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Park-Ohio Holdings 10-K 2007
Park-Ohio Holdings Corp. 10-K
Table of Contents

 
 
FORM 10-K
 
 
PARK-OHIO HOLDINGS CORP.
 


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
 
         
(Mark One)        
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934    
    For the fiscal year ended December 31, 2006    
OR
o
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934    
         
    For the transition period from                         to                            
 
Commission file number 0-3134
PARK-OHIO HOLDINGS CORP.
 
     
Ohio   34-1867219
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
23000 Euclid Avenue
Cleveland, Ohio
 
44117
     
(Address of principal executive offices)   (Zip Code)
 
Registrant’s telephone number, including area code: (216) 692-7200
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
 
Common Stock, Par Value $1.00 Per Share
  The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is 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.  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 Exchange Act Rule 12b-2).  Yes o  No þ
 
Aggregate market value of the voting stock held by non-affiliates of the registrant: Approximately $137,892,000, based on the closing price of $17.27 per share of the registrant’s Common Stock on June 30, 2006.
 
Number of shares outstanding of the registrant’s Common Stock, par value $1.00 per share, as of February 28, 2007: 11,373,867.
 
 
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held on May 24, 2007 are incorporated by reference into Part III of this Form 10-K.
 


 

 
 
                 
Item No.
      Page No.
 
1.
  Business   1
1A.
  Risk Factors   6
1B.
  Unresolved Staff Comments   12
2.
  Properties   12
3.
  Legal Proceedings   13
4.
  Submission of Matters to a Vote of Security Holders   14
4A.
  Executive Officers of the Registrant   14
5.
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   15
6.
  Selected Financial Data   16
7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   18
7A.
  Quantitative and Qualitative Disclosures about Market Risk   30
8.
  Financial Statements and Supplementary Data   31
9.
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   63
9A.
  Controls and Procedures   63
9B.
  Other Information   64
10.
  Directors, Executive Officers and Corporate Governance   64
11.
  Executive Compensation   65
12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   65
13.
  Certain Relationships and Related Transactions, and Director Independence   65
14.
  Principal Accountant Fees and Services   65
15.
  Exhibits and Financial Statement Schedules   66
  67
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32.1


Table of Contents

 
Part I
 
Item 1.  Business
 
 
Park-Ohio Holdings Corp. (“Holdings”) was incorporated as an Ohio corporation in 1998. Holdings, primarily through the subsidiaries owned by its direct subsidiary, Park-Ohio Industries, Inc. (“Park-Ohio”), is an industrial supply chain logistics and diversified manufacturing business operating in three segments: Integrated Logistics Solutions (“ILS”), Aluminum Products and Manufactured Products.
 
References herein to “we” or “the Company” include, where applicable, Holdings, Park-Ohio and Holdings’ other direct and indirect subsidiaries.
 
ILS provides our customers with integrated supply chain management services for a broad range of high-volume, specialty production components. Our Aluminum Products business manufactures cast and machined aluminum components, and our Manufactured Products business is a major manufacturer of highly-engineered industrial products. Our businesses serve large, industrial original equipment manufacturers (“OEMs”) in a variety of industrial sectors, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, electrical distribution and controls, aerospace and defense, oil and gas, power sports/fitness equipment, HVAC, electrical components, appliance and semiconductor equipment industries. As of December 31, 2006, we employed approximately 3,900 persons.
 
The following table summarizes the key attributes of each of our business segments:
 
             
    Integrated Logistics
       
    Solutions   Aluminum Products   Manufactured Products
 
NET SALES(1)
  $598.2 million
(57% of total)
  $154.6 million
(14% of total)
  $303.4 million
(29% of total)
             
SELECTED PRODUCTS
  Sourcing, planning and  
• Pump housings
 
• Induction heating and
    procurement of over  
• Clutch retainers/pistons
    melting systems
    175,000 production  
• Control arms
 
• Pipe threading
    components, including:  
• Knuckles
    systems
   
• Fasteners
 
• Master cylinders
 
• Industrial oven
   
• Pins
 
• Pinion housings
    systems
   
• Valves
 
• Brake calipers
 
• Injection molded
   
• Hoses
 
• Oil pans
    rubber components
   
• Wire harnesses
 
• Flywheel spacers
 
• Forging presses
   
• Clamps and fittings
       
   
• Rubber and plastic components
       
             
SELECTED INDUSTRIES
 
• Heavy-duty truck
 
• Automotive
 
• Steel
SERVED
 
• Automotive and vehicle parts
 
• Agricultural equipment
• Construction equipment
 
• Coatings
• Forging
   
• Electrical distribution and controls
 
• Heavy-duty truck
• Marine equipment
 
• Foundry
• Heavy-duty truck
   
• Power sports/fitness equipment
     
• Construction equipment
• Bottling
   
• HVAC
     
• Automotive
   
• Aerospace and defense
     
• Oil and gas
   
• Electrical components
• Appliance
     
• Rail and locomotive manufacturing
   
• Semiconductor equipment
     
• Aerospace and defense
 
 
(1) Results are for the year ended December 31, 2006 and exclude the results of operations related to the acquisition of NABS, Inc. prior to the date of acquisition on October 18, 2006.


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Our ILS business provides our customers with integrated supply chain management services for a broad range of high-volume, specialty production components. Our ILS customers receive various value-added services, such as engineering and design services, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. We operate 55 logistics service centers in the United States, Mexico, Canada, Puerto Rico, Scotland, Ireland, Hungary, China, Taiwan, Singapore and India, as well as production sourcing and support centers in Asia. Through our supply chain management programs, we supply more than 175,000 globally-sourced production components, many of which are specialized and customized to meet individual customers’ needs.
 
In October 2006, we acquired all of the capital stock of NABS, Inc. (“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 has 19 operations across Europe, Asia, Mexico and the United States. The historical financial data contained throughout this annual report on Form 10-K excludes the results of operations of NABS, other than for the period from October 18, 2006 through December 31, 2006. See Note C to the consolidated financial statements included elsewhere herein.
 
In July 2005, we acquired substantially all of the assets of the Purchased Parts Group, Inc. (“PPG”), a provider of supply chain management services for a broad range of production components, operating 12 service centers in the United States, the United Kingdom and Mexico. This acquisition added significantly to our customer and supplier bases, and expanded our geographic presence. ILS has eliminated substantial overhead costs from PPG and begun the process of consolidating redundant service centers. The historical financial data contained throughout this annual report on Form 10-K exclude the results of operations of PPG, other than for the period from July 20, 2005 through December 31, 2005. See Note C to the consolidated financial statements included elsewhere herein.
 
Products and Services.  Supply chain management services, which is ILS’s primary focus for future growth, involves offering customers comprehensive, on-site management for most of their production component needs. Some production components are characterized by low per unit supplier prices relative to the indirect costs of supplier management, quality assurance, inventory management and delivery to the production line. In addition, ILS delivers an increasingly broad range of higher-cost production components including valves, fittings, steering components and many others. Applications engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate production components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. As an additional service, ILS recently began providing spare parts and aftermarket products to end users of its customers’ products.
 
Supply chain management services are typically provided to customers pursuant to sole-source arrangements. We believe our services distinguish us from traditional buy/sell distributors, as well as manufacturers who supply products directly to customers, because we outsource our customers’ high-volume production components supply chain management, providing processes customized to each customer’s needs and replacing numerous current suppliers with a sole-source relationship. Our highly-developed, customized, information systems provide transparency and flexibility through the complete supply chain. This enables our customers to: (1) significantly reduce the direct and indirect cost of production component processes by outsourcing internal purchasing, quality assurance and inventory fulfillment responsibilities; (2) reduce the amount of working capital invested in inventory and floor space; (3) reduce component costs through purchasing efficiencies, including bulk buying and supplier consolidation; and (4) receive technical expertise in production component selection and design and engineering. Our sole-source arrangements foster long-term, entrenched supply relationships with our customers and, as a result, the average tenure of service for our top 50 ILS clients exceeds twelve years. ILS’s


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remaining sales are generated through the wholesale supply of industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships.
 
ILS also engineers and manufactures precision cold formed and cold extruded products, including locknuts, SPAC(R) nuts and wheel hardware, which are principally used in applications where controlled tightening is required due to high vibration. ILS produces both standard items and specialty products to customer specifications, which are used in large volumes by customers in the automotive, heavy-duty truck and rail industries.
 
Markets and Customers.  For the year ended December 31, 2006, approximately 81% of ILS’s net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada, Mexico, Europe and Asia. Supply chain management services and production components are used extensively in a variety of industries, and demand is generally related to the state of the economy and to the overall level of manufacturing activity.
 
ILS markets and sells its services to over 6,000 customers domestically and internationally. The principal markets served by ILS are 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. The five largest customers, within which ILS sells through sole-source contracts to multiple operating divisions or locations, accounted for approximately 43% and 40% of the sales of ILS for 2006 and 2005, respectively, with International Truck representing 22% and 20%, respectively, of segment sales. Two of the five largest customers are in the heavy-duty truck industry. The loss of the International Truck account or any two of the remaining top five customers could have a material adverse effect on the results of operations and financial condition of this segment.
 
Competition.  There is a limited number of companies who compete with ILS for supply chain service contracts. ILS competes mainly with domestic competitors primarily on the basis of its value-added services, which include sourcing, engineering and delivery capabilities, geographic reach, extensive product selection, price and reputation for high service levels.
 
 
We believe that we are one of the few part suppliers that has the capability to provide a wide range of high-volume, high-quality products utilizing a broad range of processes, including 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 provides us with a competitive advantage. We produce our aluminum components at five manufacturing facilities in Ohio and Indiana.
 
Products and Services.  Our Aluminum Products business casts and machines aluminum engine, transmission, brake, suspension and other components for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment OEMs, primarily on a sole-source basis. Aluminum Products’ principal products include pump housings, clutch retainers and pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers. In addition, we also provide value-added services such as design engineering, machining and part assembly. Although these parts are lightweight, they possess high durability and integrity characteristics even under extreme pressure and temperature conditions.
 
Demand by automotive OEMs for aluminum castings has increased in recent years as they have sought lighter alternatives to steel and iron, primarily to increase fuel efficiency without compromising structural integrity. We believe that this replacement trend will continue as end-users and the regulatory environment require greater fuel efficiency. To capitalize on this trend, in August 2004, we acquired substantially all of the assets of the Amcast Components Group, a producer of aluminum automotive components. This acquisition significantly increased the sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies. The


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historical financial data contained throughout this annual report on Form 10-K exclude the results of operations of the Amcast Components Group other than for the period from August 23, 2004 through December 31, 2006.
 
Markets and Customers.  The five largest customers, within which Aluminum Products sells to multiple operating divisions through sole-source contracts, accounted for approximately 46% of Aluminum Products sales for 2006 and 53% for 2005. The loss of any one of these customers could have a material adverse effect on the results of operations and financial condition of this segment.
 
Competition.  The aluminum castings industry is highly competitive. Aluminum Products competes principally on the basis of its ability to: (1) engineer and manufacture high-quality, cost-effective, machined castings utilizing multiple casting technologies in large volumes; (2) provide timely delivery; and (3) retain the manufacturing flexibility necessary to quickly adjust to the needs of its customers. Although there are a number of smaller domestic companies with aluminum casting capabilities, the customers’ stringent quality and service standards and lean manufacturing techniques enable only large suppliers with the requisite quality certifications to compete effectively. As one of these suppliers, Aluminum Products is well-positioned to benefit as customers continue to consolidate their supplier base.
 
 
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 nine international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, Poland, 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.
 
Products and Services.  Our induction heating and melting business utilizes proprietary technology and specializes in the engineering, construction, service and repair of induction heating and melting systems, primarily for the steel, coatings, forging, foundry, automotive and construction equipment industries. Our induction heating and melting systems are engineered and built to customer specifications and are used primarily for melting, heating, and surface hardening of metals and curing of coatings. Approximately 40% to 45% of our induction heating and melting systems’ revenues is derived from the sale of replacement parts and provision of field service, primarily for the installed base of our own products. Our pipe threading business serves the oil and gas industry, while our industrial ovens provide heating and curing for bottling and other applications. We also engineer and install mechanical forging presses, and sell spare parts and provide field service for the large existing base of mechanical forging presses and hammers in North America. We machine, induction harden and surface finish crankshafts and camshafts, used primarily in locomotives. We forge aerospace and defense structural components such as landing gears and struts, as well as rail products such as railcar center plates and draft lugs. We injection mold rubber and silicone products, including wire harnesses, shock and vibration mounts, spark plug boots and nipples and general sealing gaskets.
 
Markets and Customers.  We sell induction heating and other capital equipment to component manufacturers and OEMs in the steel, coatings, forging, foundry, automotive, truck, construction equipment and oil and gas industries. We sell forged and machined products to locomotive manufacturers, machining companies and sub-assemblers who finish aerospace and defense products for OEMs, and railcar builders and maintenance providers. We sell rubber products primarily to sub-assemblers in the automotive, food processing and consumer appliance industries.
 
Competition.  We compete with small to medium-sized domestic and international equipment manufacturers on the basis of service capability, ability to meet customer specifications, delivery performance and engineering expertise. We compete domestically and internationally with small to medium-


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sized forging and machining businesses on the basis of product quality and precision. We compete with other domestic small- to medium-sized manufacturers of injection molded rubber and silicone products primarily on the basis of price and product quality.
 
 
ILS 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. 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.
 
 
ILS purchases substantially all of its production components from third-party suppliers. Aluminum Products and Manufactured Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Management believes that raw materials and component parts other than certain specialty products are available from alternative sources. ILS has multiple sources of supply for its products. An increasing portion of ILS’s delivered components are purchased from suppliers in foreign countries, primarily 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. Most raw materials required by Aluminum Products and Manufactured Products are commodity products available from several domestic suppliers.
 
 
We have thousands of customers who demand quality, delivery and service. Numerous customers have recognized our performance by awarding us with supplier quality awards. The only customer which accounted for more than 10% of our consolidated sales in any of the past three years was International Truck in all three years. In September 2005, we entered into an exclusive, multi-year agreement with International Truck to supply a wide range of production components, expiring on December 31, 2008.
 
 
Management believes that backlog is not a meaningful measure for ILS, as a majority of ILS’s customers require just-in-time delivery of production components. Management believes that Aluminum Products’ and Manufactured Products’ backlog as of any particular date is not a meaningful measure of sales for any future period as a significant portion of sales are on a release or firm order basis.
 
 
We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, particularly with regard to discharges and emissions, as well as handling, storage, treatment and disposal, of various substances and wastes. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil and criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures. Pursuant to certain environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from current or former locations, without regard to whether the owner or operator knew of, or


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was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous substances or materials may be liable for costs of response at sites where they are located, whether or not the site is owned or operated by such person.
 
From time to time, we have incurred and are presently incurring costs and obligations for correcting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facilities were not material during the past five years and such expenditures are not expected to be material to us in the foreseeable future.
 
We are currently, and may in the future, be required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. For instance, we have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. The availability of third-party payments or insurance for environmental remediation activities is subject to risks associated with the willingness and ability of the third party to make payments. However, our share of such costs has not been material and, based on available information, we do not expect our exposure at any of these locations to have a material adverse effect on our results of operations, liquidity or financial condition.
 
 
The information contained under the heading “Note B—Industry Segments” of the notes to the consolidated financial statements included herein relating to (1) net sales, income before income taxes, identifiable assets and other information by industry segment and (2) net sales and assets by geographic region for the years ended December 31, 2006, 2005 and 2004 is incorporated herein by reference.
 
 
The information contained under the heading of “Note C—Acquisitions” of the notes to the consolidated financial statements included herein is incorporated herein by reference.
 
Available Information
 
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information, including amendments to these reports, with the Securities and Exchange Commission (“SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make such materials available on our website at http://www.pkoh.com. The information on our website is not a part of this annual report on Form 10-K.
 
Item 1A.  Risk Factors
 
The following are certain risk factors that could affect our business, results of operations and financial condition. These risks are not the only ones we face. If any of the following risks occur, our business, results of operations or financial condition could be adversely affected.


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We sell products to customers in industries that experience cyclicality (expectancy of recurring periods of economic growth and slowdown) in demand for products, and may experience substantial increases and decreases in business volume throughout economic cycles. Industries we serve, including the automotive and vehicle parts, heavy-duty truck, industrial equipment, steel, rail, electrical distribution and controls, aerospace and defense, power sports/fitness equipment, HVAC, electrical components, appliance and semiconductor equipment industries, are affected by consumer spending, general economic conditions and the impact of international trade. A downturn in any of the industries we serve, particularly the domestic automotive or heavy-duty truck industry, could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
Demand for certain of our products is affected by, among other things, the relative strength or weakness of the automotive and heavy-duty truck industries. The domestic automotive and heavy-duty truck industries are highly cyclical and may be adversely affected by international competition. In addition, the automotive and heavy-duty truck industries are significantly unionized and subject to work slowdowns and stoppages resulting from labor disputes. We derived 19% and 30% of our net sales during the year ended December 31, 2006 from the automobile and heavy-duty truck industries, respectively. International Truck, our largest customer, accounted for approximately 14% of our net sales for the year ended December 31, 2006. The loss of a portion of business to International Truck or any of our other major automotive or heavy-duty truck customers could have a material adverse effect on our financial condition, cash flow and results of operations. We cannot assure you that we will maintain or improve our relationships in these industries or that we will continue to supply this customer at current levels.
 
 
Most of the products and services are provided to our ILS customers under purchase orders as opposed to long-term contracts. When we do enter into long-term contracts with our customers, many of them only establish pricing terms and do not obligate our customers to buy required minimum amounts from us or to buy from us exclusively. Accordingly, many of our ILS customers may decrease the amount of products and services that they purchase from us or even stop purchasing from us altogether, either of which could have a material adverse effect on our net sales and profitability.
 
 
We rely on several key customers. For the year ended December 31, 2006, our top seven customers accounted for approximately 31% of our net sales and our top customer, International Truck, accounted for approximately 14% of our net sales. Many of our customers place orders for products on an as-needed basis and operate in cyclical industries and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. Due to competitive issues, we have lost key customers in the past and may again in the future. Customer orders are dependent upon their markets and may be subject to delays or cancellations. As a result of dependence on our key customers, we could experience a material adverse effect on our business and results of operations if any of the following were to occur:
 
  •  the loss of any key customer, in whole or in part;
 
  •  the insolvency or bankruptcy of any key customer;
 
  •  a declining market in which customers reduce orders or demand reduced prices; or


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  •  a strike or work stoppage at a key customer facility, which could affect both their suppliers and customers.
 
If any of our key customers become insolvent or file for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payments we received in the preference period prior to a bankruptcy filing may be potentially recoverable, which could adversely impact our results of operations.
 
Three of our substantial customers filed voluntary petitions for reorganization under Chapter 11 of the bankruptcy code during 2005 and 2006. Delphi Corp. and Dana Corporation, which are primarily customers of our Manufactured Products and Aluminum Products segments, filed in 2005, while Werner Ladder, which is primarily a customer of the ILS segment, filed in 2006. Collectively, these bankruptcies reduced our operating income in the aggregate by $1.8 million during 2005 and 2006.
 
 
The markets in which all three of our segments sell their products are highly competitive. Some of our competitors are large companies that have greater financial resources than we have. We believe that the principal competitive factors for our ILS segment are an approach reflecting long-term business partnership and reliability, sourced product quality and conformity to customer specifications, timeliness of delivery, price and design and engineering capabilities. We believe that the principal competitive factors for our Aluminum Products and Manufactured Products segments are product quality and conformity to customer specifications, design and engineering capabilities, product development, timeliness of delivery and price. The rapidly evolving nature of the markets in which we compete may attract new entrants as they perceive opportunities, and our competitors may foresee the course of market development more accurately than we do. In addition, our competitors may develop products that are superior to our products or may adapt more quickly than we do to new technologies or evolving customer requirements.
 
We expect competitive pressures in our markets to remain strong. These pressures arise from existing competitors, other companies that may enter our existing or future markets and, in some cases, our customers, which may decide to internally produce items we sell. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
Our success depends upon the efforts, abilities and expertise of our executive officers and other senior managers, including Edward Crawford, our Chairman and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, as well as the president of each of our operating units. An event of default occurs under our revolving credit facility if Messrs. E. Crawford and M. Crawford or certain of their related parties own less than 15% of our outstanding common stock, or if they own less than 15% of such stock, then if either Mr. E. Crawford or Mr. M. Crawford ceases to hold the office of chairman, chief executive officer or president. The loss of the services of Messrs. E. Crawford and M. Crawford, senior and executive officers, and/or other key individuals could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business, such as the acquisitions of NABS in 2006 and PPG in 2005. We cannot assure you that we will be successful in consummating any acquisitions.
 
Any targeted acquisitions will be accompanied by the risks commonly encountered in acquisitions of businesses. We may not successfully overcome these risks or any other problems encountered in connection with any of our acquisitions, including the possible inability to integrate an acquired business’ operations, IT technologies, services and products into our business, diversion of management’s attention,


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the assumption of unknown liabilities, increases in our indebtedness, the failure to achieve the strategic objectives of those acquisitions and other unanticipated problems, some or all of which could materially and adversely affect us. The process of integrating operations could cause an interruption of, or loss of momentum in, our activities. Any delays or difficulties encountered in connection with any acquisition and the integration of our operations could have a material adverse effect on our business, results of operations, financial condition or prospects of our business.
 
 
ILS purchases substantially all of its component parts from third-party suppliers and manufacturers. Our business is subject to the risk of price fluctuations and periodic delays in the delivery of component parts. Failure by suppliers to continue to supply us with these component parts on commercially reasonable terms, or at all, would have a material adverse effect on us. We depend upon the ability of these suppliers, among other things, to meet stringent performance and quality specifications and to conform to delivery schedules. Failure by third-party suppliers to comply with these and other requirements could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
Our supply of raw materials for our Aluminum Products and Manufactured Products businesses could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated significantly in the past and significant increases could adversely affect our results of operations and profit margins. While we generally attempt to pass along increased raw materials prices to our customers in the form of price increases, there may be a time delay between the increased raw materials prices and our ability to increase the price of our products, or we may be unable to increase the prices of our products due to pricing pressure or other factors.
 
Our suppliers of component parts, particularly in our ILS business, may significantly and quickly increase their prices in response to increases in costs of the raw materials, such as steel, that they use to manufacture our component parts. We may not be able to increase our prices commensurate with our increased costs. Consequently, our results of operations and financial condition may be materially adversely affected.
 
 
Our manufacturing process and the transportation of raw materials, components and finished goods are energy intensive. Our manufacturing processes are dependent on adequate supplies of electricity and natural gas. A substantial increase in the cost of transportation fuel, natural gas or electricity could have a material adverse effect on our margins. We experienced widely fluctuating natural gas costs in 2005 and in 2006. We may experience higher than anticipated gas costs in the future, which could adversely affect our results of operations. In addition, a disruption or curtailment in supply could have a material adverse effect on our production and sales levels.
 
 
Our businesses expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products and products of third-party vendors that we use or resell. While we currently maintain what we believe to be suitable and adequate product liability insurance, we cannot assure you that we will be able to maintain our insurance on acceptable terms or that our insurance will provide adequate protection against potential liabilities. In the event of a claim against us, a lack of


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sufficient insurance coverage could have a material adverse effect on our financial condition, liquidity and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
As of December 31, 2006, we were a party to eight collective bargaining agreements with various labor unions that covered approximately 690 full-time employees. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have a material adverse effect on our business, financial condition and results of operations.
 
 
Our operations are subject to the risks of doing business abroad, including the following:
 
  •  fluctuations in currency exchange rates;
 
  •  limitations on ownership and on repatriation of earnings;
 
  •  transportation delays and interruptions;
 
  •  political, social and economic instability and disruptions;
 
  •  government embargoes or foreign trade restrictions;
 
  •  the imposition of duties and tariffs and other trade barriers;
 
  •  import and export controls;
 
  •  labor unrest and current and changing regulatory environments;
 
  •  the potential for nationalization of enterprises;
 
  •  difficulties in staffing and managing multinational operations;
 
  •  limitations on our ability to enforce legal rights and remedies; and
 
  •  potentially adverse tax consequences.
 
Any of these events could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our products or otherwise having an adverse effect on our business, financial condition or results of operations. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.
 
 
Our businesses are subject to many foreign, federal, state and local environmental, health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and regulations is a significant factor in our business. We have incurred and expect to continue to incur significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements


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could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.
 
We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of property, including property where we have disposed of our waste, and for addressing environmental conditions. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.
 
We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising for example out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not exceed our reserves or have a material adverse effect on our financial condition.
 
 
We believe that our information systems are an integral part of the ILS segment and, to a lesser extent, the Aluminum Products and Manufactured Products segments. We depend on our information systems to process orders, manage inventory and accounts receivable collections, purchase products, maintain cost-effective operations, route and re-route orders and provide superior service to our customers. We cannot assure you that a disruption in the operation of our information systems used by ILS, including the failure of the supply chain management software to function properly, or those used by Aluminum Products and Manufactured Products will not occur. Any such disruption could have a material adverse effect on our financial condition, liquidity and results of operations.
 
 
The occurrence of material operating problems at our facilities may have a material adverse effect on our operations as a whole, both during and after the period of operational difficulties. We are subject to the usual hazards associated with manufacturing and the related storage and transportation of raw materials, products and waste, including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime and transportation interruption or calamities.
 
Our Chairman of the Board and Chief Executive Officer and our President and Chief Operating Officer collectively beneficially own a significant portion of our company’s outstanding common stock and their interests may conflict with yours.
 
As of February 28, 2007, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 28% of our common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Messrs. E. Crawford and M. Crawford may conflict with your interests as a shareholder.


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Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
As of December 31, 2006, our operations included numerous manufacturing and supply chain logistics services facilities located in 23 states in the United States and in Puerto Rico, as well as in Asia, Canada, Europe and Mexico. Approximately 89% of the available square footage was located in the United States. Approximately 46% of the available square footage was owned. In 2006, approximately 35% of the available domestic square footage was used by the ILS segment, 45% was used by the Manufactured Products segment and 20% by the Aluminum Products segment. Approximately 46% of the available foreign square footage was used by the ILS segment and 54% was used by the Manufactured Products segment. In the opinion of management, our facilities are generally well maintained and are suitable and adequate for their intended uses.
 
The following table provides information relative to our principal facilities as of December 31, 2006.
 
                     
Related Industry
      Owned or
  Approximate
     
Segment
 
Location
  Leased   Square Footage    
Use
 
ILS(1)
  Cleveland, OH   Leased     60,350 (2)  
ILS Corporate
Office
    Dayton, OH   Leased     112,960     Logistics
    Lawrence, PA   Leased     116,000    
Logistics and
Manufacturing
    St. Paul, MN   Leased     104,425     Logistics
    Allentown, PA   Leased     69,755     Logistics
    Atlanta, GA   Leased     56,000     Logistics
    Dallas, TX   Leased     49,985     Logistics
    Memphis, TN   Leased     48,750     Logistics
    Louisville, KY   Leased     46,230     Logistics
    Nashville, TN   Leased     44,900     Logistics
    Tulsa, OK   Leased     40,000     Logistics
    Austin, TX   Leased     30,000     Logistics
    Kent, OH   Leased     225,000     Manufacturing
    Mississauga,   Leased     117,000     Manufacturing
    Ontario, Canada                
    Solon, OH   Leased     42,600     Logistics
    Dublin, VA   Leased     40,000     Logistics
    Delaware, OH   Owned     45,000     Manufacturing
ALUMINUM
  Conneaut, OH(3)   Leased/Owned     304,000     Manufacturing
PRODUCTS
  Huntington, IN   Leased     132,000     Manufacturing
    Fremont, IN   Owned     108,000     Manufacturing
    Wapakoneta, OH   Owned     188,000     Manufacturing
    Richmond, IN   Leased/Owned     97,300     Manufacturing
MANUFACTURED
  Cuyahoga Hts., OH   Owned     427,000     Manufacturing
PRODUCTS(4)
  Le Roeulx, Belgium   Owned     120,000     Manufacturing
    Euclid, OH   Leased     154,000     Manufacturing
    Wickliffe, OH   Owned     110,000     Manufacturing
    Boaz, AL   Owned     100,000     Manufacturing
    Warren, OH   Owned     195,000     Manufacturing
    Canton, OH   Leased     125,000     Manufacturing
    Madison Heights, MI   Leased     128,000     Manufacturing
    Newport, AR   Leased     111,300     Manufacturing
    Cicero, IL   Owned     45,000     Manufacturing
    Cleveland, OH   Leased     150,000     Manufacturing
    Shanghai, China   Leased     20,500     Manufacturing


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(1) ILS has 48 other facilities, none of which is deemed to be a principal facility.
 
(2) Includes 11,000 square feet used by Park-Ohio’s corporate office.
 
(3) Includes three leased properties with square footage of 82,300, 64,000 and 45,700, respectively, and two owned properties with 91,800 and 20,200 square feet, respectively.
 
(4) Manufactured Products has 14 other owned and leased facilities, none of which is deemed to be a principal facility.
 
Item 3.  Legal Proceedings
 
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
 
At December 31, 2006, we were a co-defendant in approximately 365 cases asserting claims on behalf of approximately 8,500 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 another 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.


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Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
 
Item 4.  Submission of Matters to a Vote of Security Holders
 
There were no matters submitted to a vote of security holders during the fourth quarter of 2006.
 
Item 4A.  Executive Officers of the Registrant
 
Information with respect to the executive officers of the Company is as follows:
 
             
Name
 
Age
 
Position
 
Edward F. Crawford
  67   Chairman of the Board, Chief Executive Officer and Director
Matthew V. Crawford
  37   President and Chief Operating Officer and Director
Richard P. Elliott
  50   Vice President and Chief Financial Officer
Robert D. Vilsack
  46   Secretary and General Counsel
Patrick W. Fogarty
  45   Director of Corporate Development
 
Mr. E. Crawford has been a director and our Chairman of the Board and Chief Executive Officer since 1992. He has also served as the Chairman of Crawford Group, Inc., a management company for a group of manufacturing companies, since 1964 and is also a Director of Continental Global Group, Inc.
 
Mr. M. Crawford has been President and Chief Operating Officer since 2003 and joined us in 1995 as Assistant Secretary and Corporate Counsel. He was also our Senior Vice President from 2001 to 2003. Mr. M. Crawford became one of our directors in August 1997 and has served as President of Crawford Group, Inc. since 1995. Mr. E. Crawford is the father of Mr. M. Crawford.
 
Mr. Elliott has been Vice President and Chief Financial Officer since joining us in May 2000. Mr. Elliott held various positions, including partner, at Ernst & Young LLP, an accounting firm, from January 1986 to April 2000. At Ernst & Young, Mr. Elliott did not perform services for us.
 
Mr. Vilsack has been Secretary and General Counsel since joining us in 2002. From 1999 until his employment with us, Mr. Vilsack was engaged in the private practice of law. From 1997 to 1999, Mr. Vilsack was Vice President, General Counsel and Secretary of Medusa Corporation, a manufacturer of Portland cement, and prior to that he was Vice President, General Counsel and Secretary of Figgie International Inc., a manufacturing conglomerate.
 
Mr. Fogarty has been Director of Corporate Development since 1997 and served as Director of Finance from 1995 to 1997.


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Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Company’s common stock, par value $1.00 per share, trades on the Nasdaq Global Market under the symbol “PKOH”. The table below presents the high and low sales prices of the common stock during the periods presented. No dividends were paid during the five years ended December 31, 2006. There is no present intention to pay dividends. Additionally, the terms of the Company’s revolving credit facility and the indenture governing the Company’s 8.375% senior subordinated notes restrict the Company’s ability to pay dividends.
 
 
                                 
    2006     2005  
Quarter
  High     Low     High     Low  
 
1st
  $ 21.23     $ 13.25     $ 30.90     $ 18.00  
2nd
    21.36       14.87       19.80       12.88  
3rd
    18.37       12.72       21.68       16.29  
4th
    17.61       12.96       17.78       13.52  
 
The number of shareholders of record for the Company’s common stock as of February 28, 2007 was 1,431.
 
 
                                 
                Total Number
       
    Total
          of Shares
       
    Number
    Average
    Purchased as
    Maximum Number of Shares
 
    of Shares
    Price Paid
    Part of Publicly
    That May Yet Be Purchased
 
Period
  Purchased     Per Share     Announced Plans     Under the Plans or Program  
 
October 1 — October 31, 2006
    -0-     $ -0-       -0-       1,000,000  
November 1 — November 30, 2006
    -0-       -0-       -0-       1,000,000  
December 1 — December 31, 2006(2)
    1,246       15.33       -0-       1,000,000  
                                 
TOTAL
    1,246     $ 15.33       -0-       1,000,000  
                                 
 
(1)  The Company has a share repurchase program whereby the Company may repurchase up to 1.0 million shares of its common stock. No shares were purchased under this program during the quarter ended December 31, 2006.
 
(2)  Consists of shares of common stock the Company acquired from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient withholding tax liabilities.


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Item 6.  Selected Financial Data
 
(Dollars in thousands, except per share data)
 
                                         
    Year Ended December 31,  
    2006     2005     2004     2003     2002  
 
Selected Statement of Operations Data(a):
                                       
Net sales
  $ 1,056,246     $ 932,900     $ 808,718     $ 624,295     $ 634,455  
Cost of products sold(b)
    908,095       796,283       682,658       527,586       546,857  
                                         
Gross profit
    148,151       136,617       126,060       96,709       87,598  
Selling, general and administrative expenses
    90,296       82,133       77,048       62,667       57,830  
Restructuring and impairment charges (credits)(b)
    (809 )     943       -0-       18,808       13,601  
                                         
Operating income(b)
    58,664       53,541       49,012       15,234       16,167  
Interest expense(c)
    31,267       27,056       31,413       26,151       27,623  
                                         
Income (loss) before income taxes and cumulative effect of accounting change
    27,397       26,485       17,599       (10,917 )     (11,456 )
Income taxes (benefit)(d)
    3,218       (4,323 )     3,400       904       897  
                                         
Income (loss) before cumulative effect of accounting change(e)
    24,179       30,808       14,199       (11,821 )     (12,353 )
Cumulative effect of accounting change
    -0-       -0-       -0-       -0-       (48,799 )
                                         
Net income (loss)
  $ 24,179     $ 30,808     $ 14,199     $ (11,821 )   $ (61,152 )
                                         
Amounts per common share — basic:
                                       
Income (loss) before cumulative effect of accounting change
  $ 2.20     $ 2.82     $ 1.34     $ (1.13 )   $ (1.18 )
                                         
Cumulative effect of accounting change
  $ -0-     $ -0-     $ -0-     $ -0-     $ (4.68 )
                                         
Net income (loss)
  $ 2.20     $ 2.82     $ 1.34     $ (1.13 )   $ (5.86 )
                                         
Amounts per common share — diluted:
                                       
Income (loss) before cumulative effect of accounting change
  $ 2.11     $ 2.70     $ 1.27     $ (1.13 )   $ (1.18 )
                                         
Cumulative effect of accounting change
  $ -0-     $ -0-     $ -0-     $ -0-     $ (4.68 )
                                         
Net income (loss)
  $ 2.11     $ 2.70     $ 1.27     $ (1.13 )   $ (5.86 )
                                         


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    Year Ended December 31,  
    2006     2005     2004     2003     2002  
 
Other Financial Data:
                                       
Net cash flows provided by operating activities
  $ 6,063     $ 34,501     $ 1,633     $ 13,305     $ 28,578  
Net cash flows used by investing activities
    (31,407 )     (31,376 )     (21,952 )     (3,529 )     (17,993 )
Net cash flows provided (used) by financing activities
    28,285       8,414       23,758       (14,870 )     (5,645 )
Depreciation and amortization
    20,140       17,346       15,468       15,562       16,307  
Capital expenditures, net
    20,756       20,295       11,955       10,869       14,731  
Selected Balance Sheet Data (as of period end):
                                       
Cash and cash equivalents
  $ 21,637     $ 18,696     $ 7,157     $ 3,718     $ 8,812  
Working capital
    268,434       208,051       169,836       148,919       148,151  
Property, plant and equipment
    104,585       113,810       110,673       96,151       113,124  
Total assets
    784,142       662,854       610,022       507,452       540,858  
Total debt
    374,800       346,649       338,307       310,225       325,122  
Shareholders’ equity
    138,737       103,521       72,393       56,025       62,899  
 
 
(a) The selected consolidated financial data is not directly comparable on a year-to-year basis, primarily due to acquisitions and divestitures we made throughout the five years ended December 31, 2006, which include the following acquisitions:
 
2006 — Foundry Service and NABS
 
2005 — PPG and Lectrotherm
 
2004 — Amcast Components Group and Jamco
 
2002 — Ajax Magnethermic
 
All of the acquisitions were accounted for as purchases. During 2003, the Company sold substantially all of the assets of Green Bearing and St. Louis Screw and Bolt. During 2002, the Company sold substantially all the assets of Castle Rubber.
 
(b) In each of the years ended December 31, 2006, 2005, 2003 and 2002, we recorded restructuring and asset impairment charges related to exiting product lines and closing or consolidating operating facilities. The restructuring charges related to the write-down of inventory have no cash impact and are reflected by an increase in cost of products sold in the applicable period. The restructuring charges relating to asset impairment attributable to the closing or consolidating of operating facilities have no cash impact and are reflected in the restructuring and impairment charges. The charges for restructuring and severance and pension curtailment are accruals for cash expenses. We made cash payments of $.3 million, $.3 million, $2.1 million, $2.5 million and $5.7 million in the years ended December 31, 2006, 2005, 2004, 2003, and 2002, respectively, related to our severance and pension curtailment accrued liabilities. The table below provides a summary of these restructuring and impairment charges.
 
                                 
    Year Ended December 31,  
    2006     2005     2003     2002  
    (Dollars in thousands)  
 
Non-cash charges:
                               
Cost of products sold (inventory write-down)
  $ 800     $ 833     $ 638     $ 5,589  
Asset impairment
    -0-       391       16,051       5,302  
Restructuring and severance
    -0-       400       990       5,599  
Pension and postretirement benefits curtailment (credits)
    (809 )     152       1,767       2,700  
                                 
Total
  $ (9 )   $ 1,776     $ 19,446     $ 19,190  
                                 
Charges reflected as restructuring and impairment charges (credits) on income statement
  $ (809 )   $ 943     $ 18,808     $ 13,601  
                                 


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(c) In 2004, the Company issued $210 million of 8.375% senior subordinated notes. Proceeds from the issuance of this debt were used to fund the tender and early redemption of the 9.25% senior subordinated notes due 2007. The Company incurred debt extinguishment costs and wrote off deferred financing costs associated with the 9.25% senior subordinated notes totaling $6.0 million.
 
(d) In 2006 and 2005, the Company reversed $5.0 and $7.3 million, respectively, of its domestic deferred tax asset valuation allowances as it has been determined the realization of these amounts is more likely than not.
 
(e) Upon the adoption of FAS 142 (as defined below) in 2002, we recorded a non-cash charge of $48.8 million to reduce the carrying amount of goodwill to its fair value.
 
No dividends were paid during the five years ended December 31, 2006.
 
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 a year-to-year basis, primarily due to the reversal of a tax valuation allowance in 2006 and 2005, restructuring and unusual charges in 2006 and 2005, and debt extinguishment costs and writeoff of deferred financing costs associated with the tender and early redemption during 2004 of our 9.25% senior subordinated notes, acquisitions and divestitures during the three years ended December 31, 2006.
 
 
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 B to the consolidated financial statements.
 
Sales and profitability continued to grow substantially in 2006, continuing the trend of the prior year, as the domestic and international manufacturing economies continued to grow. Net sales increased 13% in 2006 compared to 2005, while operating income increased 10%. Net income declined in 2006 because the reversal of the Company’s tax valuation allowance was larger in 2005 than in 2006 ($7.3 million and $5.0 million, respectively) and because of higher interest expense in 2006. The tax valuation allowance has now been substantially eliminated, so no further significant reversals are expected to affect income in


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future years. During 2005, net sales increased 15%, and operating income increased 9% as compared to 2004. 2005 operating income was reduced by $1.8 million of restructuring charges ($.8 million reflected in Cost of products sold and $1.0 million in Restructuring and impairment charges).
 
During 2004, we reinforced our long-term availability and attractive pricing of funds by refinancing both of our major sources of borrowed funds: senior subordinated notes and our revolving credit facility. In November 2004, we sold $210.0 million of 8.375% senior subordinated notes due 2014. We used the net proceeds to fund the tender and early redemption of $199.9 million of our 9.25% senior subordinated notes due 2007. We incurred debt extinguishment costs primarily related to premiums and other transaction costs associated with the tender offer and early redemption and wrote off deferred financing costs totaling $6.0 million associated with the repurchased 9.25% senior subordinated notes.
 
In December 2004 and subsequently in 2005 and 2006 we amended our revolving credit facility, extending its maturity so that it now expires in December 2010, increasing the credit limit so that we may borrow up to $230.0 million subject to an asset-based formula, and providing lower interest rate levels. Borrowings under the revolving credit facility are secured by substantially all our assets. We had approximately $40.0 million of unused borrowing availability at December 31, 2006. Funds provided by operations plus available borrowings under the revolving credit facility are expected to be adequate to meet our cash requirements.
 
In October 2006, we acquired all of the capital stock of NABS, Inc. 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 has 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 GmbH 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.
 
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, Ohio, for $5.1 million cash funded with borrowings under our revolving credit facility. This acquisition augments our existing, high-margin aftermarket induction business. Lectrotherm had no significant affect on 2005 earnings.
 
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 ILS segment. ILS has already eliminated substantial overhead cost and begun the process of consolidating redundant service centers.
 
In August 2004, we acquired substantially all of the assets of the Amcast Components Group (“Amcast”), a producer of aluminum automotive products, for $10.0 million cash and the assumption of approximately $9.0 million of operating liabilities. This acquisition significantly increased the sales and production capacity of our Aluminum Products business and added attractive new customers, product lines and production technologies.
 
In April 2004, we acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Company (“Jamco”), now a Japanese-located subsidiary of our induction heating and melting equipment business, for cash existing on the balance sheet of Jamco at that date.
 
 
We elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”), and


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related interpretations. Under APB 25, because the exercise price of our employee stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense was recognized. Compensation expense resulting from fixed awards of restricted shares was measured at the date of grant and expensed over the vesting period.
 
An alternative method of accounting for stock-based compensation would have been the fair value method defined by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). FAS 123 permitted use of the intrinsic value method and did not require companies to account for employee stock options using the fair value method. If compensation cost for stock options granted had been determined based on the fair value method of FAS 123, our net income (loss) and diluted income (loss) per share would have been (decreased) or increased by $0.2 million ($.02 per share) in 2005 and $(0.3) million ($(.03) per share) in 2004.
 
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 cost resulting from all share-based payment transactions be recognized in the financial statements and establishes a fair-value measurement objective in determining the value of such a cost. FAS 123R 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 fiscal 2006 compensation expense by $0.3 million (before tax).
 
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), we review goodwill annually for potential impairment. This review was performed as of October 1, 2006, 2005 and 2004, using forecasted discounted cash flows, and it was determined that no impairment is required. At December 31, 2006, our balance sheet reflected $98.2 million of goodwill. In 2006, discount rates used ranged from 11.5% to 12.5%, and 4% long-term revenue growth rates were used.
 
Results of Operations
 
2006 versus 2005
 
 
                                         
    Year Ended
                Acquired/
 
    December 31,           Percent
    (Divested)
 
    2006     2005     Change     Change     Sales  
 
ILS
  $ 598.2     $ 532.6     $ 65.6       12 %   $ 38.7  
Aluminum products
    154.6       159.1       (4.5 )     (3 )%     0.0  
Manufactured products
    303.4       241.2       62.2       26 %     22.9  
                                         
Consolidated Net Sales
  $ 1,056.2     $ 932.9     $ 123.3       13 %   $ 61.6  
                                         
 
Net sales increased by 13% in 2006 compared to 2005. ILS sales increased primarily due to the October 2006 acquisition of NABS, 2006’s full-year’s sales of PPG (acquired in July 2005), 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 in 2006 primarily due to contraction of automobile and light truck production in North America. Manufactured Products sales increased in 2006 primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $22.9 million was due to the acquisitions of Lectrotherm and Foundry Service by the induction business in December 2005 and January 2006, respectively.


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    Year Ended
             
    December 31,           Percent
 
    2006     2005     Change     Change  
 
Consolidated cost of products sold
  $ 908.1     $ 796.3     $ 111.8       14 %
                                 
Consolidated gross profit
  $ 148.1     $ 136.6     $ 11.5       8 %
                                 
Gross Margin
    14.0 %     14.6 %                
 
Cost of products sold increased 14% in 2006 compared to 2005, while gross margin decreased to 14.0% from 14.6% in 2005. ILS gross margin decreased primarily due to PPG restructuring costs. Aluminum Products gross margin decreased due to volume reductions, product mix and pricing changes, plus the cost of preparations for new contracts due to start production in early 2007. Gross margin in the Manufactured Products segment decreased slightly, primarily as a result of operational and pricing issues in the Company’s rubber products business.
 
 
                                 
    Year Ended
             
    December 31,           Percent
 
    2006     2005     Change     Change  
 
Consolidated SG&A expenses
  $ 90.3     $ 82.1     $ 8.2       10 %
SG&A percent
    8.5 %     8.8 %                
 
Consolidated SG&A expenses increased by 10%, or $8.2 million, in 2006 compared to 2005, representing a .3% reduction in SG&A expenses as a percent of sales. Approximately $5.7 million of the SG&A increase was due to acquisitions, primarily NABS, Foundry Service, Lectrotherm and PPG. SG&A expenses increased in 2006 compared to 2005 by a $.8 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.
 
 
                             
    Year Ended
           
    December 31,           Percent
    2006     2005     Change     Change
 
Interest expense
  $ 31.3     $ 27.1     $ 4.2     15%
Average outstanding borrowings
  $ 376.5     $ 357.1     $ 19.4     5%
Average borrowing rate
    8.31 %     7.59 %     72     basis points
 
Interest expense increased in 2006 compared to 2005, due to both higher average outstanding borrowings and higher average interest rates during 2006. The increase in average borrowings in 2006 resulted primarily from growth-driven higher working capital requirements and the purchase of NABS, Foundry Service, Lectrotherm and PPG in October and January 2006, and December and July 2005, respectively. The higher average borrowing rate in 2006 was due primarily to increased interest rates under our revolving credit facility compared to 2005, which increased as a result of actions by the Federal Reserve.


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    Year Ended December 31,  
    2006     2005  
 
Income before income taxes
  $ 27.4     $ 26.5  
Income taxes (benefit)
  $ 3.2     $ (4.3 )
Reversal of tax valuation allowance included in income
    (5.0 )     (7.3 )
                 
Income taxes, excluding reversal of tax valuation allowance — (non GAAP)
  $ 8.2     $ 3.0  
                 
Effective income tax (benefit) rate
    12 %     (16 )%
Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP)
    30 %     11 %
 
In the fourth quarters of 2006 and 2005, the Company reversed $5.0 million and $7.3 million, respectively, of its deferred tax asset valuation allowance, substantially eliminating this reserve. Based on strong recent and projected earnings, the Company has determined that it is more likely than not that its deferred tax asset will be realized. The tax valuation allowance reversals resulted in increases to net income for both of these quarters. In 2006, the Company began recording a quarterly provision for federal income taxes, resulting in a total effective income tax rate of approximately 30%. The Company’s net operating loss carryforward precluded the payment of cash federal income taxes in 2006, and should significantly reduce cash payments in 2007.
 
The provision for income taxes was $3.2 million in 2006 while income tax benefits were $4.3 million in 2005, including the reversals of our deferred tax asset valuation allowance. The effective income tax rate was 12% in 2006 compared to an effective tax benefit rate of (16%) in 2005. Excluding reversals of the tax valuation allowance, in 2006, the Company provided $8.2 million of income taxes, a 30% effective income tax rate, compared to providing $3.0 million of income taxes in 2005, an 11% effective income tax rate. In 2006, these taxes consisted of federal, state and foreign income taxes, while federal income tax was not provided in 2005. At December 31, 2006, our subsidiaries had $34.9 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
 
Results of Operations
 
2005 versus 2004
 
 
                                         
                            Acquired/
 
    Year Ended December 31,           Percent
    (Divested)
 
    2005     2004     Change     Change     Sales  
 
ILS
  $ 532.6     $ 453.2     $ 79.4       18 %   $ 31.4  
Aluminum Products
    159.1       135.4       23.7       18 %     34.5  
Manufactured Products
    241.2       220.1       21.1       10 %     3.5  
                                         
Consolidated net sales
  $ 932.9     $ 808.7     $ 124.2       15 %   $ 69.4  
                                         
 
Net sales increased by 15% in 2005 compared to 2004. ILS sales increased 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 increased in 2005 primarily due to sales from manufacturing plants acquired in August 2004 from the Amcast, partially offset by volume decreases in the automotive industry. Manufactured Products sales increased in 2005 primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $3.5 million was due to the April 2004 acquisition of the remaining 66% of the common stock of Jamco.


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    Year Ended December 31,           Percent
 
    2005     2004     Change     Change  
 
Consolidated cost of products sold
  $ 796.3     $ 682.6     $ 113.7       17 %
                                 
Consolidated gross profit
  $ 136.6     $ 126.1     $ 10.5       8 %
                                 
Gross margin
    14.6 %     15.6 %                
 
Cost of products sold increased 17% in 2005 compared to 2004, while gross margin decreased to 14.6% from 15.6% in 2004. ILS gross margin decreased primarily due to steel price increases and mix changes partially offset by the absence of the negative impact of $1.1 million in 2004 of the bankruptcy of a customer, Murray, Inc. Aluminum Products gross margin decreased due to the addition of the lower-margin Amcast business, product mix and pricing changes and the increased cost of natural gas. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction equipment, pipe threading equipment and forging businesses, and also due to $.8 million writeoff of inventory associated with discontinued product lines.
 
 
                                 
    Year Ended December 31,           Percent
 
    2005     2004     Change     Change  
 
Consolidated SG&A expenses
  $ 82.1     $ 77.0     $ 5.1       7 %
SG&A percent
    8.8 %     9.5 %                
 
Consolidated SG&A expenses increased by 7% in 2005 compared to 2004. Approximately $3.6 million of the SG&A increase was due to acquisitions, primarily PPG, Amcast and Jamco, while bonus expenses of $1.4 million and charges relating to the Delphi and Dana bankruptcies totaling $1.2 million also contributed to the increase in SG&A expenses. SG&A expenses were reduced in 2005 compared to 2004 by a $.4 million increase in net pension credits reflecting improved returns on pension plan assets. Other than these changes, SG&A expenses remained essentially flat, despite increased sales and production volumes. SG&A expenses as a percent of sales decreased by .7 of a percentage point.
 
 
                             
    Year Ended December 31,         Percent
 
    2005     2004     Change   Change  
 
Interest expense
  $ 27.1     $ 31.4     $(4.3)     (14 )%
Debt extinguishment costs included in interest expense
    -0-     $ 6.0     $(6.0)        
Average outstanding borrowings
  $ 357.1     $ 328.9     $28.2     9 %
Average borrowing rate
    7.59 %     7.72 %   (13) basis points        
 
Interest expense decreased in 2005 compared to 2004, primarily due to the fourth quarter 2004 debt extinguishment costs. These costs primarily related to premiums and other transaction costs associated with the tender offer and early redemption and writeoff of deferred financing costs associated with the 9.25% senior subordinated notes. Excluding these 2004 costs, interest increased in 2005 due to higher average outstanding borrowings, partially offset by lower average interest rates during 2005. The increase in average borrowings in 2005 resulted primarily from higher working capital requirements and the purchase of Amcast Components Group and PPG in August 2004 and July 2005, respectively. The lower average borrowing rate in 2005 was due primarily to the lower interest rate of 8.375% on our senior subordinated notes sold in November 2004 compared to the 9.25% interest rate on the senior subordinated notes outstanding during the first eleven months of 2004. The lower average borrowing rate in 2005


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included increased interest rates under our revolving credit facility compared to 2004, which increased primarily as a result of actions by the Federal Reserve.
 
 
                 
    Year Ended December 31,  
    2005     2004  
 
Income before income taxes
  $ 26.5     $ 17.6  
Income taxes (benefit)
  $ (4.3 )   $ 3.4  
Reversal of tax valuation allowance included in 2005 income tax benefit
    (7.3 )        
                 
2005 Income taxes excluding reversal of tax valuation allowance — (non GAAP)
  $ 3.0          
                 
Effective income tax (benefit) rate
    (16 )%     19 %
Effective income tax rate excluding reversal of tax valuation allowance — (non GAAP)
    11 %        
 
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 has determined that it is more likely than not that this portion of the deferred tax asset will be realized. The tax valuation allowance reversal resulted in an increase to net income for the quarter. In 2006, the Company began recording a quarterly provision for federal income taxes. The Company’s significant net operating loss carryforward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond.
 
We had income tax benefits of $4.3 million in 2005, including a $7.3 million reversal of our deferred tax asset valuation allowance. This was an effective income tax benefit rate of (16%). The provision for income taxes was $3.4 million in 2004, an effective income tax rate of 19%. Excluding the reversal of the $7.3 million tax valuation allowance, in 2005 we provided $3.0 million of income taxes, an 11% effective income tax rate. In both years, these taxes consisted primarily of state and foreign taxes on profitable operations. In neither year did the income tax provision include federal income taxes. At December 31, 2005, our subsidiaries had $41.0 million of net operating loss carryforwards for federal tax purposes. We are presenting taxes and tax rates without the tax benefit of the tax valuation allowance reversal to facilitate comparison between the periods.
 
 
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of our senior subordinated notes. On July 30, 2003, we entered into a new revolving credit 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 million subject to an 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


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December 31, 2006, the Company had $156.7 million outstanding under the revolving credit facility, and approximately $40.0 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 bank 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 December 31, 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 2.23 at December 31, 2006 versus 2.12 at December 31, 2005. Working capital increased by $60.3 million to $268.4 million at December 31, 2006 from $208.1 million at December 31, 2005. Major components of working capital, including accounts receivable, inventories, other current assets, trade accounts payable and accrued expenses, increased substantially during 2006 due primarily to significant revenue growth and the acquisitions of NABS, PPG, and Lectrotherm.
 
During 2006, the Company provided $6.1 million from operating activities as compared to providing $34.5 million in 2005. The decrease in cash provision of $28.4 million was primarily the result of a much larger increase in net operating assets, net of the impact of acquisitions, in 2006 compared to 2005 ($34.7 million compared to $9.6 million, respectively), and a decrease in net income of $6.6 million. Approximately $4.6 million of the decrease in net income was due to noncash changes in deferred income taxes, partially offset by noncash restructuring and impairment charges. During 2006, the Company also invested $20.8 million in capital expenditures, received $9.4 million from the sale of facilities which were subsequently leased back, received $3.2 million from the sale of assets held for sale, borrowed an additional $28.2 million under its revolving credit facilities and invested $23.3 million in acquisitions.
 
During 2005, the Company provided $34.5 million from operating activities as compared to providing $1.6 million in 2004. The increase in cash provision of $32.9 million was primarily the result of a much smaller increase in net operating assets, net of the impact of acquisitions, in 2005 compared to 2004 ($9.6 million compared to $29.2 million, respectively), and an increase in net income of $16.6 million. Approximately $6.5 million of the increase in net income was due to noncash changes in deferred income taxes, partially offset by noncash restructuring and impairment charges. During 2005, the Company also invested $20.3 million in capital expenditures and $12.2 million in acquisitions and borrowed an additional $8.3 million under its revolving credit facilities.
 
 
We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons. There are occasions whereupon we enter into forward contracts on foreign currencies, 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, 2006, none were outstanding. We currently have no other derivative instruments.


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The following table summarizes our principal contractual obligations and other commercial commitments over various future periods as of December 31, 2006:
 
                                         
          Payments Due or Commitment Expiration Per Period  
          Less Than
                More than
 
(In Thousands)   Total     1 Year     1-3 Years     4-5 Years     5 Years  
 
Long-term debt obligations
  $ 374,800     $ 3,310     $ 1,521     $ 159,482     $ 210,487  
Interest obligations(1)
    139,234       17,588       35,175       35,175       51,296  
Capital lease obligations
    -0-       -0-       -0-       -0-       -0-  
Operating lease obligations
    52,478       14,221       19,404       10,724       8,129  
Purchase obligations
    135,893       135,893       -0-       -0-       -0-  
Postretirement obligations(2)
    22,911       2,801       5,399       4,985       9,726  
Standby letters of credit
    34,743       32,719       1,496       464       64  
                                         
Total
  $ 760,059     $ 206,532     $ 62,995     $ 210,830     $ 279,702  
                                         
 
 
(1) Interest obligations are included on the 8.375% senior subordinated notes due 2014 only and assume notes are paid at maturity. The calculation of interest on debt outstanding under our revolving credit facility and other variable rate debt ($9,982 based on 6.37% average interest rate and outstanding borrowings of $156,700 at December 31, 2006) is not included above due to the subjectivity and estimation required.
 
(2) Postretirement obligations include projected postretirement benefit payments to participants only through 2016.
 
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.
 
 
Preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
 
Revenue Recognition:  We recognize more than 90% of our revenue when title is transferred to unaffiliated customers, typically upon shipment. Our remaining revenue, from long-term contracts, is recognized using the percentage of completion method of accounting. Selling prices are fixed based on purchase orders or contractual arrangements. Our revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
 
Allowance for Uncollectible Accounts Receivable:  Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. Allowances are developed by the individual operating units based on historical losses, adjusting for economic conditions. Our policy is to identify and reserve for specific collectibility concerns based on customers’ financial condition and payment history. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Writeoffs of accounts receivable have historically been low.
 
Allowance for Obsolete and Slow Moving Inventory:  Inventories are stated at the lower of cost or market value and have been reduced by an allowance for obsolete and slow-moving inventories. The estimated allowance is based on management’s review of inventories on hand with minimal sales activity,


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which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on reserve allowances required.
 
Impairment of Long-Lived Assets:  Long-lived assets are reviewed by management for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. During 2005, 2003, and 2002, the Company decided to exit certain under-performing product lines and to close or consolidate certain operating facilities and, accordingly, recorded restructuring and impairment charges as discussed above and in Note O to the consolidated financial statements included elsewhere herein.
 
Restructuring:  We recognize costs in accordance with Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)” (“EITF 94-3”) and SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,” for charges prior to 2003. Detailed contemporaneous documentation is maintained and updated on a quarterly basis to ensure that accruals are properly supported. If management determines that there is a change in the estimate, the accruals are adjusted to reflect the changes.
 
The Company adopted Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FAS 146”), which nullified EITF 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at the fair value only when the liability is incurred. FAS 146 has no effect on charges recorded for exit activities begun prior to 2002.
 
Goodwill:  We adopted FAS 142 as of January 1, 2002. Under FAS 142, we are required to review goodwill for impairment annually or more frequently if impairment indicators arise. We have completed the annual impairment test as of October 1, 2006, 2005 and 2004 and have determined that no goodwill impairment existed as of those dates.
 
Deferred Income Tax Assets and Liabilities:  We account for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings and taxable income and the extended period of time over which the postretirement benefits will be paid and accordingly records a tax valuation allowance 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 FAS 109.
 
At December 31, 2006, the Company had net operating loss carryforwards for federal income tax purposes of approximately $34.9 million, which will expire between 2021 and 2024.
 
Pension and Other Postretirement Benefit Plans:  We and our subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans and postretirement benefit plans covering substantially all employees. The measurement of liabilities related to these plans is based on management’s assumptions related to future events, including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trends. Pension plan asset performance in the future will directly impact our net income. We have evaluated our pension and other postretirement benefit assumptions, considering current trends in interest rates and market conditions and believe our assumptions are appropriate.
 
Stock-Based Compensation:  We elected to account for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations. Under APB 25, because the exercise price of our employee stock options equals the fair market value of the underlying stock on the date of


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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.
 
An alternative method of accounting for stock-based compensation would have been the fair value method defined by FAS 123. FAS 123 permits use of the intrinsic value method and did not require companies to account for employee stock options using the fair value method. If compensation cost for stock options granted had been determined based on the fair value method of FAS 123, our net income and diluted income per share would have been decreased by $(0.2) million (($.02) per share) in 2005, and ($.3) million (($.03) per share) in 2004.
 
In December 2004, the FASB issued FAS 123R. FAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes a fair-value measurement objective in determining the value of such a cost. FAS 123R 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 2006 compensation expense by $.3 million (before-tax).
 
Accounting Changes:  In May 2005, the 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 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 November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that these items be recognized as current-period charges and requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the associated production facilities. The Company adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’s financial position or results of operations.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement that do not include explicit transition provisions. SFAS No. 154 requires that changes in accounting principle be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for in the period of change and in subsequent periods, if necessary. The Company adopted SFAS No. 154 as of January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.
 
In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, a tax benefit will only be recognized if it is more likely than not that the tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more likely than not to be realized. FIN No. 48 is effective for the Company in 2007. FIN No. 48 requires the cumulative effect of applying the provisions to be reported separately as an adjustment to the opening balance of retained


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earnings in the year of adoption. We are currently evaluating the impact of this Interpretation and do not believe at this time that its implementation will result in a significant impact to the financial statements.
 
In September of 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” (“FSP AUG AIR-1”). FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for the Company in 2007. The adoption of FSP AUG AIR-1 is not expected to have a material impact on the Company’s financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value in GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for the Company in 2008. The Company is currently evaluating the impact of adopting this Statement.
 
On December 31, 2006, the Company adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and transition assets or obligations. See Note K to the consolidated financial statements included elsewhere herein for the impact of the adoption of SFAS No. 158 on the Company’s financial statements.
 
 
We have been identified as a potentially responsible party at third-party sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state laws, which provide for strict and, under certain circumstances, joint and several liability. We are participating in the cost of certain clean-up efforts at several of these sites. 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 its 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.
 
 
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.


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This annual report on Form 10-K contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, but are not limited to the following: our substantial indebtedness; general business conditions and competitive factors, including pricing pressures and product innovation; dependence on the automotive and heavy-duty truck industries, which are highly cyclical; demand for our products and services; raw material availability and pricing; component part availability and pricing; adverse changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; changes in general domestic economic conditions such as inflation rates, interest rates, tax rates and adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in our revolving credit facility and the indenture governing the 8.375% senior subordinated notes due 2014; 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 ability to negotiate acceptable contracts with labor unions; dependence on key management; dependence on information systems; and the other 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. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.
 
Item 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 $156.7 million at December 31, 2006. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.6 million for the year ended December 31, 2006.
 
Our foreign subsidiaries generally conduct business in local currencies. During 2006, we recorded a favorable foreign currency translation adjustment of $2.1 million related to net assets located outside the United States. This foreign currency translation adjustment resulted primarily from the weakening of the 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 our anticipated natural gas usage through April 2007.


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Item 8.   Financial Statements and Supplementary Data
 
 
         
    Page
 
  32
  33
  34
  35
  36
  37
  38
  39
  63
  63


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The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, the Company’s management carried out an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based upon the evaluation described above under the framework contained in the COSO Report, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. Management has identified no material weakness in internal control over financial reporting.
 
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the Company’s management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. This attestation report is included at page 33 of this annual report on Form 10-K.
 
Park-Ohio Holdings Corp.
March 12, 2007


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The Board of Directors and Shareholders
Park-Ohio Holdings Corp.
 
We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Park-Ohio Holdings Corp. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Park-Ohio Holdings Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that Park-Ohio Holdings Corp. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Park-Ohio Holdings Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park-Ohio Holdings Corp. as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006 and our report dated March 12, 2007 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Cleveland, Ohio
March 12, 2007


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Board of Directors and Shareholders
Park-Ohio Holdings Corp.
 
We have audited the accompanying consolidated balance sheets of Park-Ohio Holdings Corp. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park-Ohio Holdings Corp. and subsidiaries at December 31, 2006 and 2005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note I to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” effective January 1, 2006. As discussed in Note K to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans,” effective December 31, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Park-Ohio Holdings Corp. and subsidiaries internal control over financial reporting as of December 31, 2006, 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, 2007 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Cleveland, Ohio
March 12, 2007


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Park-Ohio Holdings Corp. and Subsidiaries
 
 
                 
    December 31,  
    2006     2005  
    (Dollars in thousands)  
 
ASSETS
Current Assets
  $ 21,637     $ 18,696  
Cash and cash equivalents
               
Accounts receivable, less allowances for doubtful accounts of $4,305 in 2006 and $5,120 in 2005
    181,893       153,502  
Inventories
    223,936       190,553  
Deferred tax assets
    34,142       8,627  
Other current assets
    24,218       21,651  
                 
Total Current Assets
    485,826       393,029  
Property, Plant and Equipment:
               
Land and land improvements
    3,464       6,964  
Buildings
    37,656       38,384  
Machinery and equipment
    210,445       199,019  
                 
      251,565       244,367  
Less accumulated depreciation
    146,980       130,557  
                 
      104,585       113,810  
Other Assets:
               
Goodwill
    98,180       82,703  
Net assets held for sale
    6,959       1,992  
Other
    88,592       71,320  
                 
    $ 784,142     $ 662,854  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
               
Trade accounts payable
  $ 132,864     $ 115,401  
Accrued expenses
    78,655       65,416  
Current portion of long-term liabilities
    5,873       4,161  
                 
Total Current Liabilities
    217,392       184,978  
Long-Term Liabilities, less current portion
               
8.375% senior subordinated notes due 2014
    210,000       210,000  
Revolving credit
    156,700       128,300  
Other long-term debt
    4,790       6,705  
Deferred tax liability
    32,089       3,176  
Other postretirement benefits and other long-term liabilities
    24,434       26,174  
                 
      428,013       374,355  
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 — 12,110,275 shares in 2006 and 11,702,911 in 2005
    12,110       11,703  
Additional paid-in capital
    59,676       56,915  
Retained earnings
    70,193       46,014  
Treasury stock, at cost, 736,408 shares in 2006 and 733,196 shares in 2005
    (9,066 )     (9,009 )
Accumulated other comprehensive loss
    5,824       (2,102 )
                 
      138,737       103,521  
                 
    $ 784,142     $ 662,854  
                 
 
See notes to consolidated financial statements.


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Park-Ohio Holdings Corp. and Subsidiaries
 
 
                         
    Year Ended December 31,  
    2006     2005     2004  
    (Dollars in thousands,
 
    except per share data)  
 
Net sales
  $ 1,056,246     $ 932,900     $ 808,718  
Cost of products sold
    908,095       796,283       682,658  
                         
Gross profit
    148,151       136,617       126,060  
Selling, general and administrative expenses
    90,296       82,133       77,048  
Restructuring and impairment charges (credits)
    (809 )     943       -0-  
                         
Operating income
    58,664       53,541       49,012  
Interest expense
    31,267       27,056       31,413  
                         
Income before income taxes
    27,397       26,485       17,599  
Income taxes (benefit)
    3,218       (4,323 )     3,400  
                         
Net income
  $ 24,179     $ 30,808     $ 14,199  
                         
Amounts per common share:
                       
Basic
  $ 2.20     $ 2.82     $ 1.34  
                         
Diluted
  $ 2.11     $ 2.70     $ 1.27  
                         
 
See notes to consolidated financial statements.


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Park-Ohio Holdings Corp. and Subsidiaries
 
 
                                                         
                            Accumulated
             
          Additional
                Other
             
    Common
    Paid-In
    Retained
    Treasury
    Comprehensive
    Unearned
       
    Stock     Capital     Earnings     Stock     Income (Loss)     Compensation     Total  
    (Dollars in thousands)  
 
Balance at January 1, 2004
  $ 11,288     $ 55,858     $ 1,007     $ (8,864 )   $ (3,264 )   $ -0-     $ 56,025  
Comprehensive income (loss):
                                                       
Net income
                    14,199                               14,199  
Foreign currency translation adjustment
                                    2,071               2,071  
Minimum pension liability
                                    (483 )             (483 )
                                                         
Comprehensive income
                                                    15,787  
Restricted stock award
    28       405                               (433 )     -0-  
Amortization of restricted stock
                                            83       83  
Exercise of stock options (231,748 shares)
    231       267                                       498  
                                                         
Balance at December 31, 2004
    11,547       56,530       15,206       (8,864 )     (1,676 )     (350 )     72,393  
Comprehensive income (loss):
                                                       
Net income
                    30,808                               30,808  
Foreign currency translation adjustment
                                    94               94  
Minimum pension liability
                                    (520 )             (520 )
                                                         
Comprehensive income
                                                    30,382  
Restricted stock award
    56       861                               (917 )     -0-  
Amortization of restricted stock
                                            674       674  
Purchase of treasury stock
                            (145 )                     (145 )
Exercise of stock options (99,668 shares)
    100       117                                       217  
                                                         
Balance at December 31, 2005
    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 SFAS No. 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  
                                                         
 
See notes to consolidated financial statements.


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Park-Ohio Holdings Corp. and Subsidiaries
 
 
                         
    Year Ended December 31,  
    2006     2005     2004  
    (Dollars in thousands)  
 
OPERATING ACTIVITIES
                       
Net income
  $ 24,179     $ 30,808     $ 14,199  
Adjustments to reconcile net income to net cash provided by operations:
                       
Depreciation and amortization
    20,140       17,346       15,468  
Restructuring and impairment charges (credits)
    (9 )     1,776       -0-  
Deferred income taxes
    (4,631 )     (6,525 )     1,074  
Stock based compensation expense
    1,086       674       83  
Changes in operating assets and liabilities excluding acquisitions of businesses:
                       
Accounts receivable
    (16,219 )     5,507       (35,606 )
Inventories
    (28,443 )     (1,699 )     (26,541 )
Accounts payable and accrued expenses
    16,956       (959 )     39,419  
Other
    (6,996 )     (12,427 )     (6,463 )
                         
Net cash provided by operating activities
    6,063       34,501       1,633  
INVESTING ACTIVITIES
                       
Purchases of property, plant and equipment, net
    (20,756 )     (20,295 )     (11,955 )
Business acquisitions, net of cash acquired
    (23,271 )     (12,181 )     (9,997 )
Proceeds from sale-leaseback transactions
    9,420       -0-       -0-  
Proceeds from the sale of assets held for sale
    3,200       1,100       -0-  
                         
Net cash used by investing activities
    (31,407 )     (31,376 )     (21,952 )
FINANCING ACTIVITIES
                       
Proceeds from bank arrangements, net
    28,150       8,342       18,012  
Payments on long-term debt
    -0-       -0-       (199,930 )
Issuance of 8.375% senior subordinated notes, net of deferred financing costs
    -0-       -0-       205,178  
Issuance of common stock under stock option plan
    193       217       498  
Purchase of treasury stock
    (58 )     (145 )     -0-  
                         
Net cash provided by financing activities
    28,285       8,414       23,758  
Increase in cash and cash equivalents
    2,941       11,539       3,439  
Cash and cash equivalents at beginning of year
    18,696       7,157       3,718  
                         
Cash and cash equivalents at end of year
  $ 21,637     $ 18,696     $ 7,157  
                         
Income taxes paid
  $ 5,291     $ 881     $ 3,370  
Interest paid
    28,997       24,173       28,891  
 
See notes to consolidated financial statements.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
 
December 31, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
 
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.
 
Inventories:  Inventories are stated at the lower of first-in, first-out (FIFO) cost or market value. Inventory reserves were $22,978 and $19,166 at December 31, 2006 and 2005, respectively.
 
 
                 
    December 31,  
    2006     2005  
 
Finished goods
  $ 143,071     $ 128,465  
Work in process
    42,405       32,547  
Raw materials and supplies
    38,460       29,541  
                 
    $ 223,936     $ 190,553  
                 
 
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 three to 16 years for machinery and equipment. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recoverable. See Note O.
 
Goodwill and Other Intangible Assets:  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), the Company does not amortize goodwill recorded in connection with business acquisitions. The Company completed the annual impairment tests required by FAS 142 as of October 1 and these tests confirmed that the fair value of the Company’s goodwill exceed their respective carrying values and no impairment loss was required to be recognized. Other intangible assets, which consist primarily of non-contractual customer relationships, are amortized over their estimated useful lives.
 
Pensions and Other Postretirement Benefits:  The Company and its subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans, covering substantially all employees. In addition, the Company has two unfunded postretirement benefit plans. For the defined benefit plans, benefits are based on the employee’s years of service. For the defined


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation.
 
Stock-Based Compensation:  Effective January 1, 2006, the Company adopted 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 increased the Company’s fiscal 2006 compensation expense by $299 (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.
 
If compensation cost for stock options granted had 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 years ended December 31, 2005 and 2004 would have been as follows:
 
                 
    For the Years Ended
 
    December 31,  
    2005     2004  
    (Dollars in thousands, except per share amounts)  
 
Net income, as reported
  $ 30,808     $ 14,199  
Add: Stock-option expense included in reported net income, net of related tax effects
    -0-       -0-  
Deduct: Stock-option expense determined under fair value based methods, net of related tax effects
    (177 )     (284 )
                 
Pro forma net income
  $ 30,631     $ 13,915  
                 
Earnings per share:
               
Basic — as reported
  $ 2.82     $ 1.34  
Basic — pro forma
  $ 2.81     $ 1.31  
Diluted — as reported
  $ 2.70     $ 1.27  
Diluted — pro forma
  $ 2.68     $ 1.24  


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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,  
    2005     2004  
 
Risk — free interest rate
    4.15 %     3.50 %
Expected life of option in years
    6.0       6.0  
Expected dividend yield
    0 %     0 %
Expected stock volatility
    55 %     52 %
 
The weighted average fair market value of options issued for the fiscal years ended December 31, 2005 and 2004 was estimated to be $8.20 and $4.08 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:  Due to the long-term productive nature of the Company’s manufacturing operations, absent plans or expectations of plans to initiate asset retirement activities, the Company is unable to determine potential settlement dates to be used in fair value calculations for estimating conditional asset retirement obligations. As such, the Company has not recognized conditional asset retirement obligations when there are no plans or expectations of plans to undertake a major renovation or demolition project that would require the removal of asbestos.
 
Income Taxes:  The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the current enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings, 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. 109 (“FAS 109”), “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 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 policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”
 
Accounts Receivable:  Accounts receivable are recorded at selling price, which is fixed based on a purchase order or contractual arrangement. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company’s policy is to identify and reserve for specific collectibility concerns based on customers’ financial condition and payment history.
 
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.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Capitalized costs are amortized on a straight-line basis over five years, which is the estimated useful life of the software product.
 
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, 2006, the Company had uncollateralized receivables with five customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $41,860, which represented approximately 22% of the Company’s trade accounts receivable. During 2006, sales to these customers amounted to approximately $282,074, which represented approximately 27% of the Company’s net sales.
 
Shipping and Handling Costs:  All shipping and handling costs are included in cost of products sold in the Consolidated Income Statements.
 
Environmental:  The Company accrues environmental costs related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Costs that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability when environmental assessments and/or remedial 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.
 
 
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that these items be recognized as current-period charges and requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the associated production facilities. The Company adopted SFAS No. 151 effective January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’s financial position or results of operations.
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement that do not include explicit transition provisions. SFAS No. 154 requires that changes in accounting principle be applied retroactively, instead of including the cumulative effect in the income statement. The correction of an error will continue to require financial statement restatement. A change in accounting estimate will continue to be accounted for in the period of change and in subsequent periods, if necessary. The Company adopted SFAS No. 154 as of January 1, 2006. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.
 
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” that prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, a tax benefit will only be recognized if it is more likely than not that the tax position ultimately will be sustained. After this threshold is met, a tax position is reported at the largest amount of benefit that is more


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

likely than not to be realized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the Company in 2007. FIN 48 requires the cumulative effect of applying the provisions to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. We are currently evaluating the impact of this Interpretation and do not believe at this time that its implementation will result in a significant impact to the financial statements.
 
In September of 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” (“FSP AUG AIR-1”). FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods and is effective for the Company in 2007. The adoption of FSP AUG AIR-1 is not expected to have a material impact on the Company’s financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value in GAAP and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for the Company in 2008. The Company is currently evaluating the impact of adopting this statement.
 
On December 31, 2006, the Company adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and (4) disclose additional information in the notes to financial statements about certain effects on net periodic benefit costs for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and transition assets or obligations. See Note K for the impact of the adoption of SFAS No. 158 on the Company’s financial statements.
 
Reclassification:  Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
 
NOTE B — Industry Segments
 
The Company operates through three segments: Integrated Logistics Solutions (“ILS”), Aluminum Products and Manufactured Products. ILS is a supply chain logistics provider of production components to large, multinational manufacturing companies, other manufacturers and distributors. In connection with the supply of such production components, ILS provides a variety of value-added, cost-effective supply chain management services. The principal customers of ILS are in the 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 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.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The Company’s sales are made through its own sales organization, distributors and representatives. Intersegment sales are immaterial and eliminated in consolidation and are not included in the figures presented. Intersegment sales are accounted for at values based on market prices. Income allocated to segments excludes certain corporate expenses and interest expense. Identifiable assets by industry segment include assets directly identified with those operations.
 
Corporate assets generally consist of cash and cash equivalents, deferred tax assets, property and equipment, and other assets.
 
                         
    Year Ended December 31,  
    2006     2005     2004  
 
Net sales:
                       
ILS
  $ 598,228     $ 532,624     $ 453,223  
Aluminum Products
    154,639       159,053       135,402  
Manufactured Products
    303,379       241,223       220,093  
                         
    $ 1,056,246     $ 932,900     $ 808,718  
                         
Income before income taxes:
                       
ILS
  $ 38,383     $ 34,814     $ 29,191  
Aluminum Products
    3,921       9,103       9,021  
Manufactured Products
    28,991       20,630       18,890  
                         
      71,295       64,547       57,102  
Corporate costs
    (12,631 )     (11,006 )     (8,090 )
Interest expense
    (31,267 )     (27,056 )     (31,413 )
                         
    $ 27,397     $ 26,485     $ 17,599  
                         
Identifiable assets:
                       
ILS
  $ 382,101     $ 323,176     $ 297,002  
Aluminum Products
    98,041       101,489       105,535  
Manufactured Products
    206,089       169,004       163,230  
General corporate
    97,911       69,185       44,255  
                         
    $ 784,142     $ 662,854     $ 610,022  
                         
Depreciation and amortization expense:
                       
ILS
  $ 4,365     $ 4,575     $ 4,608  
Aluminum Products
    7,892       7,484       5,858  
Manufactured Products
    6,960       4,986       4,728  
General corporate
    923       301       274  
                         
    $ 20,140     $ 17,346     $ 15,468  
                         
Capital expenditures:
                       
ILS
  $ 2,447     $ 2,070     $ 3,691  
Aluminum Products
    5,528       10,473       5,497  
Manufactured Products
    12,548       7,266       2,712  
General corporate
    233       486       55  
                         
    $ 20,756     $ 20,295     $ 11,955  
                         


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had sales of $146,849 in 2006, $107,853 in 2005 and $95,610 in 2004 to International Truck, which represented approximately 14%, 12% and 12% of consolidated net sales for each respective year.
 
The Company’s approximate percentage of net sales by geographic region were as follows:
 
                         
    Year Ended
 
    December 31,  
    2006     2005     2004  
 
United States
    76 %     79 %     74 %
Canada
    9 %     7 %     9 %
Other
    15 %     14 %     17 %
                         
      100 %     100 %     100 %
                         
 
At December 31, 2006, 2005 and 2004, approximately 90%, 86% and 86%, respectively, of the Company’s assets were maintained in the United States.
 
 
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 in Regulation S-X. The results of operations for NABS have been included since October 18, 2006. The preliminary allocation of the purchase price has been performed based on the assignments of fair values to assets acquired and liabilities assumed. The preliminary 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
    8,989  
Accrued expenses and other current liabilities
    3,904  
Deferred tax liability
    3,128  
         
Goodwill
  $ 10,978  
         
 
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


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balances is as follows:
 
                         
    Severance and
    Exit and
       
    Personnel     Relocation     Total  
 
Balance at October 18, 2006
  $ -0-     $ -0-     $ -0-  
Add: Accruals
    650       250       900  
Less: Payments
    (136 )     (46 )     (182 )
                         
Balance at December 31, 2006
  $ 514     $ 204     $ 718  
                         
 
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.
 
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 results of operations for Lectrotherm have been included since December 23, 2005. In 2006, the allocation of the purchase price was finalized 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
    (2,465 )
Inventories
    -0-  
Prepaid expenses
    (97 )
Equipment
    (1,636 )
Liabilities
       
Accrued expenses
    846  
         
Goodwill
  $ 1,346  
         
 
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 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


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

in the Company’s financial statements since July 20, 2005. The final allocation of the purchase price is as follows:
 
         
Cash acquisition price
  $ 7,000  
Assets
       
Accounts receivable
    (10,835 )
Inventories
    (10,909 )
Prepaid expenses
    (1,201 )
Equipment
    (407 )
Liabilities
       
Accounts payable
    12,783  
Accrued expenses
    2,270  
Note payable
    1,299  
         
Goodwill
  $ -0-  
         
 
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:
 
                         
    Severance
    Exit and
       
   
and Personnel
    Relocation     Total  
 
Balance at June 30, 2005
  $ -0-     $ -0-     $ -0-  
Add: Accruals
    250       1,750       2,000  
Less: Payments
    (551 )     (594 )     (1,145 )
Transfers
    400       (400 )     -0-  
                         
Balance at December 31, 2005
  $ 99     $ 756     $ 855  
Less: Payments and adjustments
    (43 )     (417 )     (460 )
Transfers
    (17 )     17       -0-  
                         
Balance at December 31, 2006
  $ 39     $ 356     $ 395  
                         
 
On August 23, 2004, the Company acquired substantially all of the assets of the Automotive Components Group (“Amcast Components Group”) of Amcast Industrial Corporation. The purchase price was approximately $10,000 in cash and the assumption of approximately $9,000 of operating liabilities. The acquisition was funded with borrowings under the Company’s revolving credit facility. The purchase price and the results of operations of Amcast Components Group prior to its date of acquisition were not deemed significant as defined in Regulation S-X. The results of operations for Amcast Components Group have been included in the Company’s results since August 23, 2004.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The final allocation of the purchase price has been performed based on the assignment of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows:
 
         
Cash acquisition price
  $ 10,000  
Assets
       
Accounts receivable
    (8,948 )
Inventories
    (2,044 )
Property and equipment
    (15,499 )
Other
    (115 )
Liabilities
       
Accounts payable
    4,041  
Compensation accruals
    3,825  
Other accruals
    8,740  
         
Goodwill
  $ -0-  
         
 
The Company has a plan for integration activities and plant rationalization. In accordance with FASB EITF Issue No. 95-3, the Company recorded accruals for severance, exit and relocation costs in the purchase price allocation. A reconciliation of the beginning and ending accrual balances is as follows:
 
                                 
   
Severance
    Exit     Relocation     Total  
 
Balance at June 30, 2004
  $ -0-     $ -0-     $ -0-     $ -0-  
Add: Accruals
    1,916       100       265       2,281  
Less: Payments
    295       -0-       2       297  
                                 
Balance at December 31, 2004
    1,621       100       263       1,984  
Transfer
    0       48       (48 )     0  
Adjustments
    (612 )     0       (113 )     (725 )
Less: Payments
    1,009       148       102       1,259  
                                 
Balance at December 31, 2005
  $ 0     $ 0     $ 0     $ 0  
                                 
 
On April 1, 2004, the Company acquired the remaining 66% of the common stock of Japan Ajax Magnethermic Company (“Jamco”) for cash existing on the balance sheet of Jamco at that date. No additional purchase price was paid by the Company. The purchase price and the results of operations of Jamco prior to its date of acquisition were not deemed significant as defined in Regulation S-X. The results of operations for Jamco have been included in the Company’s results since April 1, 2004.
 
 
In accordance with the provisions of FAS 142, the Company has completed its annual goodwill impairment tests as of October 1, 2006, 2005 and 2004, and has determined that no impairment of goodwill existed as of those dates.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The following table summarizes the carrying amount of goodwill for the years ended December 31, 2006 and December 31, 2005 by reporting segment.
 
                 
    Goodwill at
    Goodwill at
 
Reporting Segment
  December 31, 2006     December 31, 2005  
 
ILS
  $ 77,732     $ 66,188  
Aluminum Products
    16,515       16,515  
Manufactured Products
    3,933       -0-  
                 
    $ 98,180     $ 82,703  
                 
 
The increase in the goodwill in the ILS segment during 2006 results from the acquisition of NABS and foreign currency fluctuations. The increase in the goodwill in the Manufactured Products segment during 2006 results from the final allocation of the purchase price for Lectrotherm and the acquisition of Foundry Service.
 
Other intangible assets were acquired in connection with the acquisition of NABS. Information regarding other intangible assets as of December 31, 2006 follows:
 
                         
    Acquisition
    Accumulated
       
    Costs     Amortization     Net  
 
Non-contractual customer relationships
  $ 7,200     $ -0-     $ 7,200  
Other
    820       -0-       820  
                         
    $ 8,020     $ -0-     $ 8,020  
                         
 
 
Other assets consists of the following:
 
                 
    December 31,  
    2006     2005  
 
Pension assets
  $ 60,109     $ 47,561  
Idle assets
    -0-       5,161  
Deferred financing costs
    5,618       7,048  
Tooling
    1,501       3,327  
Software development costs
    2,868       2,485  
Deferred tax assets
    6,555       -0-  
Intangible assets subject to amortization
    8,779       -0-  
Other
    3,162       5,738  
                 
Totals
  $ 88,592     $ 71,320  
                 


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Accrued expenses include the following:
 
                 
    December 31,  
    2006     2005  
 
Accrued salaries, wages and benefits
  $ 17,349     $ 16,435  
Advance billings
    26,729       21,969  
Warranty, project and installation accruals
    4,820       4,391  
Severance and exit costs
    -0-       1,451  
Interest payable
    3,232       2,900  
State and local taxes
    5,746       4,866  
Sundry
    20,779       13,404  
                 
Totals
  $ 78,655     $ 65,416  
                 
 
Substantially all advance billings and warranty, project and installation accruals relate to the Company’s capital equipment businesses.
 
The changes in the aggregate product warranty liability are as follows for the year ended December 31, 2006 and 2005:
 
                 
    December 31,  
    2006     2005  
 
Balance at beginning of year
  $ 3,566     $ 4,281  
Claims paid during the year
    (2,984 )     (3,297 )
Additional warranties issued during year
    2,797       2,593  
Acquired warranty liabilities
    178       -0-  
Other
    -0-       (11 )
                 
Balance at end of year
  $ 3,557     $ 3,566  
                 
 
 
Long-term debt consists of the following:
 
                 
    December 31,  
    2006     2005  
 
8.375% senior subordinated notes due 2014
  $ 210,000     $ 210,000  
Revolving credit facility maturing on December 31, 2010
    156,700       128,300  
Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15%
    3,114       3,586  
Other
    4,986       4,763  
                 
      374,800       346,649  
Less current maturities
    3,310       1,644  
                 
Total
  $ 371,490     $ 345,005  
                 
 
Maturities of long-term debt during each of the five years following December 31, 2006 are approximately $3,310 in 2007, $863 in 2008, $658 in 2009, $158,884 in 2010 and $598 in 2011.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
In November 2004, the Company issued $210,000 of 8.375% senior subordinated notes due November 15, 2014 (“8.375% Notes”). The net proceeds from this debt issuance were approximately $205,178 net of underwriting and other debt offering fees. Proceeds from the 8.375% Notes were used to fund the tender offer and early redemption of the Company’s 9.25% senior subordinated notes due 2007. The Company incurred debt extinguishment costs related primarily to premiums and other transaction costs associated with the tender and early redemption and wrote off deferred financing costs associated with the 9.25% senior subordinated notes totaling $5,963, or $.53 per share on a diluted basis.
 
The Company is a party to a credit and security agreement dated November 5, 2003, as amended (“Credit Agreement”), with a group of banks, under which it may borrow or issue standby letters of credit or commercial letters of credit up to $230,000. The credit agreement, as recently amended, provides lower interest rate brackets and modified certain covenants to provide greater flexibility. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2006, the Company had approximately $39,995 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (8.25% at December 31, 2006) 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, 2006, in addition to amounts borrowed under the Credit Agreement, there was $24,169 outstanding primarily for standby letters of credit. An annual fee of .25% is imposed by the bank on the unused portion of available borrowings. The Credit Agreement expires on December 31, 2010 and borrowings are secured by substantially all of the Company’s assets.
 
A foreign subsidiary of the Company had outstanding standby letters of credit of $10,574 at December 31, 2006 under its credit arrangement.
 
The 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 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, 2006, the Company was in compliance with all financial covenants of the Credit Agreement.
 
The weighted average interest rate on all debt was 7.41% at December 31, 2006.
 
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, borrowings under the Credit Agreement and the 8.375% Notes approximate fair value at December 31, 2006 and 2005. The approximate fair value of the 8.375% Notes was $195,300 and $184,800 at December 31, 2006 and 2005, respectively.


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
Income taxes consisted of the following:
 
                         
    Year Ended December 31,  
    2006     2005     2004  
 
Current payable (benefit):
                       
Federal
  $ 2,355     $ 165     $ (426 )
State
    432       198       23  
Foreign
    4,792       2,260       3,245  
                         
      7,579       2,623       2,842  
Deferred:
                       
Federal
    (1,093 )     (7,300 )     -0-  
State
    (1,521 )     -0-       -0-  
Foreign
    (1,747 )     354       558  
                         
      (4,361 )     (6,946 )     558  
                         
Income taxes (benefit)
  $ 3,218     $ (4,323 )   $ 3,400  
                         
 
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
  2006     2005     2004  
 
Tax at statutory rate
  $ 9,571     $ 9,189     $ 5,984  
Effect of state income taxes, net
    (1,240 )     129       15  
Effect of foreign operations
    (1,441 )     (151 )     661  
Medicare subsidy
    (126 )     (795 )     -0-  
Valuation allowance
    (4,806 )     (12,093 )     (3,042 )
Contingencies
    889       50       -0-  
Research and development credit
    (250 )     (237 )     -0-  
Nondeductible expenses
    417       53       207  
Other, net
    204       (468 )     (425 )
                         
Total
  $ 3,218     $ (4,323 )   $ 3,400  
                         


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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant components of the Company’s net deferred tax assets and liabilities are as follows:
 
                 
    December 31,  
    2006     2005  
 
Deferred tax assets:
               
Postretirement benefit obligation
  $ 9,409     $ 7,542  
Inventory
    12,493       10,433  
Net operating loss and credit carryforwards
    18,626       18,996  
Other — net
    11,616       12,246  
                 
Total deferred tax assets
    52,144       49,217  
Deferred tax liabilities:
               
Tax over book depreciation
    12,858       15,578  
Pension
    22,693       18,926  
Inventory
    889       -0-  
Intangible assets
    3,127       -0-  
Deductible goodwill
    3,452       2,251  
                 
Total deferred tax liabilities