | | (29 | ) | | | (1,277 | ) |
| | | | | | | | | | | | | | | |
| Total | | $ | 20,986 | | | $ | 9,976 | | | $ | 3,218 | | | $ | (828 | ) | | $ | 20,986 | | | $ | 9,976 | |
| | | | | | | | | | | | | | | |
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
| | | | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefit obligation | | $ | 7,060 | | | $ | 7,579 | |
| Inventory | | | 10,342 | | | | 12,126 | |
| Net operating loss and credit carryforwards | | | 22,478 | | | | 22,133 | |
| Goodwill | | | 4,381 | | | | 5,465 | |
| Other | | | 8,348 | | | | 10,832 | |
| | | | | | | | | |
| Total deferred tax assets | | | 52,609 | | | | 58,135 | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation and amortization | | | 692 | | | | 5,824 | |
| Pension | | | 18,010 | | | | 14,389 | |
| Intangible assets and other | | | 2,335 | | | | 2,645 | |
| | | | | | | | | |
| Total deferred tax liabilities | | | 21,037 | | | | 22,858 | |
| | | | | | | | | |
| Net deferred tax assets prior to valuation allowances | | | 31,572 | | | | 35,277 | |
| Valuation allowances | | | (30,668 | ) | | | (34,921 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | 904 | | | $ | 356 | |
| | | | | | | | | |
At December 31, 2009, the Company has federal, state and foreign net operating loss carryforwards for income tax purposes. The U.S. federal net operating loss carryforward is approximately $38,538 which expires between 2022 and 2029. The foreign net operating loss carryforward is $3,619 of which $1,181 expires in 2016 and $2,438 has no expiration date. The Company also has a state net operating loss carryforward of $4,589 which expires between 2010 and 2029.
At December 31, 2009, the Company has research and development credit carryforwards of approximately $2,923 which expire between 2012 and 2029. The Company also has foreign tax credit carryforwards of $1,778, which expire between 2015 and 2019, and alternative minimum tax credit carryforwards of $1,083 which have no expiration date.
51
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Significant componentsThe Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2006 through 2009 remain open for examination by the U.S. and various state and foreign taxing authorities.
As of December 31, 2009 and 2008, the Company’sCompany was in a cumulative three-year loss position and it was determined that it was not more likely than not that its U.S. net deferred tax assets and liabilities are as follows:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefit obligation | | $ | 7,579 | | | $ | 7,604 | |
| Inventory | | | 12,126 | | | | 10,969 | |
| Net operating loss and credit carryforwards | | | 22,133 | | | | 21,544 | |
| Goodwill | | | 5,465 | | | | -0- | |
| Other | | | 10,832 | | | | 9,223 | |
| | | | | | | | | |
| Total deferred tax assets | | | 58,135 | | | | 49,340 | |
| Deferred tax liabilities: | | | | | | | | |
| Tax over book depreciation | | | 5,824 | | | | 13,354 | |
| Pension | | | 14,389 | | | | 26,071 | |
| Inventory | | | -0- | | | | 864 | |
| Intangible assets and other | | | 2,645 | | | | 2,955 | |
| Deductible goodwill | | | -0- | | | | 4,704 | |
| | | | | | | | | |
| Total deferred tax liabilities | | | 22,858 | | | | 47,948 | |
| | | | | | | | | |
| Net deferred tax assets prior to valuation allowances | | | 35,277 | | | | 1,392 | |
| Valuation allowances | | | (34,921 | ) | | | (2,217 | ) |
| | | | | | | | | |
| Net deferred tax asset (liability) | | $ | 356 | | | $ | (825 | ) |
| | | | | | | | | |
Atwill be realized. As of December 31, 2009 and 2008, the Company has federal, staterecorded full valuation allowances of $28,813 and $34,475, respectively, against its U.S. net deferred tax assets. In addition, the Company determined that it was not more likely than not that certain foreign net operating loss carryforwards for incomedeferred tax purposes. The U.S. federalassets will be realized. As of December 31, 2009 and 2008, the Company recorded valuation allowances of $1,855 and $447, respectively, against certain foreign net operating loss carryforward is approximately $42,129 which expires between 2022 and 2028. Foreign net operating losses of $1,389 have no expiration date. Thedeferred tax benefit of the U.S. federal net operating loss is $13,372, which has been reduced by $1,373 of FIN 48 liabilities. The Company also has $2,281 of state tax benefit related to state net operating losses which expire between 2011 and 2028.assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities).
At December 31, 2008, the Company has research and development credit carryforwards of approximately $2,862 which expire between 2010 and 2028. The Company also has foreign tax credit carryforwards of $1,551, which expire between 2015 and 2018, and alternative minimum tax credit carryforwards of $1,146 which have no expiration date.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company’s tax years for 2005 through 2008 remain open for examination by the U.S. and various state and foreign taxing authorities.
As of December 31, 2006, the Company determined that it was more likely than not that it would be able to realize most of its deferred tax assets in the future and released $4,806 of the valuation allowance. As of December 31, 2006, the Company also recognized a tax benefit for net operating losses of $1,284 for state income taxes which it had determined are more likely than not will be fully realized in the future. As of December 31, 2008 the Company was in a cumulative three-year loss position and determined that it was not more likely than not that its net deferred tax assets will be realized. Therefore, as of December 31, 2008, the Company recorded a full valuation allowance of $33,466 against its U.S. net deferred tax assets. The Company reviews all valuation allowances related to deferred tax assets and will reverse these valuation allowances, partially or totally, when appropriate under FAS 109.
52
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)ASC 740.
The Company adopted the provisions of FIN 48Accounting for Uncertainty in Income Taxes, primarily codified under ASC 740, on January 1, 2007. As a result of thethis implementation of FIN 48, the Company recognized a $608 increase in the liability for unrecognized tax benefits which was accounted for as a reduction in retained earnings. The total amount of unrecognized tax benefits as ofon the date of the adoption was approximately $4,691. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | | 2007 | |
| |
| Unrecognized Tax Benefit — January 1, | | $ | 5,255 | | | $ | 4,691 | | | $ | 5,806 | | | $ | 5,255 | | | $ | 4,691 | |
| Gross Increases — Tax Positions in Prior Period | | | -0- | | | | 72 | | | | 101 | | | | -0- | | | | 72 | |
| Gross Decreases — Tax Positions in Prior Period | | | (39 | ) | | | (133 | ) | | | (55 | ) | | | (39 | ) | | | (133 | ) |
| Gross Increases — Tax Positions in Current Period | | | 590 | | | | 625 | | | | 97 | | | | 590 | | | | 625 | |
| Settlements | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | |
| Lapse of Statute of Limitations | | | -0- | | | | -0- | | | | (231 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | |
| Unrecognized Tax Benefit — December 31, | | $ | 5,806 | | | $ | 5,255 | | | $ | 5,718 | | | $ | 5,806 | | | $ | 5,255 | |
| | | | | | | | | | | | | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $4,633 at December 31, 2009 and $4,692 at December 31, 2008 and $4,311 at December 31, 2007.2008. The Company recognizes accrued interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 20082009 and 2007,2008, the Company recognized approximately $94$42 and $57,$94, respectively, in net interest and penalties. The Company had approximately $631$673 and $537$631 for the payment of interest and penalties accrued at December 31, 20082009 and 2007,2008, respectively. The Company does not expect that the unrecognized tax benefit will change significantly within the next twelve months.
Deferred taxes have not been provided on undistributed earnings of the Company’s foreign subsidiaries as it is the Company’s policy and intent to permanently reinvest such earnings. The Company has determined that it is not practical to determine the deferred tax liability on such undistributed earnings.
Under the provisions of the Company’s 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 directors and 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
52
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
market value at the date of grant. The aggregate number of shares of the Company’s common stock that may be awarded under the 1998 Plan is 2,650,000,3,100,000, 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.
On January 1, 2006, the Company adopted the provisions of FAS 123(R) and elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all stock option awards granted after the date of adoption and for all unvested stock option awards granted prior to the date of adoption. In accordance with FAS 123(R), prior period amounts were not restated. Additionally, the Company elected to calculate its initial pool of excess tax benefits using the simplified alternative approach described in FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” Prior to the adoption of FAS 123(R), the Company utilized the intrinsic-value based method of accounting under APB Opinion 25, “Accounting for Stock Issued to Employees,” and related
53
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
interpretations, and adopted the disclosure requirements of FAS 123, “Accounting for Stock-Based Compensation.”
Prior to January 1, 2006, no stock-based compensation expense was recognized for stock option awards under the intrinsic-value based method. The adoption of FAS 123(R) reduced operating income before income taxes for 2008, 2007 and 2006 by $436, $412 and $299.
The fair value of significant stock option awards granted during 2008 and 2007 was estimated at the date of grant using a Black-Scholes option-pricing method with the following assumptions:
Assumptions:
| | | | | | | | | |
| | | 2008 | | 2007 |
| |
| Weighted average fair value per option | | $ | 7.48 | | | $ | 12.92 | |
| Risk-free interest rate | | | 3.33 | % | | | 4.62 | % |
| Dividend yield | | | 0 | % | | | 0 | % |
| Expected stock volatility | | | 53 | % | | | 57 | % |
| Expected life — years | | | 6.0 | | | | 6.0 | |
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| |
| Weighted average fair value per option | | $ | 7.48 | | | $ | 12.92 | |
| Risk-free interest rate | | | 3.33 | % | | | 4.62 | % |
| Dividend yield | | | 0 | % | | | 0 | % |
| Expected stock volatility | | | 53 | % | | | 57 | % |
| Expected life — years | | | 6.0 | | | | 6.0 | |
The weighted average fair market value of options issued for the fiscal year ended December 31, 2008 and 2007 was estimated to be $7.48 and $12.92 per share, respectively. There were no options awarded in 2009.
There were no options awarded during the year ended December 31, 2006.2009.
Historical information was the primary basis for the selection of the expected dividend yield, and expected volatility. The SEC simplified method per SABStaff Accounting Bulletin No. 107 is the basis for the assumptions of the expected lives of the options. The Company uses the simplified method, pursuant to the guidance in Staff Accounting Bulletins No. 107 and 110, to value the expected lives of its “plain vanilla” options in accordance with ASC 718 because it believes that it is unable to rely on its historical exercise data as a reasonable basis upon which to estimate the expected lives based upon the following:
Most of our historical grant and exercise data are from options granted with an option exercise price of $1.91 in November 2001. The employees included in this grant were middle management to executive level whereas current option grants are at the executive level. Therefore, exercise data from the November 2001 grant are not representative of current option grants. The size of our recent option grants is small, and only a select few executives now receive options. Exercises for the executives are particularly driven by their individual tax considerations. Other factors are share price growth and elapsed time. The data on these drivers are insufficient to support estimates of future expected lives of new grants and historical exercise data for the executives are sparse due to short elapsed option lives and unfavorable share price paths. The Company will discontinue using the simplified method when it can rely on its historical exercise data.
The risk-free interest rate was based upon yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option being valued. Forfeitures were estimated at 3% for 2008 and 2007.
A summary of option activity as of December 31, 2008 and 2007 changes during the years then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | | | | | | | Weighted
| | | | | | | | | | | | Weighted
| | | | |
| | | | | | Weighted
| | | Average
| | | | | | | | | Weighted
| | | Average
| | | | |
| | | | | | Average
| | | Remaining
| | | Aggregate
| | | | | | Average
| | | Remaining
| | | Aggregate
| |
| | | Number
| | | Exercise
| | | Contractual
| | | Intrinsic
| | | Number
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | of Shares | | | Price | | | Term | | | Value | | | of Shares | | | Price | | | Term | | | Value | |
| |
| Outstanding — beginning of year | | | 875,719 | | | $ | 4.83 | | | | | | | | | | | | 926,386 | | | $ | 3.59 | | | | | | | | | |
| Granted | | | 90,000 | | | | 14.06 | | | | | | | | | | | | 56,250 | | | | 22.30 | | | | | | | | | |
| Exercised | | | (43,003 | ) | | | 3.42 | | | | | | | | | | | | (106,084 | ) | | | 3.21 | | | | | | | | | |
| Canceled or Expired | | | (21,666 | ) | | | 17.52 | | | | | | | | | | | | (833 | ) | | | 14.12 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding — end of year | | | 901,050 | | | $ | 4.28 | | | | 4.0 years | | | $ | 1,702 | | | | 875,719 | | | $ | 4.83 | | | | 4.8 years | | | $ | 17,752 | |
| Options Exercisable | | | 790,218 | | | | 3.99 | | | | 3.6 years | | | | 1,721 | | | | 785,646 | | | | 3.16 | | | | 4.7 years | | | | 17,240 | |
Exercise prices for options outstanding as of December 31, 2008 range from $1.91 to $6.28, $13.40 to $15.61 and $20.00 to $24.92. The number of options outstanding at December 31, 2008, which correspond with these ranges, are 693,900, 161,500 and 46,250, respectively. The number of options exercisable at December 31, 2008, which correspond to these ranges are 683,300, 91,500 and 15,418, respectively. The weighted average contractual life of these options is 4.0 years.
Exercise prices for options outstanding as of December 31, 2007 range from $1.91 to $6.28, $14.12 to $14.90 and $20.00 to $24.92. The number of options outstanding at December 31, 2007, which correspond with these ranges, are 721,303, 98,166 and 56,250, respectively. The number of options exercisable at
5453
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of option activity as of December 31, 2007,2009 and changes during the year then ended is presented below:
| | | | | | | | | | | | | | | | | |
| | | 2009 | |
| | | | | | | | | Weighted
| | | | |
| | | | | | Weighted
| | | Average
| | | | |
| | | | | | Average
| | | Remaining
| | | Aggregate
| |
| | | Number
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | of Shares | | | Price | | | Term | | | Value | |
| |
| Outstanding — beginning of year | | | 901,050 | | | $ | 4.28 | | | | | | | | | |
| Granted | | | -0- | | | | -0- | | | | | | | | | |
| Exercised | | | (410,000 | ) | | | 1.91 | | | | | | | | | |
| Canceled or Expired | | | -0- | | | | -0- | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding — end of year | | | 491,050 | | | $ | 6.26 | | | | 4.0 years | | | $ | 931 | |
| Options Exercisable | | | 421,050 | | | | 7.31 | | | | 3.6 years | | | | 877 | |
Exercise prices for options outstanding as of December 31, 2009 range from $1.91 to $6.28, $13.40 to $15.61 and $20.00 to $24.92. The number of options outstanding at December 31, 2009, which correspond with these ranges, are 283,300, 161,500 and 46,250, respectively. The number of options exercisable at December 31, 2009, which correspond to these ranges are 721,304, 64,432276,633, 113,583 and -0-,30,834, respectively. The weighted-average remainingweighted average contractual life of these options is 4.84.0 years.
The fair value provisions for option awards resulted in compensation expense of $396, $436, and $412 (before tax), for 2009, 2008 and 2007, respectively.
The number of shares available for future grants for all plans at December 31, 20082009 is 582,650.408,200.
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $104, $343 and 2006 was $343, $2,318, and $992, respectively. Net cash proceeds from the exercise of stock options were $783, $147 $340 and $193,$340, respectively. There were no income tax benefits because the Company had a net operating loss carryforward.
A summary of restricted share activity for the yearsyear ended December 31, 2008 and 20072009 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | 2007 | | | 2009 | |
| | | | | Weighted
| | | | Weighted
| | | | | Weighted
| |
| | | | | Average
| | | | Average
| | | | | Average
| |
| | | Number of
| | Grant Date
| | Number of
| | Grant Date
| | | Number of
| | Grant Date
| |
| | | Shares | | Fair Value | | Shares | | Fair Value | | | Shares | | Fair Value | |
| |
| Outstanding — beginning of year | | | 261,943 | | | $ | 14.67 | | | | 362,204 | | | $ | 14.06 | | | | 174,501 | | | $ | 14.93 | |
| Granted | | | 23,500 | | | | 14.90 | | | | 16,500 | | | | 24.92 | | | | 644,700 | | | | 3.50 | |
| Vested | | | (48,972 | ) | | | 17.28 | | | | (116,761 | ) | | | 14.23 | | | | (105,541 | ) | | | 13.39 | |
| Canceled or expired | | | (61,970 | ) | | | 13.93 | | | | -0- | | | | -0- | | | | (18,250 | ) | | | 3.49 | |
| | | | | | | | | | | | | | | |
| Outstanding — end of year | | | 174,501 | | | | 14.93 | | | | 261,943 | | | | 14.67 | | | | 695,410 | | | $ | 4.58 | |
| | | | | | | | | | | | | | | |
The Company recognizes compensation cost of all share-based awards as an expense on a straight-line basis over the vesting period of the awards.
The Company recognized compensation expense of $1,969, $1,677 $1,651 and $787$1,651 for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively, relating to restricted shares.
The total fair value of restricted stock units vested during the years ended December 31, 2009, 2008 and 2007 was $797, $1,235 and 2006 was $1,235, $2,953, and $467, respectively.
On September 11, 2008, the Company delayed the vesting of 61,970 restricted shares of the Company’s common stock held by two of the Company’s officers. In lieu of vesting the restricted shares, the officers agreed to exchange 61,970 shares of restricted stock for 61,970 restricted stock units. The restricted stock
54
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
units were fully vested and will be paid in shares of the Company’s common stock either upon termination of employment with the Company or when the deduction by the Company for such payment would not be prohibited under Section 162(m) of the Internal Revenue Code.
The Company recognizes compensation cost of all share-based awards as an expense on a straight-line basis over the vesting period of the awards.
As of December 31, 2008,2009, the Company had unrecognized compensation expense of $2,762,$2,599, before taxes, related to stock option awards and restricted shares. The unrecognized compensation expense is expected to be recognized over a total weighted average period of 2.11.8 years.
| |
| 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 is not expected to have a material adverse effect on the Company’s financial condition, liquidity and results of operations.
| |
| NOTE K — | Pensions and Postretirement Benefits |
On December 31, 2006,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 adoptedhas two unfunded postretirement benefit plans. For the recognitiondefined benefit plans, benefits are based on the employee’s years of service. For the defined contribution plans, the costs charged to operations and disclosure provisionsthe amount funded are based upon a percentage of FAS 158. FAS 158 required the Company to recognize the funded status (i.e., the difference between the Company’scovered employees’ compensation.
55
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fair value of plan assets and the benefit obligations) of its defined benefit pension and postretirement benefit plans (collectively, the “postretirement benefit plans”) in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of FAS 87 and FAS 106, all of which were previously netted against the postretirement benefit plans’ funded status in the company’s Consolidated Balance Sheet in accordance with the provisions of FAS 87 and FAS 106. These amounts will be subsequently recognized as net periodic benefit cost in accordance with the Company’s historical accounting policy for amortizing these amounts. In addition, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of FAS 158.
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2009 are $(925), $129 and $(40), respectively.
The estimated net loss for the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2009 is $386.
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, 20082009 and 2007:2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Postretirement
| | | | | Postretirement
| |
| | | Pension | | Benefits | | | Pension | | Benefits | |
| | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | | 2009 | | 2008 | |
| |
Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 48,320 | | | $ | 52,387 | | | $ | 18,711 | | | $ | 22,989 | | | $ | 48,383 | | | $ | 48,320 | | | $ | 19,961 | | | $ | 18,711 | |
| Service cost | | | 439 | | | | 334 | | | | 87 | | | | 180 | | | | 471 | | | | 439 | | | | 61 | | | | 87 | |
| Curtailment and settlement | | | -0- | | | | 80 | | | | -0- | | | | -0- | | |
| Interest cost | | | 2,892 | | | | 2,842 | | | | 1,215 | | | | 1,103 | | | | 2,748 | | | | 2,892 | | | | 1,053 | | | | 1,215 | |
| Amendments | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 10 | | | | -0- | | | | (920 | ) | | | -0- | |
| Actuarial losses (gains) | | | 1,150 | | | | (2,571 | ) | | | 2,348 | | | | (2,990 | ) | | | 1,446 | | | | 1,150 | | | | 279 | | | | 2,348 | |
| Benefits and expenses paid, net of contributions | | | (4,418 | ) | | | (4,752 | ) | | | (2,400 | ) | | | (2,571 | ) | | | (4,238 | ) | | | (4,418 | ) | | | (2,146 | ) | | | (2,400 | ) |
| | | | | | | | | | | | | | | | | | | |
| Benefit obligation at end of year | | $ | 48,383 | | | $ | 48,320 | | | $ | 19,961 | | | $ | 18,711 | | | $ | 48,820 | | | $ | 48,383 | | | $ | 18,288 | | | $ | 19,961 | |
| | | | | | | | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 118,878 | | | $ | 112,496 | | | $ | -0- | | | $ | -0- | | | $ | 87,368 | | | $ | 118,878 | | | $ | -0- | | | $ | -0- | |
| Actual return on plan assets | | | (27,092 | ) | | | 11,134 | | | | -0- | | | | -0- | | | | 16,725 | | | | (27,092 | ) | | | -0- | | | | -0- | |
| Company contributions | | | -0- | | | | -0- | | | | 2,400 | | | | 2,571 | | | | -0- | | | | -0- | | | | 2,146 | | | | 2,400 | |
| Cash transfer to fund postretirement benefit payments | | | | (1,600 | ) | | | -0- | | | | -0- | | | | -0- | |
| Benefits and expenses paid, net of contributions | | | (4,418 | ) | | | (4,752 | ) | | | (2,400 | ) | | | (2,571 | ) | | | (4,238 | ) | | | (4,418 | ) | | | (2,146 | ) | | | (2,400 | ) |
| | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets at end of year | | $ | 87,368 | | | $ | 118,878 | | | $ | -0- | | | $ | -0- | | | $ | 98,255 | | | $ | 87,368 | | | $ | -0- | | | $ | -0- | |
| | | | | | | | | | | | | | | | | | | |
| Funded (underfunded) status of the plan | | $ | 38,985 | | | $ | 70,558 | | | $ | (19,961 | ) | | $ | (18,711 | ) | |
| Funded (underfunded) status of the plans | | | $ | 49,435 | | | $ | 38,985 | | | $ | (18,288 | ) | | $ | (19,961 | ) |
| | | | | | | | | | | | | | | | | | | |
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | |
| | | | | | Postretirement
| |
| | | Pension | | | Benefits | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| |
| Noncurrent assets | | $ | 49,435 | | | $ | 38,985 | | | $ | -0- | | | $ | -0- | |
| Noncurrent liabilities | | | -0- | | | | -0- | | | | 11,111 | | | | 11,757 | |
| Current liabilities | | | -0- | | | | -0- | | | | 2,197 | | | | 2,290 | |
| Accumulated other comprehensive (income) loss | | | 15,900 | | | | 25,131 | | | | 4,980 | | | | 5,914 | |
| | | | | | | | | | | | | | | | | |
| Net amount recognized at the end of the year | | $ | 65,335 | | | $ | 64,116 | | | $ | 18,288 | | | $ | 19,961 | |
| | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive (income) loss | | | | | | | | | | | | | | | | |
| Net actuarial loss/(gain) | | $ | 15,819 | | | $ | 24,972 | | | $ | 4,980 | | | $ | 5,914 | |
| Net prior service cost (credit) | | | 253 | | | | 372 | | | | -0- | | | | -0- | |
| Net transition obligation (asset) | | | (172 | ) | | | (213 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive (income) loss | | $ | 15,900 | | | $ | 25,131 | | | $ | 4,980 | | | $ | 5,914 | |
| | | | | | | | | | | | | | | | | |
As of December 31, 2009 and 2008, the Company’s defined benefit pension plans did not hold a material amount of shares of the Company’s common stock.
56
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | | | | | | | |
| | | | | | Postretirement
| |
| | | Pension | | | Benefits | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| |
| Noncurrent assets | | $ | 38,985 | | | $ | 70,558 | | | $ | -0- | | | $ | -0- | |
| Noncurrent liabilities | | | -0- | | | | -0- | | | | 11,757 | | | | 12,786 | |
| Current liabilities | | | -0- | | | | -0- | | | | 2,290 | | | | 2,041 | |
| Accumulated other comprehensive (income) loss | | | 25,131 | | | | (12,756 | ) | | | 5,914 | | | | 3,884 | |
| | | | | | | | | | | | | | | | | |
| Net amount recognized at the end of the year | | $ | 64,116 | | | $ | 57,802 | | | $ | 19,961 | | | $ | 18,711 | |
| | | | | | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive (income) loss | | | | | | | | | | | | | | | | |
| Net actuarial loss/(gain) | | $ | 24,972 | | | $ | (13,005 | ) | | $ | 5,914 | | | $ | 3,936 | |
| Net prior service cost (credit) | | | 372 | | | | 509 | | | | -0- | | | | (52 | ) |
| Net transition obligation (asset) | | | (213 | ) | | | (260 | ) | | | -0- | | | | -0- | |
| | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive (income) loss | | $ | 25,131 | | | $ | (12,756 | ) | | $ | 5,914 | | | $ | 3,884 | |
| | | | | | | | | | | | | | | | | |
As of December 31, 2008 and 2007, the Company’s defined benefit pension plans did not hold a material amount of shares of the Company’s common stock.
The pension plan weighted-average asset allocation at December 31, 20082009 and 20072008 and target allocation for 20092010 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Plan Assets | | | | | Plan Assets | |
| | | Target 2009 | | 2008 | | 2007 | | | Target 2010 | | 2009 | | 2008 | |
| |
Asset Category | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | | 60-70 | % | | | 54.0 | % | | | 64.8 | % | | | 60-65 | % | | | 69.3 | % | | | 54.0 | % |
| Debt securities | | | 20-30 | | | | 11.6 | | | | 24.2 | | | | 25-30 | | | | 9.9 | | | | 11.6 | |
| Other | | | 7-15 | | | | 34.4 | | | | 11.0 | | | | 15-20 | | | | 20.8 | | | | 34.4 | |
| | | | | | | | | | | | | | | |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | |
The following table sets forth, by level within the fair value hierarchy, the pension plans assets:
| | | | | | | | | |
| | | Level 2 | | | Total | |
| |
Collective trust and pooled insurance funds: | | | | | | | | |
| Common stock | | $ | 52,507 | | | $ | 52,507 | |
| Equity Funds | | | 12,727 | | | | 12,727 | |
| Foreign Stock | | | 2,590 | | | | 2,590 | |
| Convertible Securities | | | 1,063 | | | | 1,063 | |
| U.S. Government Obligations | | | 4,900 | | | | 4,900 | |
| Fixed income funds | | | 4,588 | | | | 4,588 | |
| Cash and Cash Equivalents | | | 19,779 | | | | 19,779 | |
| Other | | | 100 | | | | 100 | |
| | | | | | | | | |
| | | $ | 98,254 | | | $ | 98,254 | |
| | | | | | | | | |
The following tables summarize the assumptions used by the consulting actuary and the related cost information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted-Average assumptions as of December 31, | | | Weighted-Average assumptions as of December 31, |
| | | Pension | | Postretirement Benefits | | | Pension | | Postretirement Benefits |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 |
| |
| Discount rate | | | 6.25 | % | | | 6.25 | % | | | 5.75 | % | | | 6.25 | % | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % | | | 6.00 | % | | | 6.25 | % | | | 5.50 | % | | | 6.00 | % | | | 6.25 | % |
| Expected return on plan assets | | | 8.25 | % | | | 8.25 | % | | | 8.50 | % | | | N/A | | | | N/A | | | | N/A | | | | 8.25 | % | | | 8.25 | % | | | 8.25 | % | | | N/A | | | | N/A | | | | N/A | |
| Rate of compensation increase | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
In determining its expected return on plan assets assumption for the year ended December 31, 2008,2009, 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, 20082009 of 8.25%. This assumption was supported by the asset return generation model, which projected future asset returns using simulation and asset class correlation.
57
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For measurement purposes, a 8.0%7.0% and a 9.5% annual rate of increase in the per capita cost of covered medical health care benefits wasand drug benefits, respectively were assumed for 2008.2009. The rate wasrates were assumed to decrease gradually to 5.0% for medical for 2011 and 5.0% for drug for 2012 and remain at that level thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement Benefits | | | Pension Benefits | | Postretirement Benefits | |
| | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | |
| |
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service costs | | $ | 439 | | | $ | 334 | | | $ | 426 | | | $ | 87 | | | $ | 180 | | | $ | 199 | | | $ | 471 | | | $ | 439 | | | $ | 334 | | | $ | 61 | | | $ | 87 | | | $ | 180 | |
| Interest costs | | | 2,892 | | | | 2,842 | | | | 2,915 | | | | 1,215 | | | | 1,103 | | | | 1,292 | | | | 2,748 | | | | 2,892 | | | | 2,842 | | | | 1,053 | | | | 1,215 | | | | 1,103 | |
| Expected return on plan assets | | | (9,634 | ) | | | (9,049 | ) | | | (8,408 | ) | | | -0- | | | | -0- | | | | -0- | | | | (7,036 | ) | | | (9,634 | ) | | | (9,049 | ) | | | -0- | | | | -0- | | | | -0- | |
| Transition obligation | | | (47 | ) | | | (38 | ) | | | (48 | ) | | | -0- | | | | -0- | | | | -0- | | | | (40 | ) | | | (47 | ) | | | (38 | ) | | | -0- | | | | -0- | | | | -0- | |
| FAS 88 one-time charge | | | -0- | | | | 80 | | | | 297 | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 80 | | | | -0- | | | | -0- | | | | -0- | |
| Amortization of prior service cost | | | 137 | | | | 138 | | | | 182 | | | | (52 | ) | | | (63 | ) | | | (63 | ) | | | 129 | | | | 137 | | | | 138 | | | | -0- | | | | (52 | ) | | | (63 | ) |
| Recognized net actuarial (gain) loss | | | (100 | ) | | | 13 | | | | 99 | | | | 369 | | | | 227 | | | | 374 | | | | 910 | | | | (100 | ) | | | 13 | | | | 294 | | | | 369 | | | | 227 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Benefit (income) costs | | $ | (6,313 | ) | | $ | (5,680 | ) | | $ | (4,537 | ) | | $ | 1,619 | | | $ | 1,447 | | | $ | 1,802 | | | $ | (2,818 | ) | | $ | (6,313 | ) | | $ | (5,680 | ) | | $ | 1,408 | | | $ | 1,619 | | | $ | 1,447 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AOCI at beginning of year | | $ | (12,756 | ) | | $ | (8,144 | ) | | $ | 5,358 | | | $ | 3,884 | | | $ | 7,038 | | | $ | -0- | | | $ | 25,131 | | | $ | (12,756 | ) | | $ | (8,144 | ) | | $ | 5,914 | | | $ | 3,884 | | | $ | 7,038 | |
| Net loss/(gain) | | | 37,876 | | | | (4,499 | ) | | | | | | | 2,347 | | | | (2,990 | ) | | | | | |
| Net (gain)/loss | | | | (8,241 | ) | | | 37,876 | | | | (4,499 | ) | | | 280 | | | | 2,347 | | | | (2,990 | ) |
| Recognition of prior service cost/(credit) | | | (137 | ) | | | (138 | ) | | | -0- | | | | 52 | | | | 63 | | | | -0- | | | | (120 | ) | | | (137 | ) | | | (138 | ) | | | (920 | ) | | | 52 | | | | 63 | |
| Recognition of loss/(gain) | | | 148 | | | | 25 | | | | -0- | | | | (369 | ) | | | (227 | ) | | | -0- | | |
| Decrease prior to adoption of SFAS No. 158 | | | -0- | | | | -0- | | | | (5,358 | ) | | | -0- | | | | -0- | | | | -0- | | |
| Increase (decrease) due to adoption of SFAS No. 158 | | | -0- | | | | -0- | | | | (8,144 | ) | | | -0- | | | | -0- | | | | 7,038 | | |
| Recognition of (gain)/loss | | | | (870 | ) | | | 148 | | | | 25 | | | | (294 | ) | | | (369 | ) | | | (227 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total recognized in other comprehensive (income) loss at end of year | | $ | 25,131 | | | $ | (12,756 | ) | | $ | (8,144 | ) | | $ | 5,914 | | | $ | 3,884 | | | $ | 7,038 | | | $ | 15,900 | | | $ | 25,131 | | | $ | (12,756 | ) | | $ | 4,980 | | | $ | 5,914 | | | $ | 3,884 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The estimated net (gain), prior service cost and net transition (asset) for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2010 are $330, $62 and $(40), respectively.
The estimated net loss and prior service cost for the postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2010 is $386 and $(96), respectively.
Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to Medicare subsidy over the next ten years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Postretirement Benefits | | | | | Postretirement Benefits |
| | | Pension
| | | | Expected
| | Net including
| | | Pension
| | | | Expected
| | Net including
|
| | | Benefits | | Gross | | Medicare Subsidy | | Medicare Subsidy | | | Benefits | | Gross | | Medicare Subsidy | | Medicare Subsidy |
| |
| 2009 | | $ | 4,193 | | | $ | 2,497 | | | $ | 208 | | | $ | 2,289 | | |
| 2010 | | | 4,119 | | | | 2,447 | | | | 210 | | | | 2,237 | | | | 4,088 | | | | 2,434 | | | | 237 | | | | 2,197 | |
| 2011 | | | 4,040 | | | | 2,356 | | | | 207 | | | | 2,149 | | | | 3,988 | | | | 2,353 | | | | 235 | | | | 2,118 | |
| 2012 | | | 3,959 | | | | 2,192 | | | | 204 | | | | 1,988 | | | | 3,901 | | | | 2,190 | | | | 236 | | | | 1,954 | |
| 2013 | | | 3,933 | | | | 2,074 | | | | 195 | | | | 1,879 | | | | 3,873 | | | | 2,087 | | | | 229 | | | | 1,858 | |
| 2014 to 2018 | | | 18,791 | | | | 8,670 | | | | 836 | | | | 7,834 | | |
| 2014 | | | | 3,802 | | | | 1,999 | | | | 218 | | | | 1,781 | |
| 2015 to 2019 | | | | 18,172 | | | | 7,996 | | | | 916 | | | | 7,080 | |
58
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2008 | | $ | 108 | | | $ | (93 | ) |
| Effect on postretirement benefit obligation as of December 31, 2008 | | $ | 1,581 | | | $ | (1,386 | ) |
| | | | | | | | | |
| | | 1-Percentage
| | 1-Percentage
|
| | | Point
| | Point
|
| | | Increase | | Decrease |
| |
| Effect on total of service and interest cost components in 2009 | | $ | 91 | | | $ | (79 | ) |
| Effect on postretirement benefit obligation as of December 31, 2009 | | $ | 1,309 | | | $ | (1,170 | ) |
The total contribution charged to pension expense for the Company’s defined contribution plans was $301 in 2009, $2,081 in 2008 and $2,068 in 2007 and $1,831 in 2006.2007. During March 2009, the Company suspended indefinitely its voluntary contribution to its 401(k) defined contribution plan covering substantially all U.S. employees. The Company expects to have no contributions to its defined benefit plans in 2009.2010.
In January 2008, a Supplemental Executive Retirement Plan (“SERP”) for the Company’s Chairman of the Board of Directors and Chief Executive Officer (“CEO”) was approved by the Compensation Committee of the Board of Directors of the Company. The SERP provides an annual supplemental retirement benefit for up to $375 upon the CEO’s termination of employment with the Company. The vested retirement benefit will be equal to a percentage of the Supplemental Pension that is equal to the ratio of the sum of his credited service with the Company prior to January 1, 2008 (up to a maximum of thirteen years), and his credited service on or after January 1, 2008 (up to a maximum of seven years) to twenty years of credited service. In the event of a change in control before the CEO’s termination of employment, he will receive 100% of the Supplemental Pension. The Company recorded an expense of $389 related with the SERP in 2009 and 2008. Additionally, a non-qualified defined contribution retirement benefit was also approved in which the companyCompany will credit $94 quarterly ($375 annually) for a seven year period to an account in which the CEO will always be 100% vested. The seven year period began on March 31, 2008.
| |
| NOTE L — | Leases and Sale-leaseback Transactions |
Future minimum lease commitments during each of the five years following December 31, 20082009 and thereafter are as follows: $13,581 in 2009, $9,967$12,477 in 2010, $7,797$9,216 in 2011, $5,357$5,739 in 2012, $3,381$3,600 in 2013, $2,185 in 2014 and $8,428$3,598 thereafter. Rental expense for 2009, 2008 and 2007 was $12,812, $14,400 and 2006 was $14,400, $14,687, and $15,370, respectively.
In 2006, the Company entered into two sale-leaseback arrangements. Under the arrangements, land, building and equipment with a net book value of approximately $7,988 were sold for $9,420 and leased back under two operating lease agreements ranging from five to twelve years. The gain on these transactions of approximately $1,400 was deferred and is being amortized over the terms of the lease agreements.
Certain of the Company’s leases are with related parties at an annual rental expense of approximately $2,000. Transactions with related parties are in the ordinary course of business, are conducted on an arms length basis, and are not material to the Company’s financial position, results of operations or cash flows.
59
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| NOTE M — | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| |
| NUMERATOR | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (loss) income | | $ | (119,803 | ) | | $ | 21,197 | | | $ | 24,179 | | | $ | (5,209 | ) | | $ | (119,803 | ) | | $ | 21,197 | |
| | | | | | | | | | | | | | | |
| DENOMINATOR | | | | | | | | | | | | | | | | | | | | | | | | |
| Denominator for basic earnings per share — weighted average shares | | | 11,008 | | | | 11,106 | | | | 10,997 | | | | 10,968 | | | | 11,008 | | | | 11,106 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee stock options | | | -0- | | | | 545 | | | | 464 | | | | -0- | | | | -0- | | | | 545 | |
| | | | | | | | | | | | | | | |
| Denominator for diluted earnings per share — weighted average shares and assumed conversions | | | 11,008 | | | | 11,651 | | | | 11,461 | | | | 10,968 | | | | 11,008 | | | | 11,651 | |
| Amounts per common share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (10.88 | ) | | $ | 1.91 | | | $ | 2.20 | | | $ | (.47 | ) | | $ | (10.88 | ) | | $ | 1.91 | |
| | | | | | | | | | | | | | | |
| Diluted | | $ | (10.88 | ) | | $ | 1.82 | | | $ | 2.11 | | | $ | (.47 | ) | | $ | (10.88 | ) | | $ | 1.82 | |
| | | | | | | | | | | | | | | |
Basic earnings per common share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. Diluted earnings per common share is computed as net income available to common shareholders divided by the weighted average diluted shares outstanding. Pursuant to FASB Statement No. 128,ASC 260 “Earnings Per Share,”Share” when a loss is reported the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of stock options and awards because doing so will result in anti-dilution. Therefore, for the yearyears ended December 31, 2009 and 2008, basic weighted-average shares outstanding are used in calculating diluted earnings per share.
Outstanding stock options with exercise prices greater that the average price of the common shares are anti-dilutive and are not included in the computation of diluted earnings per share. Stock options for 32,000 and 104,000 shares of common stock were excluded in the yearsyear ended December 31, 2007 and 2006, respectively.2007.
| |
| NOTE N — | Accumulated Comprehensive Loss |
The components of accumulated comprehensive loss at December 31, 20082009 and 20072008 are as follows:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2008 | | 2007 | | | 2009 | | 2008 | |
| |
| Foreign currency translation adjustment | | $ | 3,982 | | | $ | 12,712 | | | $ | 6,950 | | | $ | 3,982 | |
| Unrealized net losses on marketable securities, net of tax | | | (413 | ) | | | (323 | ) | | | -0- | | | | (413 | ) |
| Pension and postretirement benefit adjustments, net of tax | | | (21,050 | ) | | | 5,373 | | | | (12,064 | ) | | | (21,050 | ) |
| | | | | | | | | | | |
| Total | | $ | (17,481 | ) | | $ | 17,762 | | | $ | (5,114 | ) | | $ | (17,481 | ) |
| | | | | | | | | | | |
| |
| NOTE O — | Restructuring and Unusual Charges |
In 2006, the Company recorded restructuring2009 and asset impairment charges associated with its planned closure of a manufacturing facility in the Supply Technologies segment. The charges (credits) were composed of $800 of inventory and tooling included in Cost of Products Sold, $297 of pension
60
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
curtailment and $(1,106) of postretirement benefit curtailment. In 2007, the Company recorded an additional $2,214 charge for inventory related restructuring charges which are included in Cost of Products Sold.
At December 31, 2007, the Company’s balance sheet reflected assets held for sale at their estimated current value of $3,330 for property, plant and equipment. These assets were sold in 2008.
In 2008, due to the recent volume declines and volatility in the automotive markets along with the general economic downturn, the Company evaluated its long-lived assets in accordance with FAS 144.ASC 360 “Property, Plant and Equipment”. The Company determined whether the carrying amount of its long-lived assets was recoverable by comparing the carrying amount to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. If the carrying value of the assets
60
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exceeded the expected cash flows, the Company estimated the fair value of these assets to determine whether an impairment existed. During 2008, based on the results of these tests, the Company recorded asset impairment charges. In addition, the Company made a decision to exit its relationship with its largest customer, Navistar, effective December 31, 2008 which along with the general economic downturn resulted in either the closure, downsizing or consolidation of eight facilities in its distribution network. The Company expects theCompany’s restructuring activities to bewere substantially completed in 2009. As a result,In 2008, the Company recorded asset impairment charges of $30,875, which were composed of $5,544 of inventory impairment included in Cost of Products Sold, $1,758 for a loss on disposition of a foreign subsidiary, $564 of severance costs (80 employees) and $23,009 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Loss on Disposal
| | | | | | | |
| | | Asset
| | | Cost of
| | | of Foreign
| | | Severance
| | | | |
| | | Impairment | | | Products Sold | | | Subsidiary | | | Costs | | | Total | |
| |
| Supply Technologies | | $ | 6,143 | | | $ | 4,965 | | | $ | 1,758 | | | $ | 564 | | | $ | 13,430 | |
| Aluminum Products | | | 12,575 | | | | 579 | | | | -0- | | | | -0- | | | | 13,154 | |
| Manufactured Products | | | 4,291 | | | | -0- | | | | -0- | | | | -0- | | | | 4,291 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 23,009 | | | $ | 5,544 | | | $ | 1,758 | | | $ | 564 | | | $ | 30,875 | |
| | | | | | | | | | | | | | | | | | | | | |
The accrued liability for severance costs and related cash payments consisted of:
| | | | | | | | | |
| Balance at January 1, 2008 | | $ | -0- | | | $ | -0- | |
| Severance costs recorded in 2008 | | | 564 | | | | 564 | |
| Cash payments made in 2008 | | | (19 | ) | | | (19 | ) |
| | | | | | | |
| Balance at December 31, 2008 | | $ | 545 | | | | 545 | |
| Cash payments made in 2009 | | | | (460 | ) |
| | | | | | | |
| Balance at December 31, 2009 | | | $ | 85 | |
| | | | | |
In the fourth quarter of 2009, due to weakness in the general economy including the railroad industry, the Company recorded $7,003 of asset impairment charges which were composed of $1,797 for inventory impairment and $5,206 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment.
| | | | | | | | | | | | | |
| | | Asset
| | | Cost of
| | | | |
| | | Impairment | | | Products Sold | | | Total | |
| |
| Supply Technologies | | $ | 2,206 | | | $ | 1,797 | | | $ | 4,003 | |
| Manufactured Products | | | 3,000 | | | | -0- | | | $ | 3,000 | |
| | | | | | | | | | | | | |
| | | $ | 5,206 | | | $ | 1,797 | | | $ | 7,003 | |
| | | | | | | | | | | | | |
| |
| NOTE P — | Derivatives and HedgingSubsequent Event |
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 2006,On March 8, 2010 the Company entered into forward contracts foramended and restated its existing credit facility to, along with other changes, extend the purpose of hedging exposure to changes in the value of accounts receivable in euros against the U.S. dollar, for a notional amount of $1,000, of which $-0- was outstanding at December 31, 2006. The Company recognized $61 of foreign currency losses upon settlementterm of the forward contracts in 2006. The Company used no derivative instruments in 2008 or 2007, and there were no such currency hedge contracts outstanding at December 31, 2008 or December 31, 2007.facility to June 30, 2013. See Note G.
61
Supplementary Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | | Quarter Ended | |
| | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | |
| | | (Dollars in thousands, except per share data) | | | (Dollars in thousands, except per share data) | |
| | |
2009 | | | | | | | | | | | | | | | | | |
| Net sales | | | $ | 181,250 | | | $ | 163,405 | | | $ | 168,597 | | | $ | 187,795 | |
| Gross profit | | | | 23,862 | | | | 29,328 | | | | 22,659 | | | | 27,998 | |
| Net income (loss) | | | $ | (5,462 | ) | | $ | 3,272 | | | $ | (3,224 | ) | | $ | 205 | |
| | | | | | | | | | | |
| Amounts per common share: | | | | | | | | | | | | | | | | | |
| Basic | | | $ | (.50 | ) | | $ | .30 | | | $ | (.29 | ) | | $ | .02 | |
| | | | | | | | | | | |
| Diluted | | | $ | (.50 | ) | | $ | .29 | | | $ | (.29 | ) | | $ | .02 | |
| | | | | | | | | | |
2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 267,090 | | | $ | 285,940 | | | $ | 266,148 | | | $ | 249,579 | | | $ | 267,090 | | | $ | 285,940 | | | $ | 266,148 | | | $ | 249,579 | |
| Gross profit | | | 38,693 | | | | 43,735 | | | | 39,389 | | | | 27,643 | | | | 38,693 | | | | 43,735 | | | | 39,389 | | | | 27,643 | |
| Net income (loss) | | $ | 3,482 | | | $ | 5,717 | | | $ | (9,068 | ) | | $ | (119,934 | ) | | $ | 3,482 | | | $ | 5,717 | | | $ | (9,068 | ) | | $ | (119,934 | ) |
| | | | | | | | | | | | | | | | | | | |
| Amounts per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .31 | | | $ | .52 | | | $ | (.82 | ) | | $ | (10.96 | ) | | $ | .31 | | | $ | .52 | | | $ | (.82 | ) | | $ | (10.96 | ) |
| | | | | | | | | | | | | | | | | | | |
| Diluted | | $ | .30 | | | $ | .49 | | | $ | (.82 | ) | | $ | (10.96 | ) | | $ | .30 | | | $ | .49 | | | $ | (.82 | ) | | $ | (10.96 | ) |
| | | | | | | | | | | | | | | | | | | |
2007 | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 267,886 | | | $ | 286,636 | | | $ | 269,104 | | | $ | 247,815 | | |
| Gross profit | | | 38,609 | | | | 42,380 | | | | 42,224 | | | | 35,891 | | |
| Net income | | $ | 5,205 | | | $ | 5,849 | | | $ | 6,228 | | | $ | 3,916 | | |
| | | | | | | | | | | |
| Amounts per common share: | | | | | | | | | | | | | | | | | |
| Basic | | $ | .47 | | | $ | .53 | | | $ | .56 | | | $ | .35 | | |
| | | | | | | | | | | |
| Diluted | | $ | .45 | | | $ | .50 | | | $ | .53 | | | $ | .34 | | |
| | | | | | | | | | | |
| |
| Note 1 — | AtIn the endsecond quarter of fourth quarter 2007,2009, the Company adjusted downwardrecorded a gain of $3,096 on the amounts initially recorded for revenue, gross profit and net incomepurchase of $6,125 aggregate principal amount of 8.375% senior subordinated notes due 2014 issued by approximately $18,000, $4,000 and $2,600, respectively. These adjustments were made to exclude certain costs from suppliers and subcontractors fromPark-Ohio Industries, Inc. |
|
| Note 2 — | In the percentage of completion calculation that is used to account for long-term industrial equipment contracts. We performed an evaluation to determine if these adjustments recorded in the fourthsecond quarter of 2007 were material2009, the Company recorded a charge of $2,015 to any individual prior period, taking intoreserve for an account the requirements of SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatementsreceivable from a customer in Current Year Financial Statements” (SAB No. 108), which was adopted in 2006. Based on this analysis, we concluded the errors were not material to any individual prior periods and, therefore as provided by SAB No. 108, the correction of the error does not require previously filed reports to be amended.bankruptcy. |
| |
Note 23 — | In the third quarter of 2009, the Company recorded a gain of $2,011 on the purchase of $4,090 aggregate principal amount of 8.375% senior subordinated notes due 2014 issued by Park-Ohio Industries, Inc. |
|
| Note 4 — | In the third quarter of 2009, the Company recorded a charge of $2,139 to reserve for an account receivable from a customer in bankruptcy. |
|
| Note 5 — | In the fourth quarter of 2009, the Company recorded a gain of $1,190 on the purchase of $4,935 aggregate principal amount of 8.375% senior subordinated notes due 2014 issued by Park-Ohio Industries, Inc. |
|
| Note 6 — | In the fourth quarter of 2009, the Company recorded $7,003 of restructuring and asset impairment charges associated with weakness in the general economy, including in the railroad industry. |
|
| Note 7 — | In the third quarter of 2008, the Company recorded $18,059 of restructuring and asset impairment charges associated with the weakness and volatility in the automotive markets ($13,189 in the Aluminum Products segment and $4,291 in the Manufactured Products segment). Inventory impairment charges of $579 were included in Cost of Products Sold and $17,480 were included in Restructuring and impairment charges. |
| |
Note 38 — | In the fourth quarter of 2008, the Company recorded a non-cash goodwill impairment charge of $95,763. |
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| |
Note 49 — | In the fourth quarter of 2008, the Company recorded a gain of $6,232 on the purchase of $11,015 aggregate principal amount of 8.375% senior subordinated notes due 2014 issued by Park-Ohio Industries, Inc. The notes were not contributed to Park-Ohio Industries, Inc., but arewere held by Park-Ohio Holdings Corp. |
| |
Note 510 — | In the fourth quarter of 2008, the Company recorded $13,430 of restructuring and asset impairment charges associated with the decision to exit its relationship with its largest customer along with the general economic downturn resulting in either the closure, downsizing or consolidation of eight facilities in its distribution network. Impairment charges were offset by a gain of $614 recorded in the Aluminum Products segment relating to the sale of certain facilities that were previously written off. |
| |
Note 611 — | In the fourth quarter of 2008, the Company recorded a valuation allowance of $33,466 for its net deferred tax asset. |
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Schedule II
PARK-OHIO HOLDINGS CORP.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
| | Charged to
| | Deductions
| | Balance at
| | | Balance at
| | Charged to
| | Deductions
| | Balance at
| |
| | | Beginning of
| | Costs and
| | and
| | End of
| | | Beginning of
| | Costs and
| | and
| | End of
| |
Description | | Period | | Expenses | | Other | | Period | | | Period | | Expenses | | Other | | Period | |
| | | (Dollars in thousands) | |
| Year Ended December 31, 2009: | | | | | | | | | | | | | | | | | |
| Allowances deducted from assets: | | | | | | | | | | | | | | | | | |
| Trade receivable allowances | | | $ | 3,044 | | | $ | 6,527 | | | $ | (1,183 | )(A) | | $ | 8,388 | |
| Inventory Obsolescence reserve | | | | 22,313 | | | | 7,153 | | | | (8,010 | )(B) | | | 21,456 | |
| Tax valuation allowances | | | | 34,921 | | | | (1,815 | ) | | | (2,438 | )(D) | | | 30,668 | |
| Product warranty liability | | | | 5,402 | | | | 704 | | | | (3,346 | )(C) | | | 2,760 | |
| | | | | | | | | | |
| Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowances deducted from assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade receivable allowances | | $ | 3,724 | | | $ | 1,429 | | | $ | (2,109 | )(A) | | $ | 3,044 | | | $ | 3,724 | | | $ | 1,429 | | | $ | (2,109 | )(A) | | $ | 3,044 | |
| Inventory Obsolescence reserve | | | 20,432 | | | | 5,385 | | | | (3,505 | )(B) | | | 22,312 | | | | 20,432 | | | | 5,385 | | | | (3,505 | )(B) | | | 22,312 | |
| Tax valuation allowances | | | 2,217 | | | | 33,625 | | | | (921 | ) | | | 34,921 | | | | 2,217 | | | | 33,625 | | | | (921 | ) | | | 34,921 | |
| Product warranty liability | | | 5,799 | | | | 4,202 | | | | (4,599 | )(C) | | | 5,402 | | | | 5,799 | | | | 4,202 | | | | (4,599 | )(C) | | | 5,402 | |
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowances deducted from assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade receivable allowances | | $ | 4,305 | | | $ | 1,609 | | | $ | (2,190 | )(A) | | $ | 3,724 | | | $ | 4,305 | | | $ | 1,609 | | | $ | (2,190 | )(A) | | $ | 3,724 | |
| Inventory Obsolescence reserve | | | 22,978 | | | | 4,383 | | | | (6,929 | )(B) | | | 20,432 | | | | 22,978 | | | | 4,383 | | | | (6,929 | )(B) | | | 20,432 | |
| Tax valuation allowances | | | 316 | | | | 1,901 | | | | 0 | (D) | | | 2,217 | | | | 316 | | | | 1,901 | | | | -0- | (D) | | | 2,217 | |
| Product warranty liability | | | 3,557 | | | | 4,526 | | | | (2,284 | )(C) | | | 5,799 | | | | 3,557 | | | | 4,526 | | | | (2,284 | )(C) | | | 5,799 | |
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2006: | | | | | | | | | | | | | | | | | |
| Allowances deducted from assets: | | | | | | | | | | | | | | | | | |
| Trade receivable allowances | | $ | 5,120 | | | $ | 2,330 | | | $ | (3,145 | )(A) | | $ | 4,305 | | |
| Inventory Obsolescence reserve | | | 19,166 | | | | 7,216 | | | | (3,404 | )(B) | | | 22,978 | | |
| Tax valuation allowances | | | 7,011 | | | | (4,806 | ) | | | (1,889 | ) | | | 316 | | |
| Product warranty liability | | | 3,566 | | | | 2,797 | | | | (2,806 | )(C) | | | 3,557 | | |
| | | | | | | | | | | |
Note (A)- Uncollectible accounts written off, net of recoveries.
Note (B)- Amounts written off or payments incurred, net of acquired reserves.
Note (C)- Loss and loss adjustment.
Note (D)- Excess tax benefit initiallyAmounts recorded in connection with the exercise of stock options.other comprehensive income.
| |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with the Company’s independent auditors on accounting and financial disclosure matters within the two-year period ended December 31, 2008.2009.
| |
| Item 9A. | Controls and Procedures |
Evaluation of disclosure controls and procedures
As of December 31, 2008, management, includingthe end of the period covered by this report, we carried out an evaluation , under the supervision and with the participation of our Chairman and Chief Executive Officer and our Vice President and Chief Financial Officer, evaluatedof the effectiveness of the design and operation of the Company’sour disclosure controls and procedures. As defined inprocedures pursuant toRule 13a-15(e) underandRule 15d-15(e) of the Securities Exchange Act of 1934, (the “Exchangeas amended (“Exchange Act”), disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as
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appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting.
. Based upon this evaluation, our Chairman and Chief Executive Officer and Vice President and Chief Financial Officer concluded that, as of the Company’send of the period covered by this report, our disclosure controls and procedures were effective, as of December 31, 2008.effective.
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Management’s Report on 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 inRule 13a-15(f) under the Exchange Act. As required byRule 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, 2008.2009. 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 has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008.2009.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 20082009 based on the framework contained in the COSO Report. This report is included at page 3536 of this annual report onForm 10-K.10-K and is incorporated herein by reference.
Changes in internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 20082009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
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