Document/ExhibitDescriptionPagesSize 1: 10-Q Park-Ohio Holdings Corp. 10-Q HTML 340K
2: EX-10.1 Material Contract HTML 30K
3: EX-10.2 Material Contract HTML 5K
4: EX-15 Letter re: Unaudited Interim Financial Information HTML 11K
5: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 13K
6: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 13K
7: EX-32 Certification per Sarbanes-Oxley Act (Section 906) HTML 10K
Has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and
(2)
Has been subject to such filing requirements for the past
90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
Number of shares outstanding of registrant’s Common Stock,
par value $1.00 per share, as of October 31, 2006:
11,343,446
Long-Term Liabilities, less
current portion
8.375% Senior Subordinated Notes due 2014
210,000
210,000
Revolving credit
152,700
128,300
Other long-term debt
5,439
6,705
Deferred tax liability
3,176
3,176
Other postretirement benefits and
other long-term liabilities
24,598
26,174
395,913
374,355
Shareholders’ Equity
Capital stock, par value $1 a
share:
Serial Preferred Stock
-0-
-0-
Common Stock
12,080
11,703
Additional paid-in capital
57,271
56,915
Retained earnings
59,408
46,014
Treasury stock, at cost
(9,047
)
(9,009
)
Accumulated other comprehensive
income (loss)
580
(2,102
)
120,292
103,521
$
732,945
$
662,854
Note:
The balance sheet at December 31, 2005 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
The consolidated financial statements include the accounts of
Park-Ohio Holdings Corp. and its subsidiaries (the
“Company”). All significant intercompany transactions
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted for interim financial information and with
the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month and
nine-month periods ended September 30, 2006 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2006. For further information,
refer to the consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2005. Certain amounts in
the prior years’ financial statements have been
reclassified to conform to the current year presentation.
NOTE B —
Recent Accounting Pronouncements
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123
(revised 2004), “Share-Based Payment”
(“SFAS No. 123(R)”), using the
“modified prospective” method. Under this method,
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
SFAS No. 123(R) was issued on December 16, 2004
and is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation.” SFAS No. 123(R)
supersedes Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB Opinion No. 25”) and amends
SFAS No. 95, “Statement of Cash Flows.”
Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However,
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. The adoption
of fair value recognition provisions for stock options is
expected to increase the Company’s fiscal 2006 compensation
expense by approximately $300 (before tax).
As permitted by SFAS No. 123, the Company previously
accounted for share-based payments to employees using APB
Opinion No. 25’s intrinsic value method and, as such,
generally recognized no compensation cost for employee stock
options. SFAS No. 123(R) also requires the benefits of
tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current 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.
Additional information regarding our share-based compensation
program is provided in Note G.
In May 2005, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections,” which
replaces APB Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements.” The
statement changes the requirements for the accounting and
reporting of a change in accounting principle and is applicable
to all voluntary changes in
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
accounting principle. It also applies to changes required by an
accounting pronouncement if that pronouncement 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. The Company adopted this
statement effective January 1, 2006 as prescribed and its
adoption did not have any impact on the Company’s results
of operations or financial condition.
In June 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 prescribes a “more
likely than not” threshold for financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides
guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim
periods and income tax disclosures. This interpretation is
effective for the Company as of January 1, 2007. We are
currently evaluating the impact of FIN 48 on our financial
statements.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS
No. 158”), which requires the Company to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in the balance
sheet and to recognize changes in the funded status in the year
in which the changes occur through comprehensive income.
Additionally, SFAS No. 158 requires the Company to
measure the funded status of a plan as of the date of its fiscal
year end. The requirement to recognize the funded status of a
defined benefit postretirement plan and the related disclosure
requirements are effective for the Company in 2007. The
requirement to measure plan assets and benefit obligations is
effective for the Company in 2008. The Company currently uses
December 31 to measure the funded status of its plans. The
Company is currently evaluating the impact that the adoption of
SFAS No. 158 will have on its consolidated financial
statements.
NOTE C —
Acquisitions
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 in
Regulation S-X.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
On December 23, 2005, the Company completed the acquisition
of the assets of Lectrotherm, Inc. (“Lectrotherm”) for
$5,125 in cash. The acquisition was funded with borrowings under
the Company’s revolving credit facility. The purchase price
and the results of operations of Lectrotherm prior to its date
of acquisition were not deemed significant as defined in
Regulation S-X.
The preliminary allocation of the purchase price has been
performed based on the assignments of fair values to assets
acquired and liabilities assumed. The allocation of the purchase
price is as follows:
Cash acquisition price, less cash
acquired
$
4,698
Assets
Accounts receivable
(2,640
)
Inventories
(954
)
Prepaid expenses
(97
)
Equipment
(871
)
Other assets
(545
)
Liabilities
Accrued expenses
409
Goodwill
$
-0-
On July 20, 2005, the Company completed the acquisition of
the assets of Purchased Parts Group, Inc. (“PPG”) for
$7,000 in cash, $1,346 in the form of a short-term note payable
and the assumption of approximately $12,787 of trade
liabilities. The acquisition was funded with borrowings under
the Company’s revolving credit facility. The purchase price
and the results of operations of PPG prior to its date of
acquisition were not deemed significant as defined in
Regulation S-X.
The results of operations for PPG have been included in the
Company’s financial statements since July 20, 2005.
The final allocation of the purchase price is as follows:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
The Company has a plan for integration activities. In accordance
with FASB EITF Issue
No. 95-3,
“Recognition of Liabilities in Connection with a Purchase
Business Combination,”the Company recorded accruals for
severance, exit and relocation costs in the purchase price
allocation. A reconciliation of the beginning and ending accrual
balance is as follows:
At September 30, 2006, capital stock consists of
(i) Serial Preferred Stock, of which 632,470 shares
were authorized and none were issued, and (ii) Common
Stock, of which 40,000,000 shares were authorized and
12,079,608 shares were issued, of which 11,344,446 were
outstanding and 735,162 were treasury shares.
Denominator for basic earnings per
share — weighted average shares
11,007
10,928
10,987
10,896
Effect of dilutive securities:
Employee stock options
444
486
461
489
Denominator for diluted earnings
per share — weighted average shares and assumed
conversions
11,451
11,414
11,448
11,385
Amounts per common share:
Basic
$
.34
$
.47
$
1.22
$
1.73
Diluted
$
.33
$
.45
$
1.17
$
1.66
Stock options for 104,000 shares were excluded in the three
months and nine months ended September 30, 2006 because
they were anti-dilutive.
NOTE G —
Stock-Based Compensation
Under the provisions of the Park-Ohio Holdings Corp. 1998
Long-Term Incentive Plan, as amended
(“1998 Plan”), which is administered by the
Compensation Committee of the Company’s Board of Directors,
incentive stock options, non-statutory stock options, stock
appreciation rights (“SARs”), restricted shares,
performance shares or stock awards may be awarded to all
employees of the Company and its subsidiaries. Stock options
will be exercisable in whole or in installments as may be
determined, provided that no options will be exercisable more
than ten years from date of grant. The exercise price will be
the fair market value at the date of grant. The aggregate number
of shares of the Company’s common stock that may be awarded
under the 1998 Plan is 2,650,000, all of which may be incentive
stock options. No more than 500,000 shares shall be the
subject of awards to any individual participant in any one
calendar year.
Prior to January 1, 2006, the Company had elected to
account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related
interpretations. Under APB Opinion No. 25, because the
exercise price of the Company’s employee stock options
equaled the fair market value of the underlying stock on the
date of grant, no compensation expense was recognized.
Compensation expense resulting from fixed awards of restricted
shares was measured at the date of grant and expensed over the
vesting period.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
An alternative method of accounting for stock-based
compensation, allowed before January 1, 2006, was the fair
value method defined by SFAS No. 123. Had compensation
cost for stock options granted been determined based on the fair
value method of SFAS No. 123, the Company’s pro
forma net income and pro forma earnings per share for the
three-month and nine-month periods ended September 30, 2005
would have been as follows:
Stock-option expense determined
under fair value based methods, net of related tax effects
(37
)
(72
)
Pro forma net income
$
5,115
$
18,779
Earnings per share:
Basic — as reported
$
0.47
$
1.73
Basic — pro forma
$
0.47
$
1.72
Diluted — as reported
$
0.45
$
1.66
Diluted — pro forma
$
0.45
$
1.65
The fair value of stock options is estimated as of the grant
date using the Black-Scholes option pricing model. No options
were granted in the first nine months of 2006. There were 65,000
options granted in the first nine months of 2005. The following
weighted average assumptions were used for options granted in
fiscal year 2005:
Fiscal Year Ended December 31
2005
Risk — free interest rate
4.15
%
Expected life of option in years
6.0
Expected dividend yield
0
%
Expected stock volatility
55
%
The weighted average fair market value of options issued during
the fiscal year ended December 31, 2005 was estimated to be
$8.20.
Participants may also be awarded restricted stock under the 1998
Plan. The Company granted 340,000, 56,300 and 28,000 shares
of restricted stock in 2006, 2005 and 2004, respectively, with
fair values equal to the market price of the stock on the date
of grant. The restricted shares were valued at $4,779, $682 and
$433 for 2006, 2005 and 2004, respectively, and will be
recognized as compensation expense ratably over the three to
five year vesting period. Compensation expense associated with
the restricted shares of $159 and $227 was recognized in the
three-month periods ended September 30, 2006 and 2005,
respectively. For the nine-month periods ended
September 30, 2006 and 2005, the compensation expense
recognized for restricted shares was $391 and $392,
respectively. Compensation expense associated with stock options
of $73 and $-0- was recognized in the three-month period ended
September 30, 2006 and 2005, respectively. For the
nine-month periods ended September 30, 2006 and 2005, the
compensation expense associated with stock options was $227 and
$-0-, respectively.
In 2006, before-tax share-based compensation expense is expected
to total $1,107 and, net of taxes, is expected to approximate
$664 for stock option awards and restricted stock. The total
unrecognized share-based compensation expense before tax for
awards outstanding as of September 30, 2006 was $4,982,
which will be recognized over a weighted-average period of
approximately 3.5 years.
SFAS No. 123(R) requires that cash flows resulting
from the tax benefits of deductions in excess of the
compensation cost recognized for stock-based awards be
classified as financing cash flows. The Company had no gross
excess tax benefits in the nine months ended September 30,2006.
NOTE H —
Pension Plans and Other Postretirement Benefits
The components of net periodic benefit cost recognized during
the periods indicated were as follows:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
NOTE I —
Segments
The Company operates through three segments: Integrated
Logistics Solutions (“ILS”), Aluminum Products and
Manufactured Products. ILS is a leading supply chain logistics
provider of production components to large, multinational
manufacturing companies, other manufacturers and distributors.
In connection with the supply of such production components, ILS
provides a variety of value-added, cost-effective supply chain
management services. Aluminum Products manufactures cast
aluminum components for automotive, agricultural equipment,
heavy-duty truck and construction equipment. Aluminum Products
also provides value-added services such as design and
engineering, machining and assembly. Manufactured Products
operates a diverse group of niche manufacturing businesses that
design and manufacture a broad range of high quality products
engineered for specific customer applications.
The Company has responded to the economic downturn by reducing
costs in a variety of ways, including restructuring businesses
and selling non-core manufacturing assets. These activities
generated restructuring and asset impairment charges in 2001,
2002, 2003 and 2005, as the Company’s restructuring efforts
continued and evolved. For further details on the restructuring
activities, see Note O to the audited financial statements
contained in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2005.
The accrued liability balance for severance and exit costs and
related cash payments during the first nine months of 2006
consisted of:
The Company estimates the amount of warranty claims on sold
products that may be incurred based on current and historical
data. The actual warranty expense could differ from the
estimates made by the Company based on product performance. The
following table presents the changes in the Company’s
product warranty liability:
On October 18, 2006, Park-Ohio Industries, Inc., the other
loan parties thereto, the lenders party thereto and JPMorgan
Chase Bank, N.A. (successor by merger to Bank One, NA), as
agent, entered into a Fifth Amendment to
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
the Amended and Restated Credit Agreement dated November 5,2003, which, among other things, increases the availability
under the credit facility from $200,000 to $230,000.
NOTE N —
Income Taxes
In 2006, the Company began recording a quarterly provision for
federal income taxes resulting in a total effective income tax
rate of approximately 37%, compared to 11% for 2005. Only
foreign and state income taxes were provided for in 2005 because
federal income taxes were offset by net operating loss
carryforwards that were not recognized previously. At
December 31, 2005, the Company had net operating loss
carryforwards of approximately $41,000, which should preclude
the cash payment of federal income taxes in 2006. In the fourth
quarter of 2006, if a portion or all of its remaining deferred
tax asset will more likely than not be realized, the Company
will reverse into income the appropriate portion of its
remaining tax valuation allowance of approximately $5,000.
NOTE O —
Derivatives and Hedging
The Company recognizes all derivative financial instruments as
either assets or liabilities at fair value. The Company has no
derivative instruments that are classified as fair value hedges.
Changes in the fair value of derivative instruments that are
classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are
recognized in net income.
During the first nine months of 2006, the Company entered into
forward contracts for the purpose of hedging exposure to changes
in the value of accounts receivable, primarily euros against the
U.S. dollar, for a notional amount of $1,000, of which $434
was outstanding at September 30, 2006. These transactions
are considered cash flow hedges. The fair market value of these
transactions at September 30, 2006 was approximately $438
and therefore, $4 has been recognized in other comprehensive
income (loss). Because there is no ineffectiveness on the cash
flow hedges, all changes in fair value of these derivatives are
recorded in equity and not included in the current period’s
income statement.
NOTE P —
Subsequent Event
On October 18, 2006, the Company acquired 100 percent
of the outstanding capital stock of NABS, Inc.
(“NABS”) for $21 million in cash. NABS is an
international supply chain manager of production components
providing services to high technology companies in the computer,
electronics and consumer products industries. The acquisition
was funded with borrowings under the Company’s revolving
credit facility.
We have reviewed the accompanying consolidated balance sheet of
Park-Ohio Holdings Corp. and subsidiaries as of
September 30, 2006 and the related consolidated statements
of income for the three-month and nine-month periods ended
September 30, 2006 and 2005, the consolidated statement of
shareholders’ equity for the nine-month period ended
September 30, 2006 and the consolidated statements of cash
flows for the nine-month periods ended September 30, 2006
and 2005. These financial statements are the responsibility of
the Company’s management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based upon our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Park-Ohio Holdings Corp. and
subsidiaries as of December 31, 2005 and the related
consolidated statements of income, shareholders’ equity,
and cash flows for the year then ended, not presented herein,
and in our report dated March 13, 2006, we expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2005, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
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.
Financial information for the three-month and nine-month periods
ended September 30, 2006 is not directly comparable to the
financial information for the same periods in 2005 primarily due
to acquisitions.
Executive
Overview
We are an industrial supply chain logistics and diversified
manufacturing business, operating in three segments: ILS,
Aluminum Products and Manufactured Products. ILS provides
customers with integrated supply chain management services for a
broad range of high-volume, specialty production components. ILS
customers receive various value-added services, such as
engineering and design services, part usage and cost analysis,
supplier selection, quality assurance, bar coding, product
packaging and tracking,
just-in-time
and point-of use delivery, electronic billing and ongoing
technical support. The principal customers of ILS are in the
heavy-duty truck, automotive and vehicle parts, electrical
distribution and controls, power sports/fitness equipment, HVAC,
aerospace and defense, electrical components, appliance and
semiconductor equipment 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 I to the consolidated
financial statements.
Sales grew substantially in the first nine months of 2006. Net
sales increased to $785.8 million, an increase of 14%,
compared to the first nine months of 2005. Pre-tax income grew
slightly to $21.3 million. Sales and profitability growth
were reduced in the third quarter of 2006 in all three segments
(particularly Aluminum Products) by automobile and light truck
market cutbacks, which are expected to continue in the fourth
quarter. We recorded income tax expense of $7.9 million in
the first nine months of 2006, an effective income tax rate of
37%, compared to $2.3 million, or an effective income tax
rate of 11% in the first nine months of 2005. No federal income
taxes were expensed in 2005 due to our deferred tax valuation
allowance, of which a portion was reversed at the end of 2005.
This resulted in net income of $13.4 million for the first
nine months of 2006, compared to $18.9 million in the same
period of 2005.
We recently made two acquisitions to build on the success of our
Integrated Logistics Solutions long-term supply chain management
business. We acquired all of the capital stock of NABS for
$21.0 million in cash funded with borrowings under our
revolving credit facility, in October 2006. 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 14
international operations in China, India, Taiwan, Singapore,
Ireland, Hungary, Scotland and Mexico plus five locations in the
United States. 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 in cash funded with borrowings from our
revolving credit facility, $1.3 million in the form of a
short-term note payable and the assumption of approximately
$12.8 million of trade liabilities. This acquisition added
significantly to the customer and supplier bases, and expanded
the geographic presence of, our ILS segment. ILS has already
eliminated substantial overhead cost and begun the process of
consolidating redundant PPG service centers.
Building on the success of our induction heating and melting
systems business, in December 2005, we acquired the assets of
Lectrotherm, in Canton, Ohio, for $5.1 million in cash, and
in January 2006, we acquired all of the capital stock of Foundry
Service, in Germany, for $3.2 million in cash. These
induction acquisitions augmented our existing, high-margin
aftermarket induction business, and increased our presence,
revenues and profits in Germany, an important capital equipment
market. We funded these induction acquisitions with borrowings
from our revolving credit facilities and funds from foreign
subsidiaries.
Accounting
Changes
Effective January 1, 2006, we adopted
SFAS No. 123(R) using the “modified
prospective” method. Under this method, we recognized
$.2 million of compensation costs (before tax) in the first
nine months of 2006 related to all share-based awards granted to
employees prior to January 1, 2006 that remained unvested
on that date. We will continue to recognize such expenses in
future periods as long as existing awards continue in existence
and unvested. We expect these existing awards to increase our
fiscal 2006 compensation expense by approximately
$.3 million (before tax). As additional share-based
payments are awarded in the future, we will also recognize
compensation cost for these awards. Additional information
regarding our share-based compensation is provided in
Notes B and G to the consolidated financial statements.
Results
of Operations
Nine
Months 2006 versus Nine Months 2005 (Dollars in
millions)
Net
Sales by Segment:
Nine Months
Acquired/
Ended September 30,
Percent
(Divested)
2006
2005
Change
Change
Sales
ILS
$
449.6
$
394.2
$
55.4
14
%
$
28.0
Aluminum products
120.9
122.8
(1.9
)
(2
)%
0.0
Manufactured products
215.3
174.9
40.4
23
%
17.2
Consolidated net sales
$
785.8
$
691.9
$
93.9
14
%
$
45.2
Net sales increased by 14% in the first nine months of 2006
compared to the same period in 2005. ILS sales increased 14%
primarily due to the July 20, 2005 acquisition of PPG,
general economic growth, particularly as a result of significant
growth in the heavy-duty truck industry, the addition of new
customers and increases in product range to existing customers.
Aluminum Products sales decreased 2% in the first nine months of
2006, primarily due to contraction of automobile and light truck
production in North America. Manufactured Products sales
increased 23% primarily in the induction, pipe threading
equipment and forging businesses. Of this increase,
$17.2 million was due to the acquisitions of Lectrotherm
and Foundry Service by the induction business in December 2005
and January 2006, respectively.
Cost
of Products Sold & Gross Profit:
Nine Months
Ended September 30,
Percent
2006
2005
Change
Change
Consolidated cost of products sold
$
675.0
$
585.5
$
89.5
15
%
Consolidated gross profit
$
110.8
$
106.4
$
4.4
4
%
Gross margin
14.1
%
15.4
%
ILS gross margin decreased slightly, primarily due to PPG
restructuring costs. Aluminum Products gross margin decreased
primarily due to volume reductions, product mix and pricing
changes, plus the cost of preparations for new contracts due to
start production in late 2006 and early 2007. Gross margin in
the
Manufactured Products segment decreased primarily as a result of
operational and pricing issues in the Company’s rubber
products business, and changes in contract mix and timing in the
induction and pipe threading equipment businesses.
Quarter-to-quarter,
gross margins vary widely in Manufactured Products, and these
timing issues are not expected to depress full-year 2006 gross
margin significantly for the Manufactured Products segment
compared to prior years.
Selling,
General & Administrative (“SG&A”)
Expenses:
Nine Months
Ended September 30,
Percent
2006
2005
Change
Change
Consolidated SG&A expenses
$
66.4
$
64.9
$
1.5
2
%
SG&A percent
8.4
%
9.4
%
Consolidated SG&A expenses increased 2% in the first nine
months of 2006 compared to the same period in 2005, representing
a one percentage point reduction in SG&A expenses as a
percent of sales. SG&A expenses increased approximately
$3.3 million due to the acquisitions of PPG and Lectrotherm
in 2005 and Foundry Service in January 2006. SG&A expenses
were increased in the first nine months 2006 compared to the
same period of 2005 by a $.6 million decrease in net
pension credits, reflecting reduced returns on pension plan
assets. These increases in SG&A expenses from acquisitions
and reduced pension credits were partially offset by cost
reductions.
Interest
Expense:
Nine Months
Ended September 30,
Percent
2006
2005
Change
Change
Interest expense
$
23.2
$
20.4
$
2.8
14
%
Average outstanding borrowings
$
372.2
$
358.2
$
14.0
4
%
Average borrowing rate
8.30
%
7.58
%
72
basis points
Interest expense increased $2.8 million in the first nine
months of 2006 compared to the same period in 2005, primarily
due to higher average interest rates and average outstanding
borrowings during 2006. The increase in average borrowings in
2006 resulted primarily from higher working capital requirements
and the purchases of PPG, Lectrotherm and Foundry Service in
July and December 2005 and January 2006, respectively. The
higher average borrowing rate in 2006 was due primarily to
increased interest rates under our revolving credit facility
compared to 2005, in which rates increased primarily as a result
of actions by the Federal Reserve.
Income
Tax:
The provision for income taxes was $7.9 million in the
nine-month period ended September 30, 2006, a 37% effective
income tax rate, compared to income taxes of $2.3 million
provided in the corresponding period of 2005, an 11% effective
income tax rate. In 2005, these taxes consisted primarily of
state and foreign taxes on profitable operations. Taxes in the
first nine months of 2006 included such state and foreign taxes,
but also included federal income taxes. This change resulted
from the fourth-quarter 2005 reversal of a portion of our
domestic deferred tax valuation allowance.
In the fourth quarter of 2005, the Company reversed
$7.3 million of its $12.3 million year-end 2005
domestic deferred tax valuation allowance. Based on strong
recent and projected earnings, the Company determined that it
was more likely than not that this portion of the deferred tax
asset would be realized. In 2006, the Company began recording a
quarterly provision for federal income taxes. Our significant
net operating loss carry forwards should preclude the payment of
cash federal income taxes in 2006 and 2007, and possibly beyond.
In the fourth quarter of 2006, the Company will reassess the
remaining tax valuation allowance. If it is determined that a
portion or all of the remaining deferred tax asset will more
likely than not be realized, then the appropriate portion of its
remaining tax valuation allowance will be reversed into income
at that time, which could increase 2006 net income by as
much as $5.0 million.
At December 31, 2005, our subsidiaries had
$41.0 million of net operating loss carryforwards for
federal tax purposes.
Third
Quarter 2006 versus Third Quarter 2005 (Dollars in
millions)
Net
Sales by Segment:
Three Months
Acquired/
Ended September 30,
Percent
(Divested)
2006
2005
Change
Change
Sales
ILS
$
149.1
$
137.8
$
11.3
8
%
$
0.0
Aluminum products
33.3
36.8
(3.5
)
(10
)%
0.0
Manufactured products
74.8
59.6
15.2
26
%
5.8
Consolidated net sales
$
257.2
$
234.2
$
23.0
10
%
$
5.8
Net sales increased 10% in the third quarter of 2006 compared to
the same quarter in 2005. ILS sales increased 8%, primarily due
to general economic growth, particularly as a result of
significant growth in the heavy-duty truck industry, the
addition of new customers and increases in product range to
existing customers. Aluminum Products sales decreased 10% in the
third quarter of 2006, primarily due to contraction of
automobile and light truck production in North America.
Manufactured Products sales increased 26% primarily in the
induction, pipe threading equipment, rubber and forging
businesses. Of this increase, $5.8 million was due to the
acquisitions of Lectrotherm and Foundry Service by the induction
business in December 2005 and January 2006 respectively.
Cost
of Products Sold & Gross Profit:
Three Months
Ended September 30,
Percent
2006
2005
Change
Change
Consolidated cost of products sold
$
221.0
$
198.3
$
22.7
11
%
Consolidated gross profit
$
36.2
$
35.9
$
0.3
1
%
Gross margin
14.1
%
15.3
%
Cost of products sold increased 11% in the third quarter of 2006
compared to the same quarter in 2005, while gross margin
decreased to 14.1% from 15.3% in 2005.
ILS gross margin decreased slightly, primarily due to
PPG restructuring costs. Aluminum Products gross margin
decreased primarily due to volume reductions, product mix and
pricing changes, plus the cost of preparations for new contracts
due to start production in late 2006 and early 2007. Gross
margin in the Manufactured Products segment decreased primarily
as a result of operational and pricing issues in the
Company’s rubber products business and changes in contract
mix and timing in the induction and pipe threading equipment
businesses.
Quarter-to-quarter,
gross margins vary widely in Manufactured Products, and these
timing issues are not expected to depress full-year 2006 gross
margin significantly for the Manufactured Products segment
compared to prior years.
Consolidated SG&A expenses decreased 2% in the third quarter
of 2006 compared to the same quarter in 2005, representing a one
percentage point reduction in SG&A expenses as a percent of
sales. SG&A expenses increased approximately
$.8 million due to the acquisitions of Lectrotherm and
Foundry Service in December 2005 and January 2006,
respectively. SG&A expenses were increased in the third
quarter of 2006 compared to the same quarter of 2005 by a
$.2 million decrease in net pension credits reflecting
reduced returns on pension plan assets. These increases in
SG&A expenses from acquisitions and reduced pension credits
were offset by cost reductions.
Interest
Expense:
Three Months
Ended September 30,
Percent
2006
2005
Change
Change
Interest expense
$
8.1
$
7.2
$
0.9
13
%
Average outstanding borrowings
$
379.6
$
360.0
$
19.6
5
%
Average borrowing rate
8.50
%
8.00
%
50
basis points
Interest expense increased $.9 million in the third quarter
of 2006 compared to the same period in 2005, primarily due to
higher average interest rates and average outstanding borrowings
during 2005. The increase in average borrowings in 2005 resulted
primarily from higher working capital requirements and the
purchases of PPG, Lectrotherm and Foundry Service in July and
December 2005 and January 2006, respectively. The higher average
borrowing rate in 2006 was due primarily to increased interest
rates under our revolving credit facility compared to 2005, in
which rates increased primarily as a result of actions by the
Federal Reserve.
Income
Tax:
The provision for income taxes was $2.0 million in the
three-month period ended September 30, 2006, a 35%
effective income tax rate, compared to income taxes of
$0.8 million provided in the corresponding period of 2005,
an effective 14% income tax rate. In 2005 these taxes consisted
primarily of state and foreign taxes on profitable operations.
Taxes in the third quarter of 2006 included such state and
foreign taxes, but also included federal income taxes. This
change resulted from the fourth-quarter 2005 reversal of a
portion of our domestic deferred tax valuation allowance.
In fourth quarter 2005, the Company reversed $7.3 million
of its $12.3 million year-end 2005 domestic deferred tax
valuation allowance. Based on strong recent and projected
earnings, the Company determined that it was more likely than
not that this portion of the deferred tax asset would be
realized. In 2006, the Company began recording a quarterly
provision for federal income taxes. Our significant net
operating loss carry forwards should preclude the payment of
cash federal income taxes in 2006 and 2007, and possibly beyond.
In the fourth quarter of 2006, the Company will reassess the
remaining tax valuation allowance. If it is determined that a
portion or all of the remaining deferred tax asset will more
likely than not be realized, then the appropriate portion of its
remaining tax valuation allowance will be reversed into income
at that time, which could increase 2006 net income by as
much as $5.0 million.
At December 31, 2005, our subsidiaries had
$41.0 million of net operating loss carryforwards for
federal tax purposes.
Liquidity
and Sources of Capital
Our liquidity needs are primarily for working capital and
capital expenditures. Our primary sources of liquidity have been
funds provided by operations and funds available from existing
bank credit arrangements and the sale of our senior subordinated
notes. On July 30, 2003, we entered into a revolving credit
facility with a group of banks that provided for availability of
up to $165.0 million, subject to an asset-based formula. In
September 2004, December 2004, June 2006 and October 2006, we
amended our revolving credit facility to progressively increase
the availability up to $230.0 million, subject to the same
asset-based formula. The December 2004 amendment also extended
the maturity from July 30, 2007 to December 31, 2010,
while in May 2006 the revolving credit facility was amended to
reduce the pricing applicable to LIBOR-based interest rates by
50 basis points effective as of April 1,
2006. The revolving credit facility is secured by substantially
all our assets in the United States, Canada and the United
Kingdom. Borrowings from this revolving credit facility will be
used for general corporate purposes.
Amounts borrowed under the revolving credit facility may be
borrowed at the Company’s election at either (i) LIBOR
plus .75% to 1.75% or (ii) the bank’s prime lending
rate. The LIBOR-based interest rate is dependent on the
Company’s debt service coverage ratio, as defined in the
revolving credit 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. As of
September 30, 2006, the Company had $152.7 million
outstanding under the revolving credit facility, and
approximately $48.3 million of unused borrowing
availability.
Current financial resources (working capital and available bank
borrowing arrangements) and anticipated funds from operations
are expected to be adequate to meet current cash requirements.
The future availability of borrowings under the revolving 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.
At September 30, 2006, the Company was in compliance with
the debt service ratio covenant and other covenants contained in
the revolving credit facility.
The ratio of current assets to current liabilities was 2.13 at
September 30, 2006 versus 2.12 at December 31, 2005.
Working capital increased by $36.7 million to
$244.8 million at September 30, 2006 from
$208.1 million at December 31, 2005. Major components
of working capital, including accounts receivable, inventories,
trade accounts payable and accrued expenses, increased
substantially during the first nine months of 2006 due primarily
to significant revenue growth and the acquisition of Foundry
Services.
During the first nine months of 2006, the Company used
$12.5 million from operating activities compared to
generating $3.9 million in the same period of 2005. The
increase in operating cash usage of $16.4 million was
primarily the result of a greater increase in accounts
receivable, inventories and other current assets in the first
nine months of 2006 compared to the same period of 2005
($68.7 million compared to $18.5 million), more than
offsetting the operating cash generated by an increase of
$30.5 million in accounts payable in the first nine months
of 2006 compared to a reduction of $4.1 million in the
first nine months of 2005, and a reduction in net income of
$5.5 million, primarily due to the provision of federal
income tax expense in 2006. Current assets increased in the
first nine months of 2006 primarily to support increased sales,
including new contracts and capital equipment production. In the
first nine months of 2006 the Company also used cash of
$9.4 million for capital expenditures and $3.2 million
for the Foundry Service acquisition. Capital expenditures were
reduced $3.2 million by the sale of an idle asset. These
activities, plus an increase cash interest and taxes payments of
$6.3 million and a net increase in borrowing of
$23.6 million, resulted in a decrease in cash of
$1.6 million in the first nine months of 2006.
The Company does not have off-balance-sheet arrangements,
financing or other relationships with unconsolidated entities or
other persons.
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 that are included in the
Manufactured Products segment, which typically ship a few large
systems per year.
This quarterly report on
Form 10-Q
contains certain statements that are “forward-looking
statements” within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. The
words “believes”, “anticipates”,
“plans”, “expects”, “intends”,
“estimates” and similar expressions are intended to
identify forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance and
achievements, or industry results, to be materially different
from any future results, performance or achievements expressed
or implied by such forward-looking statements. These
uncertainties and other factors include such things as: general
business conditions and competitive factors, including pricing
pressures and product innovation; demand for our products and
services; raw material availability and pricing; changes in our
relationships with customers and suppliers; the financial
condition of our customers, including the impact of any
bankruptcies; our ability to successfully integrate recent and
future acquisitions into existing operations, including the
recent acquisition of NABS, changes in general domestic economic
conditions such as inflation rates, interest rates, tax rates
and adverse impacts to us, our suppliers and customers from acts
of terrorism or hostilities; our ability to meet various
covenants, including financial covenants, contained in our
revolving credit agreement and the indenture governing our
senior subordinated notes; increasingly stringent domestic and
foreign governmental regulations, including those affecting the
environment; inherent uncertainties involved in assessing our
potential liability for environmental remediation-related
activities; the outcome of pending and future litigation and
other claims; dependence on the automotive and heavy-duty truck
industries, which are highly cyclical; dependence on key
management; and dependence on information systems. Any
forward-looking statement speaks only as of the date on which
such statement is made, and we undertake no obligation to update
any forward-looking statement, whether as a result of new
information, future events or otherwise, except as required by
law. In light of these and other uncertainties, the inclusion of
a forward-looking statement herein should not be regarded as a
representation by us that our plans and objectives will be
achieved.
Review By
Independent Registered Public Accounting Firm
The consolidated financial statements at September 30, 2006
and for the three-month and nine-month periods ended
September 30, 2006 and 2005 have been reviewed, prior to
filing, by Ernst & Young LLP, our independent
registered public accounting firm, and their report is included
herein.
Item 3.
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 borrowings under
our floating rate revolving credit agreement, which consisted of
borrowings of $152.7 million at September 30, 2006. A
100 basis point increase in the interest rate would have
resulted in an increase in interest expense of approximately
$1.1 million during the nine-month period ended
September 30, 2006.
Our foreign subsidiaries generally conduct business in local
currencies. During the first nine months of 2006, we recorded a
favorable foreign currency translation adjustment of
$2.7 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 euro and 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.
The Company enters into forward contracts on foreign currencies,
primarily the euro and the British Pound Sterling, purely for
the purpose of hedging exposure to changes in the value of
accounts receivable in those currencies against the
U.S. dollar. The Company currently uses no other derivative
instruments. At September 30, 2006, $.4 million of
such currency hedge contracts were outstanding.
Item 4.
Controls
and Procedures
Under the supervision of and with the participation of our
management, including our chief executive officer and chief
financial officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and 15(d)-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this quarterly
report.
Based on that evaluation, our chief executive officer and chief
financial officer have concluded that, as of the end of the
period covered by this quarterly report, our disclosure controls
and procedures were effective.
There have been no changes in our internal control over
financial reporting that occurred during the third quarter of
2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
We are subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted in the ordinary
course of business. While any litigation involves an element of
uncertainty, in the opinion of management, liabilities, if any,
arising from currently pending or threatened litigation is not
expected to have a material adverse effect on our financial
condition, liquidity or results of operations.
At September 30, 2006, we were a co-defendant in
approximately 370 cases asserting claims on behalf of
approximately 9,900 plaintiffs alleging personal injury as a
result of exposure to asbestos. These asbestos cases generally
relate to production and sale of asbestos-containing products
and allege various theories of liability, including negligence,
gross negligence and strict liability and seek compensatory and,
in some cases, punitive damages.
In every asbestos case in which we are named as a party, the
complaints are filed against multiple named defendants. In
substantially all of the asbestos cases, the plaintiffs either
claim damages in excess of a specified amount, typically a
minimum amount sufficient to establish jurisdiction of the court
in which the case was filed (jurisdictional minimums generally
range from $25,000 to $75,000), or do not specify the monetary
damages sought. To the extent that any specific amount of
damages is sought, the amount applies to claims against all
named defendants.
There are only four asbestos cases, involving 21 plaintiffs,
that plead specified damages. In each of the four cases, the
plaintiff is seeking compensatory and punitive damages based on
a variety of potentially alternative causes of action. In three
cases, the plaintiff has alleged compensatory damages in the
amount of $3.0 million for four separate causes of action
and $1.0 million for another cause of action and punitive
damages in the amount of $10.0 million. In the other case,
the plaintiff has alleged compensatory damages in the amount of
$20.0 million for three separate causes of action and
$5.0 million for another cause of action and punitive
damages in the amount of $20.0 million.
Historically, we have been dismissed from asbestos cases on the
basis that the plaintiff incorrectly sued one of our
subsidiaries or because the plaintiff failed to identify any
asbestos-containing product manufactured or sold by us or our
subsidiaries. We intend to vigorously defend these asbestos
cases, and believe we will continue to be successful in being
dismissed from such cases. However, it is not possible to
predict the ultimate outcome of asbestos-related lawsuits,
claims and proceedings due to the unpredictable nature of
personal injury litigation. Despite this uncertainty, and
although our results of operations and cash flows for a
particular period could be adversely affected by
asbestos-related lawsuits, claims and proceedings, management
believes that the ultimate resolution of these matters will not
have a material adverse effect on our financial condition,
liquidity or results of operations. Among the factors management
considered in reaching this conclusion were: (a) our
historical success in being dismissed from these types of
lawsuits on the bases mentioned above; (b) many cases have
been improperly filed against one of our subsidiaries;
(c) in many cases, the plaintiffs have been unable to
establish any causal relationship to us or our products or
premises; (d) in many cases, the plaintiffs have been
unable to demonstrate that they have suffered any identifiable
injury or compensable loss at all, that any injuries that they
have incurred did in fact result from alleged exposure to
asbestos; and (e) the complaints assert claims against
multiple defendants and, in most cases, the damages alleged are
not attributed to individual defendants. Additionally, we do not
believe that the amounts claimed in any of the asbestos cases
are meaningful indicators of our potential exposure because the
amounts claimed typically bear no relation to the extent of the
plaintiff’s injury, if any.
Our cost of defending these lawsuits has not been material to
date and, based upon available information, our management does
not expect its future costs for asbestos-related lawsuits to
have a material adverse effect on our results of operations,
liquidity or financial position.
There have been no material changes in the risk factors
previously disclosed in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005.
Item 6.
Exhibits
The following exhibits are included herein:
10
.1
Form of Restricted Share Agreement
for Employees
10
.2
Summary of Annual Cash Bonus Plan
for President and Chief Operating Officer
15
Letter re: unaudited financial
information
31
.1
Principal Executive Officer’s
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31
.2
Principal Financial Officer’s
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32
Certification requirement under
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
