PARK-OHIO HOLDINGS CORP. 2005 ANNUAL REPORT To Our Shareholders and Stakeholders: April 14, 2006 Our increased revenues and net income in 2005 were reflective of a strong economic atmosphere combined with historical operating efficiencies. We expect our results to continue improving as we expand our global presence. Throughout the year I receive a number of personal notes from employees. One such note is reprinted after the Form 10-K. Edward F. Crawford Chairman and Chief Executive Officer About The Cover Our 2005 Annual Report cover reflects the values derived from the combi- nation of our three distinct business models. PARK-OHIO HOLDINGS CORP. • Integrated Logistics Solutions (ILS) “supply chain management” • Capital Equipment Manufacturers “world-wide suppliers to the oil, gas, steel and auto/truck industries” • Aluminum Products “cast and machined components for industrial consumption” Annual Report Cover and Insert © John Weber/Images.Com., Inc. 2005 ANNUAL REPORT FORM 10-K PARK-OHIO HOLDINGS CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ≤ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-3134 PARK-OHIO HOLDINGS CORP. (Exact name of registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation or organization) 23000 Euclid Avenue Cleveland, Ohio (Address of principal executive offices) 34-1867219 (I.R.S. Employer Identification No.) 44117 (Zip Code) Registrant’s telephone number, including area code: (216) 692-7200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $1.00 Per Share (Title of class) Park-Ohio Holdings Corp. is a successor issuer to Park-Ohio Industries, Inc. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes n No ≤ 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 n No ≤ 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 ≤ No n 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. n 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 n Accelerated filer ≤ Non-accelerated filer n Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes n No ≤ Aggregate market value of the voting stock held by non-affiliates of the registrant: Approximately $130,571,000, based on the closing price of $16.79 per share of the registrant’s Common Stock on the Nasdaq National Market on June 30, 2005. Number of shares outstanding of the registrant’s Common Stock, par value $1.00 per share, as of February 28, 2006: 10,944,915. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for the Annual Meeting of Sharehold- ers to be held on May 25, 2006 are incorporated by reference into Part III of this Form 10-K. PARK-OHIO HOLDINGS CORP. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 TABLE OF CONTENTS Item No. Page No. Part I 1. 1A. 1B. 2. 3. 4. 4A. Part II 5. 6. 7. 7A. 8. 9. 9A. 9B. Business *************************************************************** Risk Factors *********************************************************** Unresolved Staff Comments ********************************************** Properties************************************************************** Legal Proceedings******************************************************* Submission of Matters to a Vote of Security Holders ************************ Executive Officers of the Registrant*************************************** Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ************************************* Selected Financial Data************************************************** Management’s Discussion and Analysis of Financial Condition and Results of Operations ************************************************************* Quantitative and Qualitative Disclosures about Market Risk****************** Financial Statements and Supplementary Data ***************************** Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ************************************************************* Controls and Procedures************************************************* Other information******************************************************* Part III 10. 11. 12. 13. 14. Directors and Executive Officers of the Registrant ************************** Executive Compensation************************************************* Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters***************************************************** Certain Relationships and Related Transactions **************************** Principal Accountant Fees and Services *********************************** Part IV 15. Exhibits and Financial Statement Schedules ******************************* Signatures *********************************************************************** 1 6 12 12 13 14 14 15 16 18 29 30 58 59 59 59 60 60 60 60 61 62 Part I Item 1. Business Overview Park-Ohio Holdings Corp. (‘‘Holdings’’) was incorporated as an Ohio corporation in 1998. Holdings, primarily through the subsidiaries owned by its direct subsidiary, Park-Ohio Industries, Inc. (‘‘Park- Ohio’’), is an industrial supply chain logistics and diversified manufacturing business operating in three segments: Integrated Logistics Solutions (‘‘ILS’’), Aluminum Products and Manufactured Products. References herein to ‘‘we’’ or ‘‘the Company’’ include, where applicable Holdings, Park-Ohio and Holdings’ other direct and indirect subsidiaries. ILS provides our customers with integrated supply chain management services for a broad range of high-volume, specialty production components. 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, 2005, we employed approximately 3,400 persons. The following table summarizes the key attributes of each of our business segments: NET SALES(1) SELECTED PRODUCTS SELECTED INDUSTRIES SERVED Integrated Logistics Solutions $532.6 million (57% of total) Sourcing, planning and procurement of over 175,000 production components, including: ) Fasteners ) Pins ) Valves ) Hoses ) Wire harnesses ) Clamps and fittings ) Rubber and plastic components ) Heavy-duty truck ) Automotive and vehicle parts ) Electrical distribution and controls ) Power sports/fitness equipment ) HVAC ) Aerospace and defense ) Electrical components ) Appliance ) Semiconductor equipment Aluminum Products Manufactured Products $159.1 million (17% of total) ) Pump housings ) Clutch retainers/pistons ) Control arms ) Knuckles ) Master cylinders ) Pinion housings ) Brake calipers ) Oil pans ) Flywheel spacers ) Automotive ) Agricultural equipment ) Construction equipment ) Heavy-duty truck ) Marine equipment $241.2 million (26% of total) ) Induction heating and melting systems ) Pipe threading systems ) Industrial oven systems ) Injection molded rubber components ) Forging presses ) Steel ) Coatings ) Forging ) Foundry ) Heavy-duty truck ) Construction equipment ) Bottling ) Automotive ) Oil and gas ) Rail and locomotive manufacturing ) Aerospace and defense (1) Results are for the year ended December 31, 2005 and exclude the results of operations related to the assets of the Purchased Parts Group, Inc. prior to the date of acquisition on July 20, 2005. 1 Integrated Logistics Solutions Our ILS business provides our customers with integrated supply chain management services for a broad range of high-volume, specialty production components. Our ILS customers receive various value- added services, such as engineering and design services, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. We operate 40 logistics service centers in the United States, Mexico, Canada, Puerto Rico and Europe as well as production sourcing and support centers in Asia. Through our supply chain management programs, we supply more than 175,000 globally- sourced production components, many of which are specialized and customized to meet individual customers’ needs. 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 Decem- ber 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 pro- duction component needs. Some production components are characterized by low per unit supplier prices relative to the indirect costs of supplier management, quality assurance, inventory management and delivery to the production line. In addition, ILS delivers an increasingly broad range of higher-cost production components including valves, fittings, steering components and many others. Applications- engineering specialists and the direct sales force work closely with the engineering staff of OEM customers to recommend the appropriate production components for a new product or to suggest alternative components that reduce overall production costs, streamline assembly or enhance the appearance or performance of the end product. As an additional service, ILS recently began providing spare parts and aftermarket products to end users of its customers’ products. Supply chain management services are typically provided to customers pursuant to sole-source arrangements. We believe our services distinguish us from traditional buy/sell distributors, as well as manufacturers who supply products directly to customers, because we outsource our customers’ high- volume production components supply chain management, providing processes customized to each customer’s needs and replacing numerous current suppliers with a sole-source relationship. Our highly- developed, customized, information systems provide transparency and flexibility through the complete supply chain. This enables our customers to: (1) significantly reduce the direct and indirect cost of production component processes by outsourcing internal purchasing, quality assurance and inventory fulfillment responsibilities; (2) reduce the amount of working capital invested in inventory and floor space; (3) reduce component costs through purchasing efficiencies, including bulk buying and supplier consolidation; and (4) receive technical expertise in production component selection and design and engineering. Our sole-source arrangements foster long-term, entrenched supply relationships with our customers and, as a result, the average tenure of service for our top 50 ILS clients exceeds twelve years. ILS’s remaining sales are generated through the wholesale supply of industrial products to other manufacturers and distributors pursuant to master or authorized distributor relationships. ILS also engineers and manufactures precision cold formed and cold extruded products, including locknuts, SPAC˛ nuts and wheel hardware, 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. 2 Markets and Customers. For the year ended December 31, 2005, approximately 90% of ILS’s net sales were to domestic customers. Remaining sales were primarily to manufacturing facilities of large, multinational customers located in Canada, Mexico and Europe. Supply chain management services and production components are used extensively in a variety of industries, and demand is generally related to the state of the economy and to the overall level of manufacturing activity. ILS markets and sells its services to over 6,000 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 40% and 38% of sales of ILS for 2005 and 2004, respectively, with International Truck representing 20% and 15%, 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, exten- sive product selection, price and reputation for high service levels. Aluminum Products We believe that we are one of the few part suppliers that has the capability to provide a wide range of high-volume, high-quality products utilizing a broad range of processes, including gravity and low pressure permanent mold, die-cast, sand-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, con- struction 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 assem- bly. 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 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, 2005. Markets and Customers. The five largest customers, within which Aluminum Products sells to multiple operating divisions through sole-source contracts, accounted for approximately 53% of Alumi- num Products sales for 2005 and 58% for 2004. 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. 3 Competition. The aluminum castings industry is highly competitive. Aluminum Products com- petes 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. Manufactured Products Our Manufactured Products segment operates a diverse group of niche manufacturing businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems, rubber products and forged and machined products. We manufacture these products in eleven domestic facilities and nine international facilities in Canada, Mexico, the United Kingdom, Belgium, Germany, Poland, China and Japan. 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 technol- ogy 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 specifica- tions and are used primarily for melting, heating, and surface hardening of metals and curing of coatings. Approximately 35% to 40% of our induction heating and melting systems’ revenues is derived from the sale of replacement parts and provision of field service, primarily for the installed base of our own products. Additional manufactured products include other capital equipment, forged and machined metal components, and injection-molded rubber and silicone products. We manufacture other capital equip- ment such as pipe threading equipment for the oil and gas industry, and industrial oven systems and provide field service and spare parts for such equipment. 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 of up to 6,000 pounds 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 equip- ment 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-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. 4 Sales and Marketing ILS markets its products and services in the United States, Mexico, Canada and Europe, primarily through its direct sales force, which is assisted by applications engineers who provide the technical expertise necessary to assist the engineering staff of OEM customers in designing new products and 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 prod- ucts 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. Raw Materials and Suppliers ILS purchases substantially all of its production components from third-party suppliers. Aluminum Products and Manufactured Products purchase substantially all of their raw materials, principally metals and certain component parts incorporated into their products, from third-party suppliers and manufacturers. Management believes that raw materials and component parts other than certain spe- cialty 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 perform- ance standards and to conform to delivery schedules. Most raw materials required by Aluminum Products and Manufactured Products are commodity products available from several domestic suppliers. Customer Dependence We have thousands of customers who demand quality, delivery and service. Numerous customers have recognized our performance by awarding us with supplier quality awards. 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. Backlog Management believes that backlog is not a meaningful measure for ILS, as a majority of ILS’s customers require just-in-time delivery of production components. Management believes that Aluminum Products’ and Manufactured Products’ backlog as of any particular date is not a meaningful measure of sales for any future period as a significant portion of sales are on a release or firm order basis. Environmental, Health and Safety Regulations We are subject to numerous federal, state and local laws and regulations designed to protect public health and the environment, particularly with regard to discharges and emissions, as well as handling, storage, treatment and disposal, of various substances and wastes. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil and criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing opera- tions or requiring corrective measures. Pursuant to certain environmental laws, owners or operators of facilities may be liable for the costs of response or other corrective actions for contamination identified at or emanating from current or former locations, without regard to whether the owner or operator knew of, or was responsible for, the presence of any such contamination, and for related damages to natural resources. Additionally, persons who arrange for the disposal or treatment of hazardous sub- 5 stances 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 cor- recting environmental noncompliance and remediating environmental conditions at certain of our properties. In general, we have not experienced difficulty in complying with environmental laws in the past, and compliance with environmental laws has not had a material adverse effect on our financial condition, liquidity and results of operations. Our capital expenditures on environmental control facili- ties 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. Information as to Industry Segment Reporting and Geographic Areas The information contained under the heading ‘‘Note L—Industry Segments’’ of the notes to the consolidated financial statements included herein, relating to (1) net sales, income (loss) 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, 2005, 2004, and 2003 is incorporated herein by reference. Recent Developments 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. 6 The industries in which we operate are cyclical and are affected by the economy in general. 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 distribu- tion and controls, aerospace and defense, power sports/fitness equipment, HVAC, electrical compo- nents, 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. Because a significant portion of our sales is to the automotive and heavy-duty truck industries, a decrease in the demand of these industries or the loss of any of our major customers in these industries could adversely affect our financial health. 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 28% and 21% of our net sales during the year ended December 31, 2005 from the automobile and heavy-duty truck industries, respectively. International Truck, our largest customer, accounted for approximately 12% of our net sales for the year ended December 31, 2005. 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. Our ILS customers are generally not contractually obligated to purchase products and services from us. 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 are dependent on key customers. We rely on several key customers. For the year ended December 31, 2005, our top ten customers accounted for approximately 34% of our net sales and our top customer, International Truck, accounted for approximately 12% 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 7 ) 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 customers filed voluntary petitions for reorganization under Chapter 11 of the bank- ruptcy code during 2004 and 2005. These were Murray, Inc., a customer of ILS, in 2004 and Delphi Corp. and Dana Corporation, primarily customers of our Manufactured Products and Aluminum Products segments, in 2005. Collectively, these bankruptcies reduced our operating income by $2.3 million during 2004 and 2005 with a further negative impact of approximately $.4 million on our operating income expected in the first quarter of 2006. We operate in highly competitive industries. 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, timeli- ness 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, timeli- ness 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. The loss of key executives could adversely impact us. 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 may encounter difficulty in expanding our business through targeted acquisitions. We have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business, such as the acquisition of the 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 8 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 manage- ment’s attention, 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. Our ILS business depends upon third parties for substantially all of our component parts. ILS purchases substantially all of its component parts from third-party suppliers and manufactur- ers. 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 commer- cially 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 require- ments could have a material adverse effect on our financial condition, liquidity and results of operations. The raw materials used in our production processes and by our suppliers of component parts are subject to price and supply fluctuations that could increase our costs of production and adversely affect our 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. The energy costs involved in our production processes and transportation are subject to fluctuations that are beyond our control and could significantly increase our costs of production. 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 substantially higher natural gas costs in 2004 and in 2005. We could continue to 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. Potential product liability risks exist from the products which we sell. 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 9 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 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. Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations. As of December 31, 2005, we were a party to eight collective bargaining agreements with various labor unions that covered approximately 575 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. We operate and source internationally, which exposes us to the risks of doing business abroad. 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. We are subject to significant environmental, health and safety laws and regulations and related compliance expenditures and liabilities. 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. 10 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 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, installa- tion 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 occasion- ally evaluate various alternatives with respect to our facilities, including possible dispositions or clo- sures. 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 environmen- tal 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 previ- ously 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. If our information systems fail, our business will be materially affected. 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. Operating problems in our business may materially adversely affect our financial condition 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, 2006, Edward Crawford, our Chairman of the Board and Chief Executive Officer, and Matthew Crawford, our President and Chief Operating Officer, collectively beneficially owned approximately 26% of our common stock. Mr. E. Crawford is Mr. M. Crawford’s father. Their interests 11 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. Item 1B. Unresolved Staff Comments None. Item 2. Properties As of December 31, 2005, 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 88% of the available square footage was located in the United States. Approximately 49% of the available square footage was owned. In 2005, approximately 36% of the available domestic square footage was used by the ILS segment, 36% was used by the Manufactured Products segment and 28% by the Aluminum Products segment. Approximately 36% of the available foreign square footage was used by the ILS segment and 64% 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, 2005. Related Industry Segment Location Owned or Leased Approximate Square Footage Use ILS(1) Cleveland, OH Memphis, TN Dayton, OH Lawrence, PA St. Paul, MN Allentown, PA Atlanta, GA Dallas, TX Nashville, TN Charlotte, NC Kent, OH Mississauga, Ontario, Canada Solon, OH Dublin, VA Delaware, OH Conneaut, OH(3) Huntington, IN Fremont, IN Wapakoneta, OH Richmond, IN Cedarburg, WI Cuyahoga Hts., OH Le Roeulx, Belgium Euclid, OH Wickliffe, OH Boaz, AL Warren, OH Canton, OH Oxted, England Newport, AR Cicero, IL Cleveland, OH Shanghai, China ALUMINUM PRODUCTS MANUFACTURED PRODUCTS(4) Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Owned Leased/Owned Leased Owned Owned Leased/Owned Leased Owned Owned Owned Owned Owned Owned Leased Owned Leased Owned Leased Leased 12 60,350(2) ILS Corporate 121,700 112,960 116,000 104,425 62,200 56,000 49,985 44,900 24,000 225,000 117,000 42,600 40,000 45,000 304,000 132,000 108,000 188,000 97,300 157,000 427,000 120,000 154,000 110,000 100,000 195,000 125,000 135,000 111,300 45,000 150,000 20,500 Office Logistics Logistics Logistics and Manufacturing Logistics Logistics Logistics Logistics Logistics Logistics Manufacturing Manufacturing Logistics Logistics Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing (1) ILS has 30 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 and two owned properties of 91,800 and 20,200 square feet. (4) Manufactured Products has 16 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 is not expected to have a material adverse effect on our financial condition, liquidity or results of operations. At December 31, 2005, we were a co-defendant in approximately 325 cases asserting claims on behalf of approximately 10,000 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 compen- satory 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 five asbestos cases, involving 22 plaintiffs, that plead specified damages. In each of the five 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 mil- lion for another cause of action and punitive damages in the amount of $20.0 million. In the final case, the plaintiff has alleged compensatory damages in the amount of $0.41 million and punitive damages in the amount of $2.5 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 13 not attributed to individual defendants. Additionally, we do not believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff’s injury, if any. Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position. 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 2005. Item 4A. Executive Officers of the Registrant Information with respect to the executive officers of the Company is as follows: Name Edward F. Crawford ***************** Matthew V. Crawford **************** Richard P. Elliott ******************** Robert D. Vilsack ******************** Patrick W. Fogarty ******************* Age 66 36 49 45 44 Position Chairman of the Board, Chief Executive Officer and Director President and Chief Operating Officer and Director Vice President and Chief Financial Officer Secretary and General Counsel 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. 14 Part II 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 National Market under the symbol ‘‘PKOH’’. The table below presents the high and low sales prices of the common stock during the periods presented. No dividends were paid during the five years ended December 31, 2005. 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. Quarterly Common Stock Price Ranges 2005 2004 Quarter 1st 2nd 3rd 4th High $30.90 19.80 21.68 17.78 Low $18.00 12.88 16.29 13.52 High $10.06 13.32 20.12 26.19 Low $ 7.30 8.60 11.26 18.18 The number of shareholders of record for the Company’s common stock as of February 28, 2006 was 953. Issuer Purchases of Equity Securities Period October 1 — October 31, 2005 **** November 1 — November 30, 2005 December 1 — December 31, 2005 TOTAL ************************* Total Number of Shares Purchased 4,851 -0- -0- 4,851 Total Number of Shares Purchased as Part of Publicly Maximum Number of Shares Average Price Paid That May Yet Be Purchased Per Share Announced Plans Under the Plans or Program $15.96 -0- -0- $15.96 -0- -0- -0- -0- -0- -0- -0- -0- The Company acquired shares from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient withholding tax liabilities. 15 Item 6. Selected Financial Data (Dollars in thousands, except per share data) 2005 Year Ended December 31, 2003 2002 2004 2001 Selected Statement of Operations Data(a): Net sales ******************************* Cost of products sold(b) ***************** Gross profit*************************** Selling, general and administrative expenses Amortization of goodwill ***************** Restructuring and impairment charges(b) ** Operating income (loss)(b) ************* Non-operating items, net(c)*************** Interest expense(d) ********************** Income (loss) before income taxes and cumulative effect of accounting change *************************** Income taxes (benefit)(e) **************** Income (loss) before cumulative effect of accounting change(f) ************ Cumulative effect of accounting change **** Net income (loss) *********************** Amounts per common share — basic: Income (loss) before cumulative effect of accounting change********************* Cumulative effect of accounting change **** Net income (loss) *********************** Amounts per common share — diluted: Income (loss) before cumulative effect of accounting change********************* Cumulative effect of accounting change **** Net income (loss) *********************** $932,900 796,283 $808,718 682,658 $624,295 527,586 $634,455 546,857 $636,417 552,293 136,617 82,133 -0- 943 53,541 -0- 27,056 26,485 (4,323) 30,808 -0- 126,060 77,048 -0- -0- 49,012 -0- 31,413 17,599 3,400 14,199 -0- 96,709 62,667 -0- 18,808 15,234 -0- 26,151 87,598 57,830 -0- 13,601 16,167 -0- 27,623 84,124 66,623 3,733 18,163 (4,395) 1,850 31,108 (10,917) 904 (11,456) 897 (37,353) (11,400) (11,821) -0- (12,353) (48,799) (25,953) -0- $ 30,808 $ 14,199 $ (11,821) $ (61,152) $ (25,953) $ $ $ $ $ $ 2.82 -0- 2.82 2.70 -0- 2.70 $ $ $ $ $ $ 1.34 -0- 1.34 1.27 -0- 1.27 $ $ $ $ $ $ (1.13) -0- (1.13) (1.13) -0- (1.13) $ $ $ $ $ $ (1.18) (4.68) (5.86) (1.18) (4.68) (5.86) $ $ $ $ $ $ (2.49) -0- (2.49) (2.49) -0- (2.49) 16 2005 Year Ended December 31, 2003 2002 2004 2001 Other Financial Data: Net cash flows provided by operating activities Net cash flows (used) by investing activities**** Net cash flows provided (used) by financing activities ********************************* Depreciation and Amortization **************** Capital expenditures, net ********************* Selected Balance Sheet Data (as of period end): Cash and cash equivalents******************** Working capital ***************************** Property, plant and equipment **************** Total assets ********************************* Total debt ********************************** Shareholders’ equity ************************* $ 34,501 (31,376) $ 1,633 (21,952) $ 13,305 (3,529) $ 28,578 (17,993) $ 23,766 (7,872) 8,414 17,346 20,295 23,758 15,468 11,955 (14,870) 15,562 10,869 (5,645) 16,307 14,731 (14,634) 19,911 13,923 $ 18,696 204,922 116,939 665,983 346,649 103,521 $ 7,157 169,836 110,673 610,022 338,307 72,393 $ 3,718 148,919 96,151 507,452 310,225 56,025 $ 8,812 148,151 113,124 540,858 325,122 62,899 $ 3,872 183,025 109,325 593,117 330,768 127,708 (a) The selected consolidated financial data is not directly comparable on a year-to-year basis, prima- rily due to acquisitions and divestitures we made throughout the five years ended December 31, 2005, which include the following: 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 substan- tially all of the assets of Green Bearing and St. Louis Screw and Bolt. During 2002, the Company sold substantially all the assets of Castle Rubber. During 2001, the Company sold substantially all of the assets of Cleveland City Forge. (b) In each of the years ended December 31, 2005, 2003, 2002 and 2001, 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, $2.1 million, $2.5 million, $5.7 million and $2.7 million in the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively, related to our severance and pension curtailment accrued liabilities. The table below provides a summary of these restruc- turing and impairment charges. Year Ended December 31, 2005 2003 2002 2001 (Dollars in thousands) Non-cash charges: Cost of products sold (inventory write-down) ******* Asset impairment ******************************** Restructuring and severance ************************ Pension curtailment ******************************** Total ***************************************** $ 833 391 400 152 $1,776 $ 638 16,051 990 1,767 $ 5,589 5,302 5,599 2,700 $10,299 11,280 6,883 -0- $19,446 $19,190 $28,462 Charges reflected as restructuring and impairment charges on income statement********************** $ 943 $18,808 $13,601 $18,163 (c) In 2001, non-operating items, net was comprised of $1.9 million of fire-related non-recurring business interruption costs, which were not covered by insurance. 17 (d) 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. (e) In 2005, the Company reversed $7.3 million of its domestic deferred tax asset valuation allowances as it has been determined the realization of this amount is more likely than not. (f) 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, 2005. 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 2005, 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, restructuring and unusual charges in 2003 and 2005, a goodwill impairment charge in 2002 to reflect the cumulative effect of an accounting change, and acquisitions and divestitures during the three years ended December 31, 2005. Executive Overview We are an industrial supply chain logistics and diversified manufacturing business, operating in three segments: ILS, Aluminum Products and Manufactured Products. ILS provides customers with integrated supply chain management services for a broad range of high-volume, specialty production components. ILS customers receive various value-added services, such as engineering and design services, part usage and cost analysis, supplier selection, quality assurance, bar coding, product packag- ing 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 ma- chines aluminum engine, transmission, brake, suspension and other components such as pump hous- ings, 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, auto- motive, 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 L to the consolidated financial statements. Sales and profitability continued to grow substantially in 2005, continuing the trend of the prior year, as the domestic and international manufacturing economies continued to grow. Net sales in- creased 15% and net income increased 117% in 2005 compared to 2004. 2005 net income was affected by a $7.3 million reversal of the tax valuation allowance and $1.8 million of restructuring charges ($.8 mil- lion reflected in Cost of products sold and $1.0 million in Restructuring and impairment charges). 18 During 2004, net sales increased 30%, and net income was $14.2 million compared to a net loss of $11.8 in 2003. 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, 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 $200.0 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 $48.2 million of unused borrowing availability at December 31, 2005. Funds provided by operations plus available borrowings under the revolving credit facility are expected to be adequate to meet our cash requirements. At the end of 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 manage- ment 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. We acquired substantially all of the assets of the Amcast Components Group (‘‘Amcast’’), a pro- ducer of aluminum automotive products, on August 23, 2004 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. 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, on April 1, 2004 for cash existing on the balance sheet of Jamco at that date. We sold substantially all the assets of St. Louis Screw and Green Bearing in first quarter 2003 for cash totaling approximately $7.3 million. Accounting Changes and Goodwill 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 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 19 (loss) and diluted income (loss) per share would have been (decreased) or increased by $0.2 million ($.02 per share) in 2005, $(0.3) million ($(.03) per share) in 2004, and $0.3 million ($.03 per share) in 2003. In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised), ‘‘Share-Based Payment’’ (‘‘FAS 123R’’). FAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and establishes a fair-value measure- ment 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 is expected to increase the Company’s fiscal 2006 compensation expense by $0.5 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, 2005, 2004 and 2003, using forecasted discounted cash flows, and it was determined that no further impairment is required. At December 31, 2005, our balance sheet reflected $82.7 million of goodwill in the ILS and Aluminum Products segments. In 2005, discount rates used ranged from 11.0% to 11.5%, and long-term revenue growth rates used ranged from 3.5% to 4.5%. Results of Operations 2005 versus 2004 Net Sales by Segment: ILS*************************************************** Aluminum Products ************************************ Manufactured Products********************************* $532.6 159.1 241.2 $453.2 135.4 220.1 Year Ended December 31, 2004 2005 Change $ 79.4 23.7 21.1 Consolidated net sales ********************************* $932.9 $808.7 $124.2 Percent Change Acquired/ (Divested) Sales 18% 18% 10% 15% $31.4 34.5 3.5 $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 manufactur- ing 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 equip- ment, 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. Cost of Products Sold & Gross Profit: Year Ended December 31, 2004 2005 Change Percent Change Consolidated cost of products sold************************** $796.3 $682.6 $113.7 Consolidated gross profit ********************************** $136.6 $126.1 $ 10.5 17% 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 20 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. Selling, General & Administrative (‘‘SG&A’’) Expenses: Consolidated SG&A expenses********************************* SG&A percent ********************************************** Year Ended December 31, 2004 2005 Change Percent Change $82.1 $77.0 $5.1 7% 8.8% 9.5% Consolidated SG&A expenses increased by 7% in 2005 compared to 2004. Approximately $3.6 mil- lion 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. The Company expects a further $.4 million negative impact to SG&A expenses in the first quarter of 2006 resulting from the Dana bankruptcy. 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. Interest Expense: Interest expense ******************************** Debt extinguishment costs included in interest expense************************************** Average outstanding borrowings ****************** Average borrowing rate ************************** Year Ended December 31, 2004 2005 Change Percent Change $ 27.1 $ 31.4 $(4.3) (14)% -0- $357.1 7.59% $ 6.0 $328.9 $(6.0) $28.2 7.72% (13) basis points 9% 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 included increased interest rates under our revolving credit facility compared to 2004, which increased primarily as a result of actions by the Federal Reserve. 21 Income Taxes: Year Ended December 31, 2004 2005 Income before income taxes *************************************************** Income taxes (benefit) ******************************************************** Reversal of tax valuation allowance included in 2005 income tax benefit ************ $26.5 $ (4.3) (7.3) $17.6 $ 3.4 2005 Income taxes excluding reversal of tax valuation allowance ******************* $ 3.0 Effective income tax rate ****************************************************** Effective income tax rate excluding reversal of tax valuation allowance ************* (16)% 11% 19% 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 Com- pany 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 will begin recording a quarterly provision for federal income taxes, which is expected to result in a total effective income tax rate of approximately 40%. The Company’s significant net operating loss carry-forward should preclude the payment of cash federal income taxes in 2006 and 2007, and possibly beyond. In the fourth quarter of 2006, the Company will reassess the remaining tax valuation allowance. If it is determined that a portion or all of the remaining deferred tax asset will more likely than not be realized, then the appropriate portion of its remaining tax valuation allowance will be reversed into income at that time, which could increase 2006 net income by as much as $5.0 million. 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. Results of Operations 2004 versus 2003 Net Sales by Segment: ILS ********************************************** Aluminum Products ******************************* Manufactured Products **************************** Consolidated net sales ***************************** Year Ended December 31, 2003 2004 $453.2 135.4 220.1 $377.6 90.1 156.6 Change $ 75.6 45.3 63.5 $808.7 $624.3 $184.4 Percent Change 20% 50% 41% 30% Net sales increased by 30% in 2004 compared to 2003. ILS sales increased due to general economic growth, in particular due to significant growth in the heavy-duty truck and semiconductor industries, the addition of new customers and increases in product range to existing customers. ILS growth was partially offset by a $1.0 million sales decrease related to the 2003 sale of Green Bearing. Aluminum Products 2004 sales increased $30.4 million due to the Amcast Components Group acquisition in August 2004, with additional growth from new contracts and increased volumes in the existing business. 22 Manufactured Products sales increased primarily in the induction equipment, pipe threading equipment and forging businesses. Of this increase, $15.9 million was due to the second quarter 2004 acquisition of the remaining 66% of the common stock of Jamco, partially offset by the divestiture of St. Louis Screw in the first quarter of 2003. Cost of Products Sold & Gross Profit: Consolidated cost of products sold************************** Consolidated gross profit ********************************** Gross margin ********************************************* $682.6 $126.1 $527.6 $ 96.7 15.6% 15.5% Year Ended December 31, 2003 2004 Change $155.0 $ 29.4 Percent Change 29% 30% Cost of products sold increased 29% in 2004 compared to 2003, while gross margin increased to 15.6% from 15.5% in 2003. ILS gross margin decreased modestly, primarily due to steel price increases and mix changes and the negative impact of $1.1 million resulting from the bankruptcy of a significant customer, Murray, Inc. Aluminum Products gross margin decreased due to a combination of the addition of the lower-margin Amcast business, product mix and pricing changes and specific one-time costs incurred in 2004 for product startup, scrap and reserves. The $30.4 million of sales from the acquired Amcast business generated significantly lower margins than the existing Aluminum Products business. We expect margins at the acquired plants to increase over time as a result of post-acquisition cost reductions, price increases and new business. Gross margin in the Manufactured Products segment increased, primarily as a result of increased sales and overhead efficiencies achieved in the induction equipment, pipe threading equipment and forging businesses. Gross margins in both the Aluminum Products and Manufactured Products segments were negatively impacted by rising natural gas costs. SG&A Expenses: Consolidated SG&A expenses********************************* SG&A percent ********************************************** Year Ended December 31, 2003 2004 Change Percent Change $77.0 $62.7 $14.3 23% 9.5% 10.0% Consolidated SG&A expenses increased by 23% in 2004 compared to 2003. Approximately $2.8 mil- lion of the SG&A increase was due to acquisitions, primarily Jamco and Amcast Components Group, while approximately $2.7 million of the increase was due to compliance costs associated with Sec- tion 404 of the Sarbanes-Oxley Act. The remainder of the SG&A increase was primarily due to increased sales and production volumes. Despite this increase, SG&A expenses as a percent of sales decreased by 50 basis points due both to cost reductions from restructuring and to the absorption of these expenses over increased sales. SG&A expenses were reduced in 2004 compared to 2003 by a $2.3 million increase in net pension credits reflecting improved returns on pension plan assets. Interest Expense: Interest expense ********************************* Debt extinguishment costs included in interest expense*************************************** Average outstanding borrowings ******************* Average borrowing rate *************************** 23 Year Ended December 31, 2003 2004 Change Percent Change $ 31.4 $ 26.2 $5.2 20% 6.0 $ $328.9 7.72% -0- $320.8 $6.0 $8.1 8.17% (45) basis points 3% Interest expense increased in 2004 compared to 2003, primarily due to the fourth quarter 2004 debt extinguishment costs. These costs primarily related to premiums and other transaction costs associated with the tender and early redemption and writeoff of deferred financing costs associated with the 9.25% senior subordinated notes. Excluding these costs, interest decreased due to lower average interest rates in 2004, partially offset by higher average outstanding borrowings. The lower average borrowing rate in 2004 was due primarily to decreased rates on our revolving credit facility. The increase in average borrowings in 2004 resulted primarily from higher working capital requirements. Income Taxes: The effective income tax rate for 2004 was 19%. Primarily foreign and certain state income taxes were provided for in both years because federal income taxes were not owed due to the recognition of net operating loss carry-forwards for which valuation allowances had been provided. At December 31, 2004, our subsidiaries had $47.7 million of net operating loss carry-forwards for federal tax purposes. We have not recognized any tax benefit for these loss carry-forwards. In accordance with the provision of Statement of Financial Accounting Standards No. 109, ‘‘Accounting for Income Taxes,’’ (‘‘FAS 109’’) recorded no tax benefit for the 2003 net loss because we had incurred three years of cumulative losses. Income taxes of $.9 million were provided in 2003, primarily for state and foreign taxes on profitable operations. Liquidity and Sources of Capital Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of our senior subordinated notes. On July 30, 2003, we entered into a new revolving credit 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, we amended our revolving credit facility to increase the availability to $185.0 million subject to an asset-based formula. In December 2004, we further amended our revolving credit facility to increase the availability to $200.0 million, subject to an asset-based formula, as well as to extend the maturity from July 30, 2007 to December 31, 2010. 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 2.25% 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 December 31, 2005, the Company had $128.3 million outstanding under the revolving credit facility, and approximately $48.2 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, 2005, 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 2.1 at December 31, 2005 versus 1.97 at December 31, 2004. Working capital increased by $35.1 million to $204.9 million at December 31, 2005 from $169.8 million at December 31, 2004. Major components of working capital, including accounts receivable, inventories, other current assets, trade accounts payable and accrued expenses, increased 24 substantially during 2005 due primarily to significant revenue growth and the acquisition of PPG and Lectrotherm. During 2005, the Company provided $34.5 million from operating activities as compared to provid- ing $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 ($8.9 million compared to $29.1 million, respectively), and an increase in net income of $16.6 mil- lion. 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. During 2004, the Company provided $1.6 million from operating activities as compared to providing $13.3 million in 2003. The decrease of $11.7 million was primarily the result of the increase in working capital, net of the impact of acquisitions, of $18.9 million and the absence of non-cash restructuring charges ($18.6 million in 2003) offset by the increase in net income of $26.0 million. During 2004, the Company also invested $12.0 million in capital expenditures and $10.0 million in an acquisition, gener- ated $205.2 million from the issuance of the 8.375% senior subordinated notes and $18.0 million from its revolving credit facility and used $199.9 million to redeem the 9.25% senior subordinated notes. These activities resulted in an increase in cash of $3.4 million for the year. Off-Balance Sheet Arrangements We do not have off-balance-sheet arrangements, financing or other relationships with unconsoli- dated 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 US dollar. At December 31, 2005, none were outstanding. We currently have no other derivative instruments. The following table summarizes our principal contractual obligations and other commercial com- mitments over various future periods as of December 31, 2005: (In Thousands) Long-term debt obligations ************** Interest obligations(1) ****************** Capital lease obligations **************** Operating lease obligations ************** Purchase obligations******************** Postretirement obligations(2) ************ Standby letters of credit **************** Total ****************************** Payments Due or Commitment Expiration Per Period Total $346,649 156,822 -0- 32,978 137,898 21,981 17,675 Less Than 1 Year $ 1,644 17,588 -0- 10,637 130,823 2,517 11,983 1-3 Years 4-5 Years $ 2,847 35,175 -0- 13,051 7,075 4,915 5,519 $131,116 35,175 -0- 7,004 -0- 4,668 173 More than 5 Years $211,042 68,884 -0- 2,286 -0- 9,881 -0- $714,003 $175,192 $68,582 $178,136 $292,093 (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 ($7,595 based on 5.92% average interest rate and outstand- ing borrowings of $128.3 at December 31, 2005) is not included above due to the subjectivity and estimation required. (2) Postretirement obligations include projected postretirement benefit payments to participants only through 2015. 25 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. Critical Accounting Policies Preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assump- tions 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, 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, 2002 and 2001, the Company decided to exit certain under-performing product lines and to close or consolidate certain operating facilities and, accordingly, recorded restructuring and impairment charges as discussed above and in Note 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 Bulle- tin No. 100, ‘‘Restructuring and Impairment Charges’’ for charges prior to 2003. Detailed contemporane- ous 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. 26 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 completed the transitional impairment review of goodwill during the fourth quarter of 2002 and recorded a non-cash charge of $48.8 million. The charge has been reported as a cumulative effect of a change in accounting principle. We have also completed the annual impairment test as of October 1, 2005, 2004 and 2003 and have determined that no additional goodwill impairment existed as of those dates. Deferred Income Tax Assets and Liabilities: We account for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. In determining these amounts, management determined the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings and taxable income and the extended period of time over which the postretirement benefits will be paid 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, 2005, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $41.0 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 postre- tirement 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 intrin- sic 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 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 (loss) and diluted income (loss) per share would have been (decreased) increased by $(0.2) million (($.02) per share) in 2005, ($.3) million (($.03) per share) in 2004, and $.3 million ($.03 per share) in 2003. 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 is expected to increase the Company’s 2006 compensation expense by $.5 million (before-tax). Environmental We have been identified as a potentially responsible party at third-party sites under the Comprehen- sive 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 27 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, how- ever, that inherent in management’s estimates of our exposure are expected trends in claims severity, frequency and other factors that may materially vary as claims are filed and settled or otherwise resolved. Seasonality; Variability of Operating Results Our results of operations are typically stronger in the first six months than the last six months of each calendar year due to scheduled plant maintenance in the third quarter to coincide with customer plant shutdowns and due to holidays in the fourth quarter. The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general eco- nomic 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 seg- ment, which typically ship a few large systems per year. Forward-Looking Statements This annual report on Form 10-K contains certain statements that are ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words ‘‘believes’’, ‘‘anticipates’’, ‘‘plans’’, ‘‘expects’’, ‘‘intends’’, ‘‘estimates’’ and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These 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 opera- tions; 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 out- come 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; and 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 28 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 $128.3 million at December 31, 2005. A 100 basis point increase in the interest rate would have resulted in an increase in interest expense of approximately $1.3 million for the year ended December 31, 2005. Our foreign subsidiaries generally conduct business in local currencies. During 2005, we recorded a favorable foreign currency translation adjustment of $.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 price increases, which have increased significantly in 2005. We do not have any commodity swap agreements or hedge contracts for future increases in steel or natural gas prices. 29 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Supplementary Financial Data Report of Management on Internal Control Over Financial Reporting*********************** Report of Independent Registered Public Accounting Firm ******************************** Report of Independent Registered Public Accounting Firm ******************************** Consolidated Balance Sheets — December 31, 2005 and 2004 ****************************** Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003**** Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003 ****************************************************************************** Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003 *** Notes to Consolidated Financial Statements ********************************************* Supplementary Financial Data: Selected Quarterly Financial Data (Unaudited) — Years Ended December 31, 2005 and 2004 ** Page 31 32 33 34 35 36 37 38 58 30 REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, the Company’s management carried out an evalua- tion, 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 Commis- sion (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, 2005. 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, 2005. This attestation report is included at page 32 of this annual report on Form 10-K. Park-Ohio Holdings Corp. March 13, 2006 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005, 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 effec- tiveness 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 mainte- nance 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 account- ing 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 com- pany’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, 2005, 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, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Over- sight Board (United States), the consolidated balance sheets of Park-Ohio Holdings Corp. as of Decem- ber 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005 and our report dated March 13, 2006 expressed an unqualified opinion thereon. Cleveland, Ohio March 13, 2006 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. 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 Over- sight 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, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Over- sight Board (United States), the effectiveness of the Park-Ohio Holdings Corp. and subsidiaries internal control over financial reporting as of December 31, 2005, based on criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread- way Commission and our report dated March 13, 2006 expressed an unqualified opinion thereon. Cleveland, Ohio March 13, 2006 33 Park-Ohio Holdings Corp. and Subsidiaries Consolidated Balance Sheets ASSETS Current Assets Cash and cash equivalents *********************************************** Accounts receivable, less allowances for doubtful accounts of $5,120 in 2005 and $3,976 in 2004 **************************************************** Inventories************************************************************* Deferred tax assets ***************************************************** Other current assets **************************************************** Total Current Assets ************************************************ Property, Plant and Equipment: Land and land improvements********************************************* Buildings ************************************************************** Machinery and equipment *********************************************** Less accumulated depreciation ******************************************* Other Assets: Goodwill*************************************************************** Net assets held for sale ************************************************* Other****************************************************************** LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Trade accounts payable ************************************************* Accrued expenses ****************************************************** Current portion of long-term liabilities ************************************ Total Current Liabilities ********************************************* Long-Term Liabilities, less current portion 8.375% senior subordinated notes due 2014 ******************************** Revolving credit ******************************************************** Other long-term debt **************************************************** Deferred tax liability **************************************************** Other postretirement benefits and other long-term liabilities ***************** December 31, 2005 2004 (Dollars in thousands) $ 18,696 $ 7,157 153,502 190,553 8,627 21,651 393,029 6,964 38,384 199,019 244,367 127,428 116,939 145,475 177,294 -0- 14,593 344,519 6,788 36,217 186,489 229,494 118,821 110,673 82,703 1,992 71,320 $665,983 82,565 3,027 69,238 $610,022 $115,401 68,545 4,161 188,107 210,000 128,300 6,705 3,176 26,174 374,355 $108,868 60,003 5,812 174,683 210,000 120,600 4,776 1,074 26,496 362,946 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 — 11,702,911 shares in 2005 and 11,546,943 in 2004 ************************************************ Additional paid-in capital ************************************************ Retained earnings******************************************************* Treasury stock, at cost, 733,196 shares in 2005 and 725,676 shares in 2004 **** Accumulated other comprehensive loss *********************************** Unearned compensation — restricted stock awards ************************* 11,703 57,508 46,014 (9,009) (2,102) (593) 103,521 $665,983 11,547 56,530 15,206 (8,864) (1,676) (350) 72,393 $610,022 See notes to consolidated financial statements. 34 Park-Ohio Holdings Corp. and Subsidiaries Consolidated Statements of Operations Net sales **************************************************** Cost of products sold ***************************************** Gross profit************************************************ Selling, general and administrative expenses********************* Restructuring and impairment charges ************************** Operating income ****************************************** Interest expense********************************************** Income (loss) before income taxes *************************** Income taxes (benefit) **************************************** Net income (loss) **************************************** 2005 Year Ended December 31, 2004 (Dollars in thousands, except per share data) $808,718 682,658 $932,900 796,283 $624,295 527,586 2003 136,617 82,133 943 53,541 27,056 26,485 (4,323) 126,060 77,048 -0- 49,012 31,413 17,599 3,400 96,709 62,667 18,808 15,234 26,151 (10,917) 904 $ 30,808 $ 14,199 $ (11,821) Amounts per common share (income (loss)): Basic ***************************************************** Diluted **************************************************** $ $ 2.82 2.70 $ $ 1.34 1.27 $ $ (1.13) (1.13) See notes to consolidated financial statements. 35 Park-Ohio Holdings Corp. and Subsidiaries Consolidated Statements of Shareholders’ Equity Common Stock Additional Paid-In Capital Accumulated Other Retained Treasury Comprehensive Earnings Stock Income (Loss) Compensation Unearned Total Balance at January 1, 2003************ $11,210 $56,135 $ 12,828 $(9,092) Amortization of restricted stock ******* Comprehensive (loss): $(8,096) $ (86) $ 62,899 86 86 (Dollars in thousands) Net loss ************************ Foreign currency translation adjustment******************** Minimum pension liability ******** Comprehensive (loss) ************ (11,821) 3,632 1,200 Exercise of stock options (110,533 shares) ******************* 78 (277) 228 (11,821) 3,632 1,200 (6,989) 29 Balance at December 31, 2003********* Comprehensive income (loss): Net income ********************* Foreign currency translation adjustment******************** Minimum pension liability ******** Comprehensive income*********** Restricted stock award *************** Amortization of restricted stock ******* Exercise of stock options (231,748 shares) ******************* Balance at December 31, 2004********* Comprehensive income (loss): Net income ********************* Foreign currency translation adjustment******************** Minimum pension liability ******** Comprehensive income*********** Restricted stock award *************** Amortization of restricted stock ******* Purchase of treasury stock *********** Exercise of stock options (99,668 shares) ******************** 11,288 55,858 1,007 (8,864) (3,264) -0- 56,025 14,199 28 405 231 267 2,071 (483) (433) 83 14,199 2,071 (483) 15,787 -0- 83 498 11,547 56,530 15,206 (8,864) (1,676) (350) 72,393 30,808 94 (520) 56 861 100 117 (917) 674 (145) 30,808 94 (520) 30,382 -0- 674 (145) 217 Balance at December 31, 2005********* $11,703 $57,508 $ 46,014 $(9,009) $(2,102) $(593) $103,521 See notes to consolidated financial statements. 36 Park-Ohio Holdings Corp. and Subsidiaries Consolidated Statements of Cash Flows 2005 Year Ended December 31, 2004 (Dollars in thousands) 2003 OPERATING ACTIVITIES Net income (loss) ******************************************** Adjustments to reconcile net income (loss) to net cash provided by operations: $30,808 $ 14,199 $(11,821) Depreciation and amortization ***************************** Restructuring and impairment charges********************** Deferred income taxes************************************ 17,346 1,776 (6,525) 15,468 -0- 1,074 15,562 18,641 -0- Changes in operating assets and liabilities excluding acquisitions of businesses: Accounts receivable ************************************** Inventories ********************************************** Accounts payable and accrued expenses ******************** Other *************************************************** Net cash provided by operating activities ******************* INVESTING ACTIVITIES Purchases of property, plant and equipment, net***************** Costs of acquisitions, net of cash acquired ********************** Proceeds from the sale of business units or assets held for sale *** Net cash used by investing activities ************************* FINANCING ACTIVITIES Proceeds from bank arrangements, net ************************* Payments on long-term debt*********************************** Issuance of 8.375% senior subordinated notes, net of deferred financing costs********************************************* Issuance of common stock under stock option plan ************** Purchase of treasury stock ************************************ Net cash provided (used) by financing activities ************* Increase (decrease) in cash and cash equivalents ************ Cash and cash equivalents at beginning of year ************** Cash and cash equivalents at end of year ******************* Income taxes paid (refunded) ********************************* Interest paid************************************************* 5,507 (1,699) (959) (11,753) 34,501 (20,295) (12,181) 1,100 (35,606) (26,541) 39,419 (6,380) 539 6,991 (11,984) (4,623) 1,633 13,305 (11,955) (9,997) -0- (10,869) -0- 7,340 (31,376) (21,952) (3,529) 8,342 -0- 18,012 (199,930) 112,000 (126,899) -0- 217 (145) 8,414 11,539 7,157 $18,696 $ 881 24,173 205,178 498 -0- 23,758 3,439 3,718 -0- 29 -0- (14,870) (5,094) 8,812 $ $ 7,157 $ 3,718 3,370 28,891 $ (1,038) 25,213 See notes to consolidated financial statements. 37 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003 (Dollars in thousands, except per share data) NOTE A — Summary of Significant Accounting Policies Consolidation: The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assump- tions 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 $19,166 and $18,604 at December 31, 2005 and 2004, respectively. Major Classes of Inventories Finished goods ***************************************** Work in process **************************************** Raw materials and supplies ****************************** $128,465 32,547 29,541 $121,832 27,959 27,503 $190,553 $177,294 December 31, 2005 2004 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 25-60 years for buildings, and 3-16 years for machinery and equipment. The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recoverable (See Note O). Goodwill: As discussed in Note B, the Company adopted Statement of Financial Accounting Standards No. 142 (‘‘FAS 142’’), ‘‘Goodwill and Other Intangible Assets,’’ as of January 1, 2002. Under FAS 142, goodwill is no longer amortized but is subject to impairment testing at least annually on October 1. Prior to 2002, goodwill was amortized primarily over 40 years using the straight-line method. Pensions and Other Postretirement Benefits: The Company and its subsidiaries have pension plans, principally noncontributory defined benefit or noncontributory defined contribution plans, cover- ing 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 contribution plans, the costs charged to operations and the amount funded are based upon a percentage of the covered employees’ compensation. Stock-Based Compensation: The Company elected to continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plan, as permitted under FAS 123 and ‘‘Ac- counting for Stock-Based Compensation — Transition and Disclosure — an Amendment to FASB State- 38 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued ment No. 123’’ (‘‘FAS 148’’) through 2005. Accordingly, no compensation cost has been recognized for its stock option plan since the exercise price of the stock options equals or exceeds the fair value of the common stock at the date of grant. However, the Company recognizes compensation expense resulting from fixed awards of restricted shares, which is measured at the date of grant and expensed over the vesting period. If compensation cost for stock options granted had been determined based on the fair value method of FAS 123, the Company’s pro forma net income and pro forma earnings per share for the years ended December 31, 2005, 2004, and 2003 would have been as follows: Net income (loss), as reported *************************** Add: Stock-option expense included in reported net income, net of related tax effects ****************************** Deduct: Stock-option expense determined under fair value based methods, net of related tax effects **************** Pro forma net income (loss) ***************************** Earnings (loss) per share: Basic — as reported************************************* Basic — pro forma ************************************** Diluted — as reported *********************************** Diluted — pro forma ************************************ For the Years Ended December 31, 2003 2004 2005 (Dollars in thousands, except per share amounts) $14,199 $30,808 $(11,821) 0 0 0 (177) (284) (345) $30,631 $13,915 $(12,166) $ 2.82 $ 2.81 $ 2.70 $ 2.68 $ 1.34 $ 1.31 $ 1.27 $ 1.24 $ (1.13) $ (1.16) $ (1.13) $ (1.16) 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, 2004 2003 2005 Risk — free interest rate ****************************************** Expected life of option in years *********************************** Expected dividend yield ****************************************** Expected stock volatility****************************************** 4.15% 3.50% 3.85% 6.0 0% 55% 6.0 0% 49% 6.0 0% 52% The weighted average fair market value of options issued for the fiscal years ended December 31, 2005, 2004, and 2003 was estimated to be $8.20, $4.08, and $2.47 per share, respectively. Impact of Other Recently Issued Accounting Pronouncements: On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS No. 123(R)’’), which is a revision of SFAS No. 123, ‘‘Accounting for Stock-Based Compensation.’’ SFAS No. 123(R) supercedes APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ and amends SFAS No. 95, ‘‘Statement of Cash Flows.’’ Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS 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 Company adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: (1) a ‘‘modified prospective’’ method in which compensation costs is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted 39 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date; or (2) a ‘‘modified retrospective’’ method that includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recog- nized under SFAS No. 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company adopted SFAS No. 123(R) using the ‘‘modified prospective’’ method. As permitted by SFAS No. 123, through 2005 the Company 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. Accordingly, the adoption of the fair value method under SFAS No. 123(R) could have a significant impact on the results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of fair-value recognition provisions for stock options is expected to increase the Company’s 2006 compensation expense by $.5 million (before-tax). Had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net earnings and earnings per share earlier in this note. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior years 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. 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 Statement of Financial Accounting Standards 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 (less than 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 40 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued 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. 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 indus- tries. 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, 2005, the Company had uncollateralized receivables with six customers in the automotive and heavy-duty truck industries, each with several locations, aggregating $42,579, which represented approximately 28% of the Company’s trade accounts receivable. During 2005, sales to these customers amounted to approximately $255,114, which represented approxi- mately 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 Statements of Operations. Environmental: The Company accrues environmental costs related to existing conditions result- ing 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 shareholders’ equity. Reclassification: Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation. NOTE B — FAS 142, ‘‘Goodwill and Other Intangible Assets’’ In accordance with the provisions of FAS 142, the Company has completed its annual goodwill impairment tests as of October 1, 2005, 2004 and 2003, and has determined that no additional impair- ment of goodwill existed as of those dates. The following table summarizes the carrying amount of goodwill for the years ended December 31, 2005 and December 31, 2004 by reporting segment. Reporting Segment ILS ***************************************************** Aluminum Products ************************************** Goodwill at December 31, 2005 Goodwill at December 31, 2004 $66,188 16,515 $82,703 $66,050 16,515 $82,565 41 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued The increase in the goodwill in the ILS segment during 2005 results from foreign currency fluctuations. NOTE C — Acquisitions 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. The preliminary allocation of the purchase price has been performed based on the assignments of fair values to assets acquired and liabilities assumed. The allocation of the purchase price is as follows: Cash acquisition price, less cash acquired ********************************************* Assets $ 4,698 Accounts receivable*************************************************************** Inventories*********************************************************************** Prepaid expenses ***************************************************************** Equipment *********************************************************************** Other assets ********************************************************************* (2,640) (954) (97) (871) (545) Liabilities Accrued expenses **************************************************************** Goodwill ************************************************************************** $ 409 -0- On July 20, 2005, the Company completed the acquisition of the assets of Purchased Parts Group, Inc. (‘‘PPG’’) for $7,000 in cash, $483 in a short-term note payable and the assumption of approximately $13,255 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 since July 20, 2005. The preliminary allocation of the purchase price is as follows: Cash acquisition price****************************************************** Assets $ 7,000 Accounts receivable****************************************************** Inventories************************************************************** Prepaid expenses ******************************************************** Equipment ************************************************************** (10,894) (10,606) (1,201) (407) Liabilities Accounts payable ******************************************************** Accrued expenses ******************************************************* Note payable ************************************************************ Goodwill ***************************************************************** 13,255 2,370 483 $ -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 re- 42 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued corded accruals for severance, exit and relocation costs in the purchase price allocation. A reconcilia- tion of the beginning and ending accrual balance is as follows: Balance at June 30, 2005*************************** Add: Accruals ************************************ Less: Payments *********************************** Transfers **************************************** Balance at December 31, 2005********************** $ -0- 250 (551) 400 $ 99 Severance and Personnel Exit and Relocation $ -0- 1,750 (594) (400) Total $ -0- 2,000 (1,145) -0- $ 756 $ 855 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. 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****************************************************** Assets $ 10,000 Accounts receivable****************************************************** Inventories************************************************************** Property and equipment ************************************************** Other ****************************************************************** (8,948) (2,044) (15,499) (115) Liabilities Accounts payable ******************************************************** Compensation accruals *************************************************** Other accruals ********************************************************** Goodwill ***************************************************************** 4,041 3,825 8,740 $ -0- 43 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued 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: Balance at June 30, 2004 ************************ Add: Accruals********************************** Less: Payments ******************************** Balance at December 31, 2004 ******************* Transfer*************************************** Adjustments *********************************** Less: Payments ******************************** Balance at December 31, 2005 ******************* Severance Exit Relocation Total $ -0- 1,916 295 1,621 0 (612) 1,009 $ -0- 100 -0- 100 48 0 148 $ -0- 265 2 263 (48) (113) 102 $ -0- 2,281 297 1,984 0 (725) 1,259 $ 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. NOTE D — Other Assets Other assets consists of the following: Pension assets**************************************************** Idle assets ******************************************************* Deferred financing costs ******************************************* Tooling ********************************************************** Software development costs**************************************** Other************************************************************ Totals ********************************************************* December 31, 2005 2004 $47,164 5,161 7,048 3,327 2,485 6,135 $41,295 6,040 7,846 3,570 3,390 7,097 $71,320 $69,238 44 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued NOTE E — Accrued Expenses Accrued expenses include the following: Accrued salaries, wages and benefits ******************************** Advance billings ************************************************** Warranty, project and installation accruals *************************** Severance and exit costs ****************************************** Interest payable ************************************************** State and local taxes ********************************************** Sundry ********************************************************** Totals ********************************************************* December 31, 2005 2004 $16,435 21,969 4,391 1,451 2,900 4,866 16,533 $14,098 10,059 5,660 2,175 2,022 4,553 21,436 $68,545 $60,003 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 Decem- ber 31, 2005 and 2004: Balance at beginning of year**************************************** Claims paid during the year **************************************** Additional warranties issued during year ***************************** Acquired warranty liabilities **************************************** Other ************************************************************ Balance at end of year ********************************************* December 31, 2005 2004 $ 4,281 (3,297) 2,593 -0- (11) $ 5,614 (4,708) 2,874 501 -0- $ 3,566 $ 4,281 The acquired warranty liability during 2004 reflects the warranty liability of Jamco, which was acquired in April 2004. NOTE F — Financing Arrangements Long-term debt consists of the following: 8.375% senior subordinated notes due 2014 ************************ Revolving credit maturing on December 31, 2010 ******************* Industrial development revenue bonds maturing in 2012 at interest rates from 2.00% to 4.15% ************************************** Other********************************************************** Less current maturities ****************************************** Total ******************************************************** 45 December 31, 2005 2004 $210,000 128,300 $210,000 120,600 3,586 4,763 346,649 1,644 4,041 3,666 338,307 2,931 $345,005 $335,376 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued Maturities of long-term debt during each of the five years following December 31, 2005 are approxi- mately $1,644 in 2006, $2,019 in 2007, $827 in 2008, $646 in 2009 and $130,471 in 2010. In November 2004, the Company issued $210,000 of 8.375% senior subordinated notes due Novem- ber 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 $200,000. During 2004, the Credit Agreement was amended to extend the maturity to December 31, 2010 and increase the credit line to $200,000. The amended credit agreement provides lower interest rate brackets and modified certain covenants to provide greater flexibility. The Credit Agreement currently contains a detailed borrowing base formula that provides borrowing capacity to the Company based on negotiated percentages of eligible accounts receivable, inventory and fixed assets. At December 31, 2005, the Company had approximately $48,335 of unused borrowing capacity available under the Credit Agreement. Interest is payable quarterly at either the bank’s prime lending rate (7.25% at December 31, 2005) or, at the Company’s election, at LIBOR plus .75% to 2.25%. 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 $20,000 in standby letters of credit and commercial letters of credit may be issued under the Credit Agreement. As of December 31, 2005, in addition to amounts borrowed under the Credit Agreement, there was $12,519 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. At December 31, 2005, the Company also had an operating lease line of credit available of approximately $9,300. A foreign subsidiary of the Company had outstanding standby letters of credit of $5,156 at Decem- ber 31, 2005 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 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 encum- brances, 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, 2005, the Company was in compliance with all financial covenants of the Credit Agreement. The weighted average interest rate on all debt was 7.35% at December 31, 2005. 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, 2005 and 2004. 46 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued NOTE G — Income Taxes Income taxes consisted of the following: Current payable (benefit): Federal *********************************************** State ************************************************* Foreign *********************************************** Deferred: Federal *********************************************** State ************************************************* Foreign *********************************************** Year Ended December 31, 2004 2005 2003 $ $ 165 198 2,260 2,623 $ (426) 23 3,245 2,842 (7,300) -0- 354 (6,946) -0- -0- 558 558 -0- 16 888 904 -0- -0- -0- -0- Income taxes (benefit) *********************************** $(4,323) $ 3,400 $ 904 The reasons for the difference between income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows: Year Ended December 31, 2004 2005 2003 Computed statutory amount******************************* Effect of state income taxes ****************************** Foreign rate differences ********************************** Medicare subsidy **************************************** Valuation allowance ************************************** Other, net*********************************************** Income taxes (benefit) *********************************** $ 9,189 65 (151) (795) (12,093) (538) $5,984 16 661 -0- (3,042) (219) $(3,712) 11 815 -0- 3,695 95 $ (4,323) $3,400 $ 904 47 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, 2005 2004 Deferred tax assets: Postretirement benefit obligation***************************************** Inventory ************************************************************* Net operating loss and tax credit carryforwards *************************** Other — net *********************************************************** Total deferred tax assets ****************************************** $ 7,542 10,433 18,996 12,246 $ 7,933 11,277 20,384 11,867 49,217 51,461 Deferred tax liabilities: Tax over book depreciation ********************************************* Pension *************************************************************** Deductible goodwill **************************************************** Total deferred tax liabilities *************************************** 15,578 18,926 2,251 36,755 15,492 16,725 1,087 33,304 Valuation reserves******************************************************** Net deferred tax asset (liability) ******************************************* 12,462 (7,011) 18,157 (19,231) $ 5,451 $ (1,074) At December 31, 2005, the Company had net operating loss carryforwards for federal income tax purposes of approximately $40,960, which will expire between 2021 and 2024. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities). As of December 31, 2004, the Company was in a cumulative three year loss position and determined it was not more likely than not that its net deferred tax assets would be realized. Therefore, as of December 31, 2004, the Company had a full valuation allowance against its U.S. net deferred tax asset and a portion of its foreign net operating loss carryfor- wards. As of December 31, 2005, the Company was no longer in a three year cumulative loss position and after consideration of the relevant positive and negative evidence, the Company determined a full valuation allowance was no longer appropriate. Accordingly, the Company reversed a portion of its valuation allowance and recognized $7,300 of tax benefit related to its U.S. net deferred tax asset as it has been determined the realization of this amount is more likely than not. At December 31, 2005, the Company had research and development credit carryforwards of approx- imately $1,985, which expire between 2010 and 2024. The Company also had foreign tax credit carryfor- wards of $711 which expire in 2015 and alternative minimum tax credit carryforwards of $1,141 which have no expiration date. Deferred taxes have not been provided on undistributed earnings of the Company’s foreign subsidi- aries as it is the Company’s policy to permanently reinvest such earnings. The Company has determined that it is not practical to determine the deferred tax liability on such undistributed earnings. NOTE H — Stock Plan Under the provisions of the 1998 Long-Term Incentive Plan, as amended (‘‘1998 Plan’’), which is administered by the Compensation Committee of the Company’s Board of Directors, incentive stock options, non-statutory stock options, stock appreciation rights (‘‘SARs’’), restricted shares, performance 48 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued shares or stock awards may be awarded to all employees of the Company and its subsidiaries. Stock options will be exercisable in whole or in installments as may be determined provided that no options will be exercisable more than ten years from date of grant. The exercise price will be the fair market value at the date of grant. The aggregate number of shares of the Company’s stock that may be awarded under the 1998 Plan is 1,650,000, all of which may be incentive stock options. No more than 500,000 shares shall be the subject of awards to any individual participant in any one calendar year. The following table reflects activity in option shares from January 1, 2003 through December 31, 2005 and the weighted average exercise prices: Outstanding, January 1, 2003******************************** Granted ************************************************ Forfeited *********************************************** Exercised ********************************************** Outstanding, December 31, 2003 **************************** Granted ************************************************ Forfeited *********************************************** Exercised ********************************************** Outstanding, December 31, 2004 **************************** Granted ************************************************ Exercised ********************************************** Outstanding, December 31, 2005 **************************** Number of Options 1,258,700 83,000 (15,667) (110,533) 1,215,500 21,000 (11,333) (231,748) 993,419 104,000 (99,668) 997,751 Weighted Average Exercise Price Per Share $ 1.99 4.82 1.91 1.91 2.19 7.77 7.08 2.15 2.25 14.61 2.18 $ 3.55 The following table summarizes information about options outstanding as of December 31, 2005: Exercise Price Range $1.91 $ 3.05 — $ 4.50 $ 6.28 — $ 7.77 $14.12 — $14.90 Number of Options 793,600 56,234 43,917 104,000 Options Outstanding Weighted Average Exercise Price Per Share $ 1.91 $ 3.88 $ 6.64 $14.61 Weighted Average Remaining Contractual Life 5.92 years 6.98 years 7.69 years 9.54 years Options Exercisable Weighted Average Exercise Price Per Share $1.91 $3.99 $6.42 — Number Exercisable 793,600 41,234 36,584 0 Participants may also be awarded restricted stock under the 1998 Plan. The Company granted 56,300 shares of restricted common stock under the 1998 Plan in 2005 and 28,000 in 2004 with fair values equal to the market price of the stock on the date of grant. The restricted shares were valued at $682 in 2005 and $433 in 2004 and will be recognized as compensation expense ratably over a one to three year vesting period. Compensation expense associated with the restricted shares of $674 was recognized in 2005 and $83 was recognized in 2004. NOTE I — Legal Proceedings The Company is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of 49 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation is not expected to have a material adverse effect on the Company’s financial condition, liquidity and results of operations. NOTE J — Pensions and Postretirement Benefits The following tables set forth the change in benefit obligation, plan assets, funded status and amounts recognized in the consolidated balance sheet for the defined benefit pension and postretire- ment benefit plans as of December 31, 2005 and 2004: Change in benefit obligation Benefit obligation at beginning of year **************** Service cost *************************************** Curtailment and settlement ************************** Interest cost *************************************** Amendments*************************************** Actuarial losses (gains) ***************************** Benefits and expenses paid, net of contributions ******* Benefit obligation at end of year ********************* Change in plan assets Fair value of plan assets at beginning of year********** Actual return on plan assets ************************* Company contributions ***************************** Curtailments and settlement ************************* Benefits and expenses paid, net of contributions ******* Fair value of plan assets at end of year *************** Pension Postretirement Benefits 2005 2004 2005 2004 $ 55,303 364 (1,023) 3,194 -0- 2,101 (5,205) $ 53,075 291 -0- 3,320 566 2,799 (4,748) $ 24,680 145 -0- 1,281 -0- 200 (3,463) $ 27,366 136 -0- 1,532 -0- (637) (3,717) $ 54,734 $ 55,303 $ 22,843 $ 24,680 $103,948 3,919 -0- (1,023) (5,205) $ 97,603 11,093 -0- -0- (4,748) $ -0- -0- 3,463 -0- (3,463) $ -0- -0- 3,717 -0- (3,717) $101,639 $103,948 $ -0- $ -0- Funded (underfunded) status of the plan************** Unrecognized net transition obligation **************** Unrecognized net actuarial (gain) loss **************** Unrecognized prior service cost (benefit) ************* Net amount recognized at year end******************* $ 46,905 (386) (13) 922 $ 48,645 (439) (6,929) 1,210 $(22,843) -0- 4,734 (178) $(24,680) -0- 4,639 (247) $ 47,428 $ 42,487 $(18,287) $(20,288) Amounts recognized in the consolidated balance sheets consists of: Prepaid pension cost ************************************** Accrued pension cost ************************************* Intangible asset ******************************************* Accumulated other comprehensive loss********************** Net amount recognized at the end of the year ************** 2005 2004 $47,164 (5,491) 397 5,358 $41,295 (4,211) 565 4,838 $47,428 $42,487 50 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued The pension plan weighted-average asset allocation at December 31, 2005 and 2004 and target allocation for 2006 are as follows: Asset Category Equity securities ******************************************* Debt securities ********************************************* Other ***************************************************** Target 2006 Plan Assets 2004 2005 60-70% 20-30 7-15 71.1% 66.7% 19.7 9.2 20.5 12.8 100% 100% 100% The Company recorded a minimum pension liability of $5,358 at December 31, 2005 and $4,838 at December 31, 2004, as required by Financial Accounting Standards Board Statement No. 87. The adjustment is reflected in other comprehensive income and long-term liabilities. The adjustment relates to two of the Company’s defined benefit plans, for which the accumulated benefit obligations of $17,476 at December 31, 2005 ($17,458 at December 31, 2004), exceed the fair value of the underlying pension assets of $11,985 at December 31, 2005 ($13,247 at December 31, 2004). Amounts were as follows: For the Year Ended December 31, 2005 2004 Projected benefit obligation **************************************** $17,476 $17,458 Accumulated benefit obligation ************************************* $17,476 $17,458 Fair value of plan assets ******************************************* $11,985 $13,247 The following tables summarize the assumptions used by the consulting actuary and the related cost information. Weighted-Average assumptions as of December 31, Discount rate ************************************* Expected return on plan assets ********************* Rate of compensation increase********************** 2005 5.50% 8.75% N/A Pension 2004 2003 Postretirement Benefits 2004 2005 2003 6.00% 6.50% 5.50% 6.00% 6.50% 8.75% 8.75% N/A 2.00% N/A N/A N/A N/A N/A N/A In determining its expected return on plan assets assumption for the year ended December 31, 2005, the Company considered historical experience, its asset allocation, expected future long-term rates of return for each major asset class, and an assumed long-term inflation rate. Based on these factors, the Company derived an expected return on plan assets for the year ended December 31, 2005 of 8.50%. This assumption was supported by the asset return generation model, which projected future asset returns using simulation and asset class correlation. 51 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter. Pension Benefits 2004 2005 2003 2005 Other Benefits 2004 2003 Components of net periodic benefit cost Service costs*************************** Interest costs ************************** Expected return on plan assets ********** Transition obligation ******************** Amortization of prior service cost ******** Recognized net actuarial (gain) loss ****** Benefit (income) costs ****************** $ 364 3,194 (8,804) (49) 163 (224) $ 291 3,320 (8,313) (49) 129 (286) $ 545 3,498 (7,229) (49) 257 361 $ 145 1,281 –0- –0- (69) 106 $ 136 1,532 –0- –0- (80) 99 $ 147 1,701 –0- –0- (80) 43 $(5,356) $(4,908) $(2,617) $1,463 $1,687 $1,811 Below is a table summarizing the Company’s expected future benefit payments and the expected payments due to the Medicare subsidy over the next ten years: Pension Benefits Other Benefits Payments due to Medicare Subsidy 2006 ************************************ 2007 ************************************ 2008 ************************************ 2009 ************************************ 2010 ************************************ 2011 to 2015 ***************************** $ 4,534 4,374 4,300 4,290 4,240 20,087 $2,517 2,465 2,450 2,364 2,304 9,881 $ 231 237 270 242 241 1,080 The Company recorded $167 of non-cash pension curtailment charges in 2003 related to the closure of a manufacturing facility. These were classified as restructuring charges in each year. The Company has two postretirement benefit plans. Under both of these plans, health care benefits are provided on both a contributory and noncontributory basis. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1-Percentage Point Increase 1-Percentage Point Decrease Effect on total of service and interest cost components in 2005 ***************************************** Effect on post retirement benefit obligation as of December 31, 2005******************************* $ 127 $ (107) $1,886 $(1,601) The total contribution charged to pension expense for the Company’s defined contribution plans was $1,753 in 2005, $1,446 in 2004 and $1,331 in 2003. The Company expects to have contributions of $1,212 to its defined benefit plans in 2006. 52 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued NOTE K — Leases Rental expense for 2005, 2004 and 2003 was $13,494, $10,588 and $10,263, respectively. Future minimum lease commitments during each of the five years following December 31, 2005 and thereafter are as follows: $10,637 in 2006, $7,662 in 2007, $5,389 in 2008, $4,279 in 2009, $2,724 in 2010 and $2,286 thereafter. NOTE L — 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, automo- tive 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. 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. 53 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued Year Ended December 31, 2004 2005 2003 Net sales: ILS ******************************************************* Aluminum Products **************************************** Manufactured Products ************************************* $532,624 159,053 241,223 $453,223 135,402 220,093 $377,645 90,080 156,570 $932,900 $808,718 $624,295 Income (loss) before income taxes: ILS ******************************************************* Aluminum Products **************************************** Manufactured Products ************************************* $ 34,814 9,103 20,630 $ 29,191 9,021 18,890 Corporate costs ******************************************** Interest expense******************************************** 64,547 (11,006) (27,056) 57,102 (8,090) (31,413) $ 24,893 10,201 (13,759) 21,335 (6,101) (26,151) $ 26,485 $ 17,599 $ (10,917) Identifiable assets: ILS ******************************************************* Aluminum Products **************************************** Manufactured Products ************************************* General corporate ****************************************** $323,176 104,618 169,004 69,185 $297,002 105,535 163,230 44,255 $267,361 88,031 121,331 30,729 $665,983 $610,022 $507,452 Depreciation and amortization expense: ILS ******************************************************* Aluminum Products **************************************** Manufactured Products ************************************* General corporate ****************************************** $ 4,575 7,484 4,986 301 $ 4,608 5,858 4,728 274 $ 4,868 5,342 5,050 302 $ 17,346 $ 15,468 $ 15,562 Capital expenditures: ILS ******************************************************* Aluminum Products **************************************** Manufactured Products ************************************* General corporate ****************************************** $ 2,070 10,473 7,266 486 $ 3,691 5,497 2,712 55 $ 3,017 1,878 5,867 107 $ 20,295 $ 11,955 $ 10,869 The Company had sales of $107,853 in 2005, $95,610 in 2004 and $68,238 in 2003 to International Truck, which represented approximately 12%, 12% and 11% of consolidated net sales for each respective year. 54 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued The Company’s approximate percentage of net sales by geographic region were as follows: Year Ended December 31, 2004 2003 2005 United States ******************************************** Canada ************************************************* Other*************************************************** 79% 7% 14% 74% 9% 17% 83% 8% 9% 100% 100% 100% At December 31, 2005, approximately 86% of the Company’s assets were maintained in the United States. NOTE M — Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (all dollars and share amounts are in thousands): Year Ended December 31, 2004 2003 2005 NUMERATOR Net income (loss) ************************************** $30,808 $14,199 $(11,821) DENOMINATOR Denominator for basic earnings per share - weighted average shares *********************************************** Effect of dilutive securities: 10,908 10,624 10,506 Employee stock options ******************************* 501 561 (a) Denominator for diluted earnings per share - weighted average shares and assumed conversions **************** 11,409 11,185 10,506 Amounts per common share: Basic************************************************ $ 2.82 $ 1.34 $ (1.13) Diluted ********************************************** $ 2.70 $ 1.27 $ (1.13) (a) The addition of 456 shares in 2003 would result in anti-dilution because the Company reported a net loss in those periods. NOTE N — Accumulated Comprehensive Loss The components of accumulated comprehensive loss at December 31, 2005 and 2004 are as follows: Foreign currency translation adjustment ********************* Minimum pension liability ********************************** Total *************************************************** $(3,256) 5,358 $(3,162) 4,838 $ 2,102 $ 1,676 December 31, 2005 2004 55 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued NOTE O — Restructuring and Unusual Charges During the fourth quarter of 2003, the Company continued its multi-year efforts to position the Company for renewed, more profitable growth and recorded restructuring and asset impairment charges aggregating $19,446. The action primarily related to restructuring at the Company’s Forge Group resulting from a decision to shut down its locomotive crankshaft forging plant after entering into a long-term supply contract to purchase these forgings from a third party. The charges were composed of $990 for exit costs; $638 of cost of goods sold primarily to write down inventory of discontinued product lines to current market value; $1,767 for pension curtailment and multi-employer pension plan withdrawal costs resulting primarily from the termination of union representation at the locomotive crankshaft forging plant and another Manufactured Products manufacturing facility and the closure of an Aluminum Products manufacturing plant; and $16,051 for impairment of property and equipment and other long-term assets. Below is a summary of these charges by segment. Manufactured Products ************* Aluminum Products **************** Cost of Products Sold $638 -0- $638 Asset Impairment Restructuring & Severance Pension Curtailment $16,051 -0- $16,051 $990 -0- $990 $1,600 167 $1,767 Total $19,279 167 $19,446 During the fourth quarter of 2005, the Company recorded additional restructuring and asset impair- ment charges associated with executing restructuring actions in the Aluminum Products and Manufac- tured Products segments initiated in prior years. The charges were composed of $833 of inventory impairment included in Cost of Products Sold, $391 of asset impairment, $152 of multi-employer pension plan withdrawal costs and $400 of restructuring charges related to the closure of two Manufac- tured Products manufacturing facilities. Below is a summary of these charges by segment. Manufactured Products ************** Aluminum Products ***************** Cost of Products Sold $833 -0- $833 Asset Impairment Restructuring & Severance Pension Curtailment $ -0- 391 $391 $400 -0- $400 $152 -0- $152 Total $1,385 391 $1,776 The accrued liability for severance and exit costs and related cash payments consisted of: Balance at January 1, 2003****************************************** Severance and exit charges recorded in 2003 ************************* Cash payments made in 2003 *************************************** Balance at December 31, 2003 ************************************** Severance and exit charges recorded in 2004 ************************* Cash payments made in 2004 *************************************** Balance at December 31, 2004 ************************************** Exit charges recorded in 2005*************************************** Cash payments made in 2005 *************************************** Balance at December 31, 2005 ************************************** $ 4,045 990 (2,500) 2,535 -0- (2,073) 462 400 (266) $ 596 56 PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued As of December 31, 2005, all of the 525 employees identified in 2001 and all of the 490 employees identified in 2002 had been terminated. The workforce reductions under the restructuring plan con- sisted of hourly and salaried employees at various operating facilities due to either closure or consolida- tion. As of December 31, 2005, the Company had an accrued liability of $596 for future estimated employee severance and plant closing payments. Idle fixed assets of $5,161 were included in other assets as of December 31, 2005. These consisted primarily of property, plant and equipment of two idled aluminum casting plants, for which the Com- pany is evaluating new products and technologies. These assets may either be reclassified to property, plant and equipment if placed in service, or sold. They are currently carried at estimated fair value. At December 31, 2005, the Company’s balance sheet reflected assets held for sale at their estimated current value of $1,992 for property, plant and equipment. Net sales for the businesses that were included in net assets held for sale were $-0- in 2005, $-0- in 2004, and $1,139 in 2003. Operating income (loss) for these entities were $-0- in 2005, $-0- in 2004, and $(32) in 2003. NOTE P — Derivatives and Hedging The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. The Company has no derivative instruments that are classified as fair value hedges. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income. During the second quarter of 2004, the Company entered into forward contracts for the purpose of hedging exposure to changes in the value of accounts receivable in euros against the US dollar, for a notional amount of $5,075, of which $500 was outstanding at December 31, 2004. These transactions are considered cash flow hedges and, therefore, the fair market value at December 31, 2004 of a $75 loss has been recognized in other comprehensive income (loss). Because there is no ineffectiveness on the cash flow hedges, all changes in fair value of these derivatives are recorded in equity and not included in the current period’s income statement. The $75 of loss on the fair value of the hedges is classified in current accrued liabilities. The Company recognized $169 of foreign currency losses upon settlement of the forward contracts. 57 Supplementary Financial Data Selected Quarterly Financial Data (Unaudited) Quarter Ended 2005 March 31 Dec. 31 (Dollars in thousands, except per share data) Sept. 30 June 30 Net sales********************************** Gross profit ******************************* Net income ******************************* $228,883 35,096 6,187 $ $228,795 35,366 7,513 $ $234,247 35,920 5,152 $ $240,975 30,235 $ 11,956 Amounts per common share: Basic *********************************** Diluted ********************************* 2004 Net sales********************************** Gross profit ******************************* Net income (loss) ************************** Amounts per common share (income (loss)): Basic *********************************** Diluted ********************************* $ $ .57 .54 $ $ .69 .66 $ $ .47 .45 $ $ 1.09 1.05 $192,370 30,237 5,814 $ $200,908 33,652 6,666 $ $200,875 31,326 3,991 $ $214,565 30,845 $ (2,272) $ $ .55 .52 $ $ .63 .60 $ $ .38 .36 $ $ (.21) (.21) Note 1 — In the third quarter of 2004, the Company acquired substantially all of the assets of Amcast Components Group. The purchase price for the assets acquired was $10,000 in cash, plus the assumption of certain operating liabilities. Note 2 — In the fourth quarter of 2004, the Company issued $210,000 of 8.375% senior subordinated notes due 2014. Proceeds from this debt issuance were used to fund the tender offer and early redemption of the Company’s 9.25% senior subordinated notes due 2007. The Company incurred debt extinguishment costs and wrote off deferred financing costs associated with the 9.25% senior subordinated notes totaling $5,963 or $.53 per share on a diluted basis. Note 3 — In the third quarter of 2005, the Company acquired substantially all of the assets of PPG. The purchase price for the assets was $7,000 in cash, $483 in a short-term note payable and the assumption of certain operating liabilities. Note 4 — In the fourth quarter of 2005, the Company reversed $7,300 of its domestic deferred tax asset valuation allowances as it has been determined the realization of this amount is more likely than not. Note 5 — In the fourth quarter of 2005, the Company recorded $1,776 of additional restructuring and asset impairment charges associated with executing restructuring actions initiated in prior years. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with the Company’s independent auditors on account- ing and financial disclosure matters within the two-year period ended December 31, 2005. 58 Item 9A. Controls and Procedures Evaluation of disclosure controls and procedures As of December 31, 2005, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Changes in internal controls over financial reporting There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, management carried out an evaluation, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of December 31, 2005. 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 Re- port’’). Management has identified no material weakness in internal control over financial reporting. The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based on the framework contained in the COSO Report, and has prepared Management’s Annual Report on Internal Control Over Financial Reporting included at page 31 of this annual report on Form 10-K, which is incorporated herein by reference. Ernst & Young LLP, the Company’s independent registered public accounting firm, have issued an attestation report on the Company’s management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. This attestation report is included at page 32 of this Form 10-K and is incorporated herein by reference. During 2005, we invested approximately $12.2 million, including debt assumed, in the acquisition of businesses across all our operations. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into these recently acquired businesses. Item 9B. Other Information None. Part III Item 10. Directors and Executive Officers of the Registrant The information concerning directors, the identification of the audit committee and the audit committee financial expert and the Company’s code of ethics required under this item is incorporated herein by reference from the material contained under the captions ‘‘Election of Directors’’ and ‘‘Certain Matters Pertaining to the Board of Directors and Corporate Governance,’’ as applicable, in the regis- trant’s definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the close of the fiscal year (the ‘‘Proxy Statement’’). The information concerning Section 16(a) beneficial ownership reporting compliance is incorporated herein by reference from the material contained under the caption ‘‘Principal Sharehold- 59 ers — Section 16(a) Beneficial Ownership Reporting Compliance’’ in the Proxy Statement. Information relating to executive officers is contained in Part I of this annual report on Form 10-K. Item 11. Executive Compensation The information relating to executive compensation contained under the headings ‘‘Certain Matters Pertaining to the Board of Directors and Corporate Governance — Compensation of the Board of Directors’’ and ‘‘Executive Compensation’’ in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required under this item is incorporated herein by reference from the material contained under the caption ‘‘Principal Shareholders’’ in the Proxy Statement, except that information required by Item 201(d) of Regulation S-K can be found below. The following table provides information about the Company’s common stock that may be issued under the Company’s equity compensation plan as of December 31, 2005. Plan Category Equity Compensation Plan Information Number of securities to be issued upon exercise price of outstanding options warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders(1) ******************* Equity compensation plans not approved by security holders ** Total************************** 997,751 -0- 997,751 $3.55 -0- $3.55 82,400 -0- 82,400 (1) Includes the Company’s Amended and Restated 1998 Long-Term Incentive Plan. Item 13. Certain Relationships and Related Transactions The information required under this item is incorporated herein by reference to the material contained under the captions ‘‘Certain Matters Pertaining to the Board of Directors and Corporate Governance — Company Affiliations with the Board of Directors and Nominees’’ and ‘‘Certain Transac- tions’’ in the Proxy Statement. Item 14. Principal Accountant Fees and Services The information required under this item is incorporated herein by reference to the material contained under the caption ‘‘Audit Committee — Independent Auditor Fee Information’’ in the Proxy Statement. 60 Part IV Item 15. Exhibits and Financial Statement Schedules (a)(1) The following financial statements are included in Part II, Item 8 of this annual report on Form 10-K: Page 31 32 33 34 35 Management’s Annual Report on Internal Control Over Financial Reporting ************** Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ************************************************************** Report of Independent Registered Public Accounting Firm ***************************** Consolidated Balance Sheets — December 31, 2005 and 2004 *************************** Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003 Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003************************************************************************ Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements ****************************************** Selected Quarterly Financial Data (Unaudited) — Years Ended December 31, 2005 and 2004 (2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and, therefore, have been omitted. (3) Exhibits: The exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such exhibits and are incorporated herein by reference. 36 37 38 58 61 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES PARK-OHIO HOLDINGS CORP. (Registrant) By: /s/ RICHARD P. ELLIOTT Richard P. Elliott, Vice President and Chief Financial Officer Date: March 15, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. * Edward F. Crawford * Richard P. Elliott * Matthew V. Crawford * Patrick V. Auletta * Kevin R. Greene * Lewis E. Hatch, Jr. * Dan T. Moore * Lawrence O. Selhorst * Ronna Romney * James W. Wert Chairman, Chief Executive Officer and Director Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) President, Chief Operating Officer and Director Director Director Director Director Director Director Director E F H March 15, 2006 * The undersigned, pursuant to a Power of Attorney executed by each of the directors and officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this report on behalf of each of the persons noted above, in the capacities indicated. March 15, 2006 By: /s/ ROBERT D. VILSACK Robert D. Vilsack, Attorney-in-Fact 62 ANNUAL REPORT ON FORM 10-K PARK-OHIO HOLDINGS CORP. For the Year Ended December 31, 2005 EXHIBIT INDEX Amended and Restated Articles of Incorporation of Park-Ohio Holdings Corp. (filed as Exhibit 3.1 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) Code of Regulations of Park-Ohio Holdings Corp. (filed as Exhibit 3.2 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties party thereto, the lenders party thereto, Bank One, NA and Banc One Capital Markets Inc. (filed as Exhibit 4 to the Form 10-Q of Park-Ohio Holdings Corp. for the quarter ended September 30, 2003, SEC File No. 000-03134 and incorporated by reference and made a part hereof) First Amendment, dated September 30, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto, Bank One, NA and Bank One Capital Markets, Inc. (filed as Exhibit 4.1 to the Form 8-K of Park- Ohio Holdings Corp. on October 1, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Second Amendment, dated December 29, 2004, to the Amended and Restated Credit Agreement, dated November 5, 2003, among Park-Ohio Industries, Inc., the other loan parties thereto, the lenders party thereto and JP Morgan Chase Bank, NA (successor by merger to Bank One, NA), as agent (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on January 5, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Indenture, dated as of November 30, 2004, among Park-Ohio Industries, Inc., the Guarantors (as defined therein) and Wells Fargo Bank, NA, as trustee (filed as Exhibit 4.1 to the Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Form of Indemnification Agreement entered into between Park-Ohio Holdings Corp. and each of its directors and certain officers (filed as Exhibit 10.1 to the Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 1998, SEC File No. 000-03134 and incorporated by reference and made a part hereof) Amended and Restated 1998 Long-Term Incentive Plan (filed as Appendix A to the Definitive Proxy Statement of Park-Ohio Holdings Corp., filed on April 23, 2001, SEC File No. 000-03134 and incorporated by reference and made a part hereof) Registration Rights Agreement, dated November 30, 2004, among Park-Ohio Industries, Inc., the Guaran- tors (as defined therein) and the initial purchasers that are party thereto (filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on December 6, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Form of Restricted Share Agreement between the Company and each non-employee director (filed as Exhibit 10.1 to Form 8-K of Park-Ohio Holdings Corp. filed on January 25, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Form of Incentive Stock Option Agreement (filed as Exhibit 10.5 to Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2004, SEC File No. 000-03134 and incorporated by reference and made a part hereof) Form of Non-Statutory Stock Option Agreement (filed as Exhibit 10.6 to Form 10-K of Park-Ohio Holdings Corp. for the year ended December 31, 2004, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) Summary of Annual Cash Bonus Plan (filed as Exhibit 10.1 to Form 10-Q for Park-Ohio Holdings Corp. for the quarter ended March 31, 2005, SEC File No. 000-03134 and incorporated herein by reference and made a part hereof) List of Subsidiaries of Park-Ohio Holdings Corp. Consent of Ernst & Young LLP Power of Attorney Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification requirement under Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 3.1 3.2 4.1 4.2 4.3 4.4 10.1 10.2* 10.3 10.4* 10.5* 10.6* 10.7* 21.1 23.1 24.1 31.1 31.2 32.1 * Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(c) of this Report. Exhibit 31.1 PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward F. Crawford, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Park-Ohio Holdings Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circum- stances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evalua- tion of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the regis- trant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 15, 2006 /s / EDWARD F. CRAWFORD Edward F. Crawford, Chairman and Chief Executive Officer Exhibit 31.2 PRINCIPAL FINANCIAL OFFICER’S CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard P. Elliott, Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Park-Ohio Holdings Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circum- stances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evalua- tion of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the regis- trant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 15, 2006 /s / RICHARD P. ELLIOTT Richard P. Elliott, Vice President and Chief Financial Officer [This Page Intentionally Left Blank] Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Park-Ohio Holdings Corp. (the ‘‘Company’’) on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Dated: March 15, 2006 By /s/ EDWARD F. CRAWFORD Name: Edward F. Crawford Title: Chairman and Chief Executive Officer By /s/ RICHARD P. ELLIOTT Name: Richard P. Elliott Title: Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document. END OF FORM 10-K THE FOLLOWING DOES NOT CONSTITUTE PART OF THE FORM 10-K. The following is a letter from our ILS employee, David Tygielski, the Operations manager at the ILS Livonia, Michigan branch: BOARD OF DIRECTORS Patrick V. Auletta (b) (d) President Emeritus Key Bank National Association Edward F. Crawford (a) Chairman and Chief Executive Officer Matthew V. Crawford (a) President and Chief Operating Officer Kevin R. Greene (b) (d) Chairman & Chief Executive Officer KR Group Lewis E. Hatch, Jr. (b) (c) (d) Retired: Former Chairman & Chief Operating Officer Rusch International (a) Executive Committee (b) Audit Committee (c) Compensation Committee (d) Nominating and Corporate Governance Committee OFFICERS Edward F. Crawford Chairman and Chief Executive Officer Matthew V. Crawford President and Chief Operating Officer Richard P. Elliott Vice President & Chief Financial Officer Dan T. Moore III (d) Chief Executive Officer Dan T. Moore Co. Ronna Romney (d) Director Molina Healthcare, Inc. Lawrence O. Selhorst (c) (d) Chairman American Spring Wire Corp. James W. Wert (a) (b) (c) (d) Chief Executive Officer and President Clanco Management Corporation Patrick W. Fogarty Director of Corporate Development Robert D. Vilsack Secretary & General Counsel SHAREHOLDER INFORMATION AND PRESS RELEASES Park-Ohio files Forms 10-K and 10-Q with the Securities and Exchange Commission. Shareholders may obtain copies of these reports, including Park-Ohio’s Annual Report on Form 10-K for 2005, and copies of Park-Ohio’s Annual Report to Shareholders, without charge, by accessing the Company’s website at www.pkoh.com or by writing or calling: Corporate Secretary Park-Ohio Holdings Corp. 23000 Euclid Avenue Cleveland, Ohio 44117 (216) 692-7200 Park-Ohio’s recent news releases may also be accessed through its website. Park-Ohio Headquarters We Welcome Your Comments Park-Ohio Holdings Corp. ~ 23000 Euclid Avenue ~ Cleveland, OH 44117 ~ 216-692-7200