Park-Ohio Annual Report 2007

Plain-text annual report

2007AnnualReportPark-OhioHoldingsCorp.April14,2008TToo OOuurr SShhaarreehhoollddeerrss aanndd SSttaakkeehhoollddeerrss::For the fourth year in a row our Company has increased revenues and operating income. Sales outside the United States in 2007exceeded 29 percent of our total revenues as we participate in the expanding global economy. We expect our results in 2008 to continue toimprove. Edward F. CrawfordChairman and Chief Executive Officer AAbboouutt TThhee CCoovveerrOur 2007 Annual Report cover portrays Park-Ohio’s twenty-four/seven involvement inthe expanding world markets.Annual Report Cover and Insert © Acacetus Productions, Inc.FORM10-KPARK-OHIOHOLDINGSCORP.UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549Form10-K(MarkOne)¥ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedDecember31,2007ORnTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber0-3134PARK-OHIOHOLDINGSCORP.(Exactnameofregistrantasspecifiedinitscharter)Ohio34-1867219(Stateorotherjurisdictionofincorporationororganization)(I.R.S.EmployerIdentificationNo.)6065ParklandBoulevardCleveland,Ohio44124(Addressofprincipalexecutiveoffices)(ZipCode)Registrant’stelephonenumber,includingareacode:(440)947-2000SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofeachclassNameofeachexchangeonwhichregisteredCommonStock,ParValue$1.00PerShareTheNASDAQStockMarketLLCSecuritiesregisteredpursuanttoSection12(g)oftheAct:NonePark-OhioHoldingsCorp.isasuccessorissuertoPark-OhioIndustries,Inc.Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesnNo¥IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesnNo¥Indicatebycheckmarkwhethertheregistrant:(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes¥NonIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.nIndicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(Checkone):LargeacceleratedfilernAcceleratedfiler¥Non-acceleratedfilern(Donotcheckifasmallerreportingcompany)SmallerReportingcompanynIndicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinExchangeActRule12b-2).YesnNo¥Aggregatemarketvalueofthevotingstockheldbynon-affiliatesoftheregistrant:Approximately$221,246,000,basedontheclosingpriceof$27.30pershareoftheregistrant’sCommonStockonJune29,2007.Numberofsharesoutstandingoftheregistrant’sCommonStock,parvalue$1.00pershare,asofFebruary29,2008:11,404,198.DOCUMENTSINCORPORATEDBYREFERENCEPortionsoftheregistrant’sdefinitiveproxystatementfortheAnnualMeetingofShareholderstobeheldonMay20,2008areincorporatedbyreferenceintoPartIIIofthisForm10-K.PARK-OHIOHOLDINGSCORP.FORM10-KANNUALREPORTFORTHEFISCALYEARENDEDDECEMBER31,2007TABLEOFCONTENTSItemNo.PageNo.PARTI1.Business..........................................................11A.RiskFactors.......................................................71B.UnresolvedStaffComments..........................................122.Properties.........................................................123.LegalProceedings..................................................134.SubmissionofMatterstoaVoteofSecurityHolders.......................144A.ExecutiveOfficersoftheRegistrant....................................15PARTII5.MarketfortheRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities...................................166.SelectedFinancialData..............................................177.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations........................................................197A.QuantitativeandQualitativeDisclosuresaboutMarketRisk.................318.FinancialStatementsandSupplementaryData............................329.ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure.........................................................649A.ControlsandProcedures.............................................649B.OtherInformation..................................................65PARTIII10.Directors,ExecutiveOfficersandCorporateGovernance...................6611.ExecutiveCompensation.............................................6612.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters.................................................6613.CertainRelationshipsandRelatedTransactions,andDirectorIndependence....6714.PrincipalAccountantFeesandServices.................................67PARTIV15.ExhibitsandFinancialStatementSchedules..............................68Signatures.................................................................69PartIItem1.BusinessOverviewPark-OhioHoldingsCorp.(“Holdings”)wasincorporatedasanOhiocorporationin1998.Holdings,primarilythroughthesubsidiariesownedbyitsdirectsubsidiary,Park-OhioIndustries,Inc.(“Park-Ohio”),isanindustrialsupplychainlogisticsanddiversifiedmanufacturingbusinessoperatinginthreesegments:SupplyTechnologies(formerlyknownasIntegratedLogisticsSolutions(“ILS”)),AluminumProductsandManufacturedProducts.Referenceshereinto“we”or“theCompany”include,whereapplicable,Holdings,Park-OhioandHoldings’otherdirectandindirectsubsidiaries.SupplyTechnologiesprovidesourcustomerswithTotalSupplyManagementTMservicesforabroadrangeofhigh-volume,specialtyproductioncomponents.OurAluminumProductsbusinessmanufacturescastandmachinedaluminumcomponents,andourManufacturedProductsbusinessisamajormanu-facturerofhighly-engineeredindustrialproducts.Ourbusinessesservelarge,industrialoriginalequip-mentmanufacturers(“OEMs”)inavarietyofindustrialsectors,includingtheautomotiveandvehicleparts,heavy-dutytruck,industrialequipment,steel,rail,electricaldistributionandcontrols,aerospaceanddefense,oilandgas,powersports/fitnessequipment,HVAC,electricalcomponents,applianceandsemiconductorequipmentindustries.AsofDecember31,2007,weemployedapproximately3,700persons.Thefollowingtablesummarizesthekeyattributesofeachofourbusinesssegments:SupplyTechnologiesAluminumProductsManufacturedProductsNETSALES(1)$531.4million(49%oftotal)$169.1million(16%oftotal)$370.9million(35%oftotal)SELECTEDPRODUCTSSourcing,planningand(cid:129)Pumphousings(cid:129)Inductionheatingandprocurementofover(cid:129)Clutchretainers/pistonsmeltingsystems175,000production(cid:129)Controlarms(cid:129)Pipethreadingcomponents,including:(cid:129)Knucklessystems(cid:129)Fasteners(cid:129)Mastercylinders(cid:129)Industrialoven(cid:129)Pins(cid:129)Pinionhousingssystems(cid:129)Valves(cid:129)Brakecalipers(cid:129)Injectionmolded(cid:129)Hoses(cid:129)Oilpansrubbercomponents(cid:129)Wireharnesses(cid:129)Flywheelspacers(cid:129)Forgingpresses(cid:129)Clampsandfittings(cid:129)RubberandplasticcomponentsSELECTEDINDUSTRIESSERVED(cid:129)Heavy-dutytruck(cid:129)Automotiveandvehicleparts(cid:129)Electricaldistributionandcontrols(cid:129)Powersports/fitnessequipment(cid:129)HVAC(cid:129)Aerospaceanddefense(cid:129)Electricalcomponents(cid:129)Appliance(cid:129)Semiconductorequipment(cid:129)Automotive(cid:129)Agriculturalequipment(cid:129)Constructionequipment(cid:129)Heavy-dutytruck(cid:129)Marineequipment(cid:129)Steel(cid:129)Coatings(cid:129)Forging(cid:129)Foundry(cid:129)Heavy-dutytruck(cid:129)Constructionequipment(cid:129)Bottling(cid:129)Automotive(cid:129)Oilandgas(cid:129)Railandlocomotivemanufacturing(cid:129)AerospaceanddefenseSupplyTechnologiesInNovember2007,ourILSbusinesschangeditsnametoSupplyTechnologiestobetterreflectitsbreadthofservicesandfocusondrivingefficienciesthroughoutthetotalsupplymanagementprocess.1OurSupplyTechnologiesbusinessprovidesourcustomerswithTotalSupplyManagementTM,aproactivesolutionsapproachthatmanagestheefficienciesofeveryaspectofsupplyingproductionpartsandmaterialstoourcustomers’manufacturingfloor,fromstrategicplanningtoprogramimplementation.TotalSupplyManagementtmincludessuchservicesasengineeringanddesignsupport,partusageandcostanalysis,supplierselection,qualityassurance,barcoding,productpackagingandtracking,just-in-timeandpoint-of-usedelivery,electronicbillingservicesandongoingtechnicalsupport.Weoperate51logisticsservicecentersintheUnitedStates,Mexico,Canada,PuertoRico,Scotland,Ireland,Hungary,China,Taiwan,SingaporeandIndia,aswellasproductionsourcingandsupportcentersinAsia.Throughoursupplychainmanagementprograms,wesupplymorethan175,000globally-sourcedproductioncompo-nents,manyofwhicharespecializedandcustomizedtomeetindividualcustomers’needs.InOctober2006,weacquiredallofthecapitalstockofNABSfor$21.2millionincash.NABSisapremierinternationalsupplychainmanagerofproductioncomponents,providingservicestohightechnologycompaniesinthecomputer,electronics,andconsumerproductsindustries.NABShas17operationsacrossEurope,Asia,MexicoandtheUnitedStates.ThehistoricalfinancialdatacontainedthroughoutthisannualreportonForm10-KexcludestheresultsofoperationsofNABSpriortoOctober18,2006.SeeNoteCtotheconsolidatedfinancialstatementsincludedelsewhereherein.InJuly2005,weacquiredsubstantiallyalloftheassetsofthePurchasedPartsGroup,Inc.(“PPG”),aproviderofsupplychainmanagementservicesforabroadrangeofproductioncomponents.Atacquisitiondate,PPGoperated12servicecentersintheUnitedStates,ofwhich9havesincebeenamalgamatedintootherSupplyTechnologiesoperations,andalsoservescustomersintheUnitedKingdomandMexico.Thisacquisitionaddedsignificantlytoourcustomerandsupplierbases,andexpandedourgeographicpresence.SupplyTechnologieshaseliminatedsubstantialoverheadcostsfromPPGthroughtheprocessofconsolidatingredundantservicecenters.ThehistoricalfinancialdatacontainedthroughoutthisannualreportonForm10-KexcludetheresultsofoperationsofPPGpriortoJuly20,2005.SeeNoteCtotheconsolidatedfinancialstatementsincludedelsewhereherein.ProductsandServices.TotalSupplyManagementTMprovidesourcustomerswithanexpertpartnerinstrategicplanning,globalsourcing,technicalservices,partsandmaterials,logistics,distributionandinventorymanagementofproductioncomponents.Someproductioncomponentsarecharacterizedbylowperunitsupplierpricesrelativetotheindirectcostsofsuppliermanagement,qualityassurance,inventorymanagementanddeliverytotheproductionline.Inaddition,SupplyTechnologiesdeliversanincreasinglybroadrangeofhigher-costproductioncomponentsincludingvalves,electro-mechanicalhardware,fittings,steeringcomponentsandmanyothers.ApplicationsengineeringspecialistsandthedirectsalesforceworkcloselywiththeengineeringstaffofOEMcustomerstorecommendtheappro-priateproductioncomponentsforanewproductortosuggestalternativecomponentsthatreduceoverallproductioncosts,streamlineassemblyorenhancetheappearanceorperformanceoftheendproduct.Asanadditionalservice,SupplyTechnologiesrecentlybeganprovidingsparepartsandaftermarketproductstoendusersofitscustomers’products.TotalSupplyManagementTMservicesaretypicallyprovidedtocustomerspursuanttosole-sourcearrangements.Webelieveourservicesdistinguishusfromtraditionalbuy/selldistributors,aswellasmanufacturerswhosupplyproductsdirectlytocustomers,becauseweoutsourceourcustomers’high-volumeproductioncomponentssupplychainmanagement,providingprocessescustomizedtoeachcustomer’sneedsandreplacingnumerouscurrentsupplierswithasole-sourcerelationship.Ourhighly-developed,customized,informationsystemsprovidetransparencyandflexibilitythroughthecompletesupplychain.Thisenablesourcustomersto:(1)significantlyreducethedirectandindirectcostofproductioncomponentprocessesbyoutsourcinginternalpurchasing,qualityassuranceandinventoryfulfillmentresponsibilities;(2)reducetheamountofworkingcapitalinvestedininventoryandfloorspace;(3)reducecomponentcoststhroughpurchasingefficiencies,includingbulkbuyingandsupplierconsol-idation;and(4)receivetechnicalexpertiseinproductioncomponentselectionanddesignandengineer-ing.Oursole-sourcearrangementsfosterlong-term,entrenchedsupplyrelationshipswithourcustomersand,asaresult,theaveragetenureofserviceforourtop50SupplyTechnologiesclientsexceedstwelveyears.SupplyTechnologies’remainingsalesaregeneratedthroughthewholesalesupplyofindustrial2productstoothermanufacturersanddistributorspursuanttomasterorauthorizeddistributorrelationships.TheSupplyTechnologiessegmentalsoengineersandmanufacturesprecisioncoldformedandcoldextrudedproducts,includinglocknuts,SPAC»nutsandwheelhardware,whichareprincipallyusedinapplicationswherecontrolledtighteningisrequiredduetohighvibration.SupplyTechnologiesproducesbothstandarditemsandspecialtyproductstocustomerspecifications,whichareusedinlargevolumesbycustomersintheautomotive,heavy-dutytruckandrailindustries.MarketsandCustomers.FortheyearendedDecember31,2007,approximately76%ofSupplyTechnologies’netsalesweretodomesticcustomers.Remainingsaleswereprimarilytomanufacturingfacilitiesoflarge,multinationalcustomerslocatedinCanada,Mexico,EuropeandAsia.TotalSupplyManagementtmservicesandproductioncomponentsareusedextensivelyinavarietyofindustries,anddemandisgenerallyrelatedtothestateoftheeconomyandtotheoveralllevelofmanufacturingactivity.SupplyTechnologiesmarketsandsellsitsservicestoover6,000customersdomesticallyandinternationally.TheprincipalmarketsservedbySupplyTechnologiesaretheheavy-dutytruck,automotiveandvehicleparts,electricaldistributionandcontrols,consumerelectronics,powersports/fitnessequip-ment,HVAC,agriculturalandconstructionequipment,semiconductorequipment,plumbing,aerospaceanddefense,andapplianceindustries.Thefivelargestcustomers,withinwhichSupplyTechnologiessellsthroughsole-sourcecontractstomultipleoperatingdivisionsorlocations,accountedforapproximately33%and43%ofthesalesofSupplyTechnologiesfor2007and2006,respectively,withInternationalTruckrepresenting13%and22%,respectively,ofsegmentsales.Twoofthefivelargestcustomersareintheheavy-dutytruckindustry.ThelossoftheInternationalTruckaccountoranytwooftheremainingtopfivecustomerscouldhaveamaterialadverseeffectontheresultsofoperationsandfinancialconditionofthissegment.Competition.AlimitednumberofcompaniescompetewithSupplyTechnologiestoprovidesupplymanagementservicesforproductionpartsandmaterials.SupplyTechnologiescompetesinNorthAmerica,Mexico,EuropeandAsia,primarilyonthebasisofitsTotalSupplyManagementTMservices,includingengineeringanddesignsupport,partusageandcostanalysis,supplierselection,qualityassurance,barcoding,productpackagingandtracking,just-in-timeandpoint-of-usedelivery,electronicbillingservicesandongoingtechnicalsupport,anditsgeographicreach,extensiveproductselection,priceandreputationforhighservicelevels.NumerousNorthAmericanandforeigncompaniescompetewithSupplyTechnologiesinmanufacturingcold-formedandcold-extrudedproducts.AluminumProductsWebelievethatweareoneofthefewaluminumcomponentsuppliersthathasthecapabilitytoprovideawiderangeofhigh-volume,high-qualityproductsutilizingabroadrangeofprocesses,includinggravityandlowpressurepermanentmold,die-castandlost-foam,aswellasemergingalternativecastingtechnologies.Ourabilitytoofferourcustomersthiscomprehensiverangeofcapabilitiesatalowcostprovidesuswithacompetitiveadvantage.WeproduceouraluminumcomponentsatfivemanufacturingfacilitiesinOhioandIndiana.ProductsandServices.OurAluminumProductsbusinesscastsandmachinesaluminumengine,transmission,brake,suspensionandothercomponentsforautomotive,agriculturalequipment,construc-tionequipment,heavy-dutytruckandmarineequipmentOEMs,primarilyonasole-sourcebasis.Alumi-numProducts’principalproductsincludepumphousings,clutchretainersandpistons,controlarms,knuckles,mastercylinders,pinionhousings,brakecalipers,oilpansandflywheelspacers.Inaddition,wealsoprovidevalue-addedservicessuchasdesignengineering,machiningandpartassembly.Althoughthesepartsarelightweight,theypossesshighdurabilityandintegritycharacteristicsevenunderextremepressureandtemperatureconditions.DemandbyautomotiveOEMsforaluminumcastingshasincreasedinrecentyearsastheyhavesoughtlighteralternativestosteelandiron,primarilytoincreasefuelefficiencywithoutcompromising3structuralintegrity.Webelievethatthisreplacementtrendwillcontinueasend-usersandtheregulatoryenvironmentrequiregreaterfuelefficiency.Tocapitalizeonthistrend,inAugust2004,weacquiredsubstantiallyalloftheassetsoftheAmcastComponentsGroup,aproducerofaluminumautomotivecomponents.ThisacquisitionsignificantlyincreasedthesalesandproductioncapacityofourAluminumProductsbusinessandaddedattractivenewcustomers,productlinesandproductiontechnologies.MarketsandCustomers.Thefivelargestcustomers,withinwhichAluminumProductssellstomultipleoperatingdivisionsthroughsole-sourcecontracts,accountedforapproximately55%ofAlumi-numProductssalesfor2007and46%for2006.Thelossofanyoneofthesecustomerscouldhaveamaterialadverseeffectontheresultsofoperationsandfinancialconditionofthissegment.Competition.ThealuminumcastingsindustryservingNorthAmericaishighlycompetitive.Alu-minumProductscompetesprincipallyonthebasisofitsabilityto:(1)engineerandmanufacturehigh-quality,cost-effective,machinedcastingsutilizingmultiplecastingtechnologiesinlargevolumes;(2)pro-videtimelydelivery;and(3)retainthemanufacturingflexibilitynecessarytoquicklyadjusttotheneedsofitscustomers.Althoughthereareanumberofsmallerdomesticcompanieswithaluminumcastingcapabilities,thecustomers’stringentqualityandservicestandardsandleanmanufacturingtechniquesenableonlylargesupplierswiththerequisitequalitycertificationstocompeteeffectively.Asoneofthesesuppliers,AluminumProductsiswell-positionedtobenefitascustomerscontinuetoconsolidatetheirsupplierbase.ManufacturedProductsOurManufacturedProductssegmentoperatesadiversegroupofnichemanufacturingbusinessesthatdesignandmanufactureabroadrangeofhighly-engineeredproducts,includinginductionheatingandmeltingsystems,pipethreadingsystems,rubberproductsandforgedandmachinedproducts.WemanufacturetheseproductsinelevendomesticfacilitiesandnineinternationalfacilitiesinCanada,Mexico,theUnitedKingdom,Belgium,Germany,Poland,ChinaandJapan.InJanuary2006,theCompanycompletedtheacquisitionofallofthecapitalstockofFoundryServiceGmbH(“FoundryService”).InDecember2005,weacquiredsubstantiallyalloftheassetsofLectrotherm,Inc.(“Lectrotherm”),whichisprimarilyaprovideroffieldserviceandsparepartsforinductionheatingandmeltingsystems,locatedinCanton,Ohio.ProductsandServices.Ourinductionheatingandmeltingbusinessutilizesproprietarytechnologyandspecializesintheengineering,construction,serviceandrepairofinductionheatingandmeltingsystems,primarilyforthesteel,coatings,forging,foundry,automotiveandconstructionequipmentindustries.Ourinductionheatingandmeltingsystemsareengineeredandbuilttocustomerspecificationsandareusedprimarilyformelting,heating,andsurfacehardeningofmetalsandcuringofcoatings.Approximately35%to40%ofourinductionheatingandmeltingsystems’revenuesarederivedfromthesaleofreplacementpartsandprovisionoffieldservice,primarilyfortheinstalledbaseofourownproducts.Ourpipethreadingbusinessservestheoilandgasindustry,whileourindustrialovensprovideheatingandcuringforbottlingandotherapplications.Wealsoengineerandinstallmechanicalforgingpresses,andsellsparepartsandprovidefieldserviceforthelargeexistingbaseofmechanicalforgingpressesandhammersinNorthAmerica.Wemachine,inductionhardenandsurfacefinishcrankshaftsandcamshafts,usedprimarilyinlocomotives.Weforgeaerospaceanddefensestructuralcomponentssuchaslandinggearsandstruts,aswellasrailproductssuchasrailcarcenterplatesanddraftlugs.Weinjectionmoldrubberandsiliconeproducts,includingwireharnesses,shockandvibrationmounts,sparkplugbootsandnipplesandgeneralsealinggaskets.MarketsandCustomers.WesellinductionheatingandothercapitalequipmenttocomponentmanufacturersandOEMsinthesteel,coatings,forging,foundry,automotive,truck,constructionequip-mentandoilandgasindustries.Wesellforgedandmachinedproductstolocomotivemanufacturers,machiningcompaniesandsub-assemblerswhofinishaerospaceanddefenseproductsforOEMs,andrailcarbuildersandmaintenanceproviders.Wesellrubberproductsprimarilytosub-assemblersintheautomotive,foodprocessingandconsumerapplianceindustries.4Competition.Wecompetewithsmalltomedium-sizeddomesticandinternationalequipmentmanufacturersonthebasisofservicecapability,abilitytomeetcustomerspecifications,deliveryper-formanceandengineeringexpertise.Wecompetedomesticallyandinternationallywithsmalltomedium-sizedforgingandmachiningbusinessesonthebasisofproductqualityandprecision.Wecompetewithotherdomesticsmall-tomedium-sizedmanufacturersofinjectionmoldedrubberandsiliconeproductsprimarilyonthebasisofpriceandproductquality.SalesandMarketingSupplyTechnologiesmarketsitsproductsandservicesintheUnitedStates,Mexico,Canada,WesternandEasternEuropeandEastandSouthAsiaprimarilythroughitsdirectsalesforce,whichisassistedbyapplicationsengineerswhoprovidethetechnicalexpertisenecessarytoassisttheengineeringstaffofOEMcustomersindesigningnewproductsandimprovingexistingproducts.AluminumProductspri-marilymarketsandsellsitsproductsinNorthAmericathroughinternalsalespersonnel.ManufacturedProductsprimarilymarketsandsellsitsproductsinNorthAmericathroughbothinternalsalespersonnelandindependentsalesrepresentatives.InductionheatingandpipethreadingequipmentisalsomarketedandsoldinEurope,Asia,LatinAmericaandAfricathroughbothinternalsalespersonnelandindependentsalesrepresentatives.Insomeinstances,theinternalengineeringstaffassistsinthesalesandmarketingeffortthroughjointdesignandapplications-engineeringeffortswithmajorcustomers.RawMaterialsandSuppliersSupplyTechnologiespurchasessubstantiallyallofitsproductioncomponentsfromthird-partysuppliers.AluminumProductsandManufacturedProductspurchasesubstantiallyalloftheirrawmate-rials,principallymetalsandcertaincomponentpartsincorporatedintotheirproducts,fromthird-partysuppliersandmanufacturers.Managementbelievesthatrawmaterialsandcomponentpartsotherthancertainspecialtyproductsareavailablefromalternativesources.SupplyTechnologieshasmultiplesourcesofsupplyforitsproducts.AnincreasingportionofSupplyTechnologies’deliveredcomponentsarepurchasedfromsuppliersinforeigncountries,primarilyCanada,Taiwan,China,SouthKorea,Singapore,IndiaandmultipleEuropeancountries.Wearedependentupontheabilityofsuchsupplierstomeetstringentqualityandperformancestandardsandtoconformtodeliveryschedules.MostrawmaterialsrequiredbyAluminumProductsandManufacturedProductsarecommodityproductsavailablefromseveraldomesticsuppliers.CustomerDependenceWehavethousandsofcustomerswhodemandquality,deliveryandservice.Numerouscustomershaverecognizedourperformancebyawardinguswithsupplierqualityawards.Theonlycustomerwhichaccountedformorethan10%ofourconsolidatedsalesinanyofthepastthreeyearswasInternationalTruckin2006and2005.InSeptember2005,weenteredintoanexclusive,multi-yearagreementwithInternationalTrucktosupplyawiderangeofproductioncomponents,expiringonDecember31,2008.BacklogManagementbelievesthatbacklogisnotameaningfulmeasureforSupplyTechnologies,asamajorityofSupplyTechnologies’customersrequirejust-in-timedeliveryofproductioncomponents.ManagementbelievesthatAluminumProducts’andManufacturedProducts’backlogasofanyparticulardateisnotameaningfulmeasureofsalesforanyfutureperiodasasignificantportionofsalesareonareleaseorfirmorderbasis.Environmental,HealthandSafetyRegulationsWearesubjecttonumerousfederal,stateandlocallawsandregulationsdesignedtoprotectpublichealthandtheenvironment,particularlywithregardtodischargesandemissions,aswellashandling,storage,treatmentanddisposal,ofvarioussubstancesandwastes.Ourfailuretocomplywithapplicable5environmentallawsandregulationsandpermitrequirementscouldresultincivilandcriminalfinesorpenaltiesorenforcementactions,includingregulatoryorjudicialordersenjoiningorcurtailingoperationsorrequiringcorrectivemeasures.Pursuanttocertainenvironmentallaws,ownersoroperatorsoffacilitiesmaybeliableforthecostsofresponseorothercorrectiveactionsforcontaminationidentifiedatoremanatingfromcurrentorformerlocations,withoutregardtowhethertheowneroroperatorknewof,orwasresponsiblefor,thepresenceofanysuchcontamination,andforrelateddamagestonaturalresources.Additionally,personswhoarrangeforthedisposalortreatmentofhazardoussubstancesormaterialsmaybeliableforcostsofresponseatsiteswheretheyarelocated,whetherornotthesiteisownedoroperatedbysuchperson.Fromtimetotime,wehaveincurredandarepresentlyincurringcostsandobligationsforcorrectingenvironmentalnoncomplianceandremediatingenvironmentalconditionsatcertainofourproperties.Ingeneral,wehavenotexperienceddifficultyincomplyingwithenvironmentallawsinthepast,andcompliancewithenvironmentallawshasnothadamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Ourcapitalexpendituresonenvironmentalcontrolfacilitieswerenotmaterialduringthepastfiveyearsandsuchexpendituresarenotexpectedtobematerialtousintheforeseeablefuture.Wearecurrently,andmayinthefuture,berequiredtoincurcostsrelatingtotheinvestigationorremediationofproperty,includingpropertywherewehavedisposedofourwaste,andforaddressingenvironmentalconditions.Forinstance,wehavebeenidentifiedasapotentiallyresponsiblepartyatthird-partysitesundertheComprehensiveEnvironmentalResponse,CompensationandLiabilityActof1980,asamended,orcomparablestatelaws,whichprovideforstrictand,undercertaincircumstances,jointandseveralliability.Weareparticipatinginthecostofcertainclean-upeffortsatseveralofthesesites.Theavailabilityofthird-partypaymentsorinsuranceforenvironmentalremediationactivitiesissubjecttorisksassociatedwiththewillingnessandabilityofthethirdpartytomakepayments.However,ourshareofsuchcostshasnotbeenmaterialand,basedonavailableinformation,wedonotexpectourexposureatanyoftheselocationstohaveamaterialadverseeffectonourresultsofoperations,liquidityorfinancialcondition.InformationastoIndustrySegmentReportingandGeographicAreasTheinformationcontainedundertheheading“NoteB—IndustrySegments”ofthenotestotheconsolidatedfinancialstatementsincludedhereinrelatingto(1)netsales,incomebeforeincometaxes,identifiableassetsandotherinformationbyindustrysegmentand(2)netsalesandassetsbygeographicregionfortheyearsendedDecember31,2007,2006and2005isincorporatedhereinbyreference.RecentDevelopmentsTheinformationcontainedundertheheadingof“NoteC—Acquisitions”ofthenotestothecon-solidatedfinancialstatementsincludedhereinisincorporatedhereinbyreference.AvailableInformationWefileannualreportsonForm10-K,quarterlyreportsonForm10-Q,currentreportsonForm8-Kandotherinformation,includingamendmentstothesereports,withtheSecuritiesandExchangeCommission(“SEC”).ThepubliccanobtaincopiesofthesematerialsbyvisitingtheSEC’sPublicReferenceRoomat100FStreet,NE,Washington,D.C.20549,bycallingtheSECat1-800-SEC-0330,orbyaccessingtheSEC’swebsiteathttp://www.sec.gov.Inaddition,assoonasreasonablypracticableaftersuchmaterialsarefiledwithorfurnishedtotheSEC,wemakesuchmaterialsavailableonourwebsiteathttp://www.pkoh.com.TheinformationonourwebsiteisnotapartofthisannualreportonForm10-K.6Item1A.RiskFactorsThefollowingarecertainriskfactorsthatcouldaffectourbusiness,resultsofoperationsandfinancialcondition.Theserisksarenottheonlyonesweface.Ifanyofthefollowingrisksoccur,ourbusiness,resultsofoperationsorfinancialconditioncouldbeadverselyaffected.Theindustriesinwhichweoperatearecyclicalandareaffectedbytheeconomyingeneral.Wesellproductstocustomersinindustriesthatexperiencecyclicality(expectancyofrecurringperiodsofeconomicgrowthandslowdown)indemandforproducts,andmayexperiencesubstantialincreasesanddecreasesinbusinessvolumethroughouteconomiccycles.Industriesweserve,includingtheautomotiveandvehicleparts,heavy-dutytruck,industrialequipment,steel,rail,electricaldistributionandcontrols,aerospaceanddefense,powersports/fitnessequipment,HVAC,electricalcomponents,applianceandsemiconductorequipmentindustries,areaffectedbyconsumerspending,generaleconomicconditionsandtheimpactofinternationaltrade.Adownturninanyoftheindustriesweserve,particularlythedomesticautomotiveorheavy-dutytruckindustry,couldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Becauseasignificantportionofoursalesistotheautomotiveandheavy-dutytruckindustries,adecreaseinthedemandoftheseindustriesorthelossofanyofourmajorcustomersintheseindustriescouldadverselyaffectourfinancialhealth.Demandforcertainofourproductsisaffectedby,amongotherthings,therelativestrengthorweaknessoftheautomotiveandheavy-dutytruckindustries.Thedomesticautomotiveandheavy-dutytruckindustriesarehighlycyclicalandmaybeadverselyaffectedbyinternationalcompetition.Inaddition,theautomotiveandheavy-dutytruckindustriesaresignificantlyunionizedandsubjecttoworkslowdownsandstoppagesresultingfromlabordisputes.Wederived24%and11%ofournetsalesduringtheyearendedDecember31,2007fromtheautomobileandheavy-dutytruckindustries,respectively.InternationalTruck,ourlargestcustomer,accountedforapproximately7%ofournetsalesfortheyearendedDecember31,2007.ThelossofaportionofbusinesstoInternationalTruckoranyofourothermajorautomotiveorheavy-dutytruckcustomerscouldhaveamaterialadverseeffectonourfinancialcondition,cashflowandresultsofoperations.Wecannotassureyouthatwewillmaintainorimproveourrelationshipsintheseindustriesorthatwewillcontinuetosupplythiscustomeratcurrentlevels.OurSupplyTechnologiescustomersaregenerallynotcontractuallyobligatedtopurchaseproductsandservicesfromus.MostoftheproductsandservicesareprovidedtoourSupplyTechnologiescustomersunderpurchaseordersasopposedtolong-termcontracts.Whenwedoenterintolong-termcontractswithourcustomers,manyofthemonlyestablishpricingtermsanddonotobligateourcustomerstobuyrequiredminimumamountsfromusortobuyfromusexclusively.Accordingly,manyofourSupplyTechnologiescustomersmaydecreasetheamountofproductsandservicesthattheypurchasefromusorevenstoppurchasingfromusaltogether,eitherofwhichcouldhaveamaterialadverseeffectonournetsalesandprofitability.Wearedependentonkeycustomers.Werelyonseveralkeycustomers.FortheyearendedDecember31,2007,ourtopsevencustomersaccountedforapproximately21%ofournetsalesandourtopcustomer,InternationalTruck,accountedforapproximately7%ofournetsales.Manyofourcustomersplaceordersforproductsonanas-neededbasisandoperateincyclicalindustriesand,asaresult,theirorderlevelshavevariedfromperiodtoperiodinthepastandmayvarysignificantlyinthefuture.Duetocompetitiveissues,wehavelostkeycustomersinthepastandmayagaininthefuture.Customerordersaredependentupontheirmarketsandmaybesubjectto7delaysorcancellations.Asaresultofdependenceonourkeycustomers,wecouldexperienceamaterialadverseeffectonourbusinessandresultsofoperationsifanyofthefollowingweretooccur:(cid:129)thelossofanykeycustomer,inwholeorinpart;(cid:129)theinsolvencyorbankruptcyofanykeycustomer;(cid:129)adecliningmarketinwhichcustomersreduceordersordemandreducedprices;or(cid:129)astrikeorworkstoppageatakeycustomerfacility,whichcouldaffectboththeirsuppliersandcustomers.Ifanyofourkeycustomersbecomeinsolventorfileforbankruptcy,ourabilitytorecoveraccountsreceivablefromthatcustomerwouldbeadverselyaffectedandanypaymentswereceivedinthepreferenceperiodpriortoabankruptcyfilingmaybepotentiallyrecoverable,whichcouldadverselyimpactourresultsofoperations.ThreeofoursubstantialcustomersfiledvoluntarypetitionsforreorganizationunderChapter11ofthebankruptcycodeduring2005and2006.DelphiCorp.andDanaCorporation,whichareprimarilycustomersofourManufacturedProductsandAluminumProductssegments,filedin2005,whileWernerLadder,whichisprimarilyacustomeroftheSupplyTechnologiessegment,filedin2006.Collectively,thesebankruptciesreducedouroperatingincomeintheaggregateby$1.8millionduring2005and2006.Weoperateinhighlycompetitiveindustries.Themarketsinwhichallthreeofoursegmentsselltheirproductsarehighlycompetitive.Someofourcompetitorsarelargecompaniesthathavegreaterfinancialresourcesthanwehave.WebelievethattheprincipalcompetitivefactorsforourSupplyTechnologiessegmentareanapproachreflectinglong-termbusinesspartnershipandreliability,sourcedproductqualityandconformitytocustomerspecifications,timelinessofdelivery,priceanddesignandengineeringcapabilities.WebelievethattheprincipalcompetitivefactorsforourAluminumProductsandManufacturedProductssegmentsareproductqualityandconformitytocustomerspecifications,designandengineeringcapabilities,productdevelopment,timelinessofdeliveryandprice.Therapidlyevolvingnatureofthemarketsinwhichwecompetemayattractnewentrantsastheyperceiveopportunities,andourcompetitorsmayforeseethecourseofmarketdevelopmentmoreaccuratelythanwedo.Inaddition,ourcompetitorsmaydevelopproductsthataresuperiortoourproductsormayadaptmorequicklythanwedotonewtechnologiesorevolvingcustomerrequirements.Weexpectcompetitivepressuresinourmarketstoremainstrong.Thesepressuresarisefromexistingcompetitors,othercompaniesthatmayenterourexistingorfuturemarketsand,insomecases,ourcustomers,whichmaydecidetointernallyproduceitemswesell.Wecannotassureyouthatwewillbeabletocompetesuccessfullywithourcompetitors.Failuretocompetesuccessfullycouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Thelossofkeyexecutivescouldadverselyimpactus.Oursuccessdependsupontheefforts,abilitiesandexpertiseofourexecutiveofficersandotherseniormanagers,includingEdwardCrawford,ourChairmanandChiefExecutiveOfficer,andMatthewCrawford,ourPresidentandChiefOperatingOfficer,aswellasthepresidentofeachofouroperatingunits.AneventofdefaultoccursunderourrevolvingcreditfacilityifMessrs.E.CrawfordandM.Crawfordorcertainoftheirrelatedpartiesownlessthan15%ofouroutstandingcommonstock,oriftheyownlessthan15%ofsuchstock,thenifeitherMr.E.CrawfordorMr.M.Crawfordceasestoholdtheofficeofchairman,chiefexecutiveofficerorpresident.ThelossoftheservicesofMessrs.E.CrawfordandM.Crawford,seniorandexecutiveofficers,and/orotherkeyindividualscouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.8Wemayencounterdifficultyinexpandingourbusinessthroughtargetedacquisitions.Wehavepursued,andmaycontinuetopursue,targetedacquisitionopportunitiesthatwebelievewouldcomplementourbusiness,suchastheacquisitionsofNABSin2006andPPGin2005.Wecannotassureyouthatwewillbesuccessfulinconsummatinganyacquisitions.Anytargetedacquisitionswillbeaccompaniedbytheriskscommonlyencounteredinacquisitionsofbusinesses.Wemaynotsuccessfullyovercometheserisksoranyotherproblemsencounteredinconnectionwithanyofouracquisitions,includingthepossibleinabilitytointegrateanacquiredbusiness’operations,ITtechnologies,servicesandproductsintoourbusiness,diversionofmanagement’sattention,theassumptionofunknownliabilities,increasesinourindebtedness,thefailuretoachievethestrategicobjectivesofthoseacquisitionsandotherunanticipatedproblems,someorallofwhichcouldmateriallyandadverselyaffectus.Theprocessofintegratingoperationscouldcauseaninterruptionof,orlossofmomentumin,ouractivities.Anydelaysordifficultiesencounteredinconnectionwithanyacquisitionandtheintegrationofouroperationscouldhaveamaterialadverseeffectonourbusiness,resultsofoperations,financialconditionorprospectsofourbusiness.OurSupplyTechnologiesbusinessdependsuponthirdpartiesforsubstantiallyallofourcomponentparts.SupplyTechnologiespurchasessubstantiallyallofitscomponentpartsfromthird-partysuppliersandmanufacturers.Ourbusinessissubjecttotheriskofpricefluctuationsandperiodicdelaysinthedeliveryofcomponentparts.Failurebysupplierstocontinuetosupplyuswiththesecomponentpartsoncommerciallyreasonableterms,oratall,wouldhaveamaterialadverseeffectonus.Wedependupontheabilityofthesesuppliers,amongotherthings,tomeetstringentperformanceandqualityspecificationsandtoconformtodeliveryschedules.Failurebythird-partysupplierstocomplywiththeseandotherrequirementscouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Therawmaterialsusedinourproductionprocessesandbyoursuppliersofcomponentpartsaresubjecttopriceandsupplyfluctuationsthatcouldincreaseourcostsofproduc-tionandadverselyaffectourresultsofoperations.OursupplyofrawmaterialsforourAluminumProductsandManufacturedProductsbusinessescouldbeinterruptedforavarietyofreasons,includingavailabilityandpricing.Pricesforrawmaterialsnecessaryforproductionhavefluctuatedsignificantlyinthepastandsignificantincreasescouldadverselyaffectourresultsofoperationsandprofitmargins.Whilewegenerallyattempttopassalongincreasedrawmaterialspricestoourcustomersintheformofpriceincreases,theremaybeatimedelaybetweentheincreasedrawmaterialspricesandourabilitytoincreasethepriceofourproducts,orwemaybeunabletoincreasethepricesofourproductsduetopricingpressureorotherfactors.Oursuppliersofcomponentparts,particularlyinourSupplyTechnologiesbusiness,maysignificantlyandquicklyincreasetheirpricesinresponsetoincreasesincostsoftherawmaterials,suchassteel,thattheyusetomanufactureourcomponentparts.Wemaynotbeabletoincreaseourpricescommensuratewithourincreasedcosts.Consequently,ourresultsofoperationsandfinancialconditionmaybemate-riallyadverselyaffected.Theenergycostsinvolvedinourproductionprocessesandtransportationaresubjecttofluctuationsthatarebeyondourcontrolandcouldsignificantlyincreaseourcostsofproduction.Ourmanufacturingprocessandthetransportationofrawmaterials,componentsandfinishedgoodsareenergyintensive.Ourmanufacturingprocessesaredependentonadequatesuppliesofelectricityandnaturalgas.Asubstantialincreaseinthecostoftransportationfuel,naturalgasorelectricitycouldhaveamaterialadverseeffectonourmargins.Weexperiencedwidelyfluctuatingnaturalgascostsin2006andin2007.Wemayexperiencehigherthananticipatedgascostsinthefuture,whichcouldadverselyaffectour9resultsofoperations.Inaddition,adisruptionorcurtailmentinsupplycouldhaveamaterialadverseeffectonourproductionandsaleslevels.Potentialproductliabilityrisksexistfromtheproductswhichwesell.Ourbusinessesexposeustopotentialproductliabilityrisksthatareinherentinthedesign,man-ufactureandsaleofourproductsandproductsofthird-partyvendorsthatweuseorresell.Whilewecurrentlymaintainwhatwebelievetobesuitableandadequateproductliabilityinsurance,wecannotassureyouthatwewillbeabletomaintainourinsuranceonacceptabletermsorthatourinsurancewillprovideadequateprotectionagainstpotentialliabilities.Intheeventofaclaimagainstus,alackofsufficientinsurancecoveragecouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Moreover,evenifwemaintainadequateinsurance,anysuccessfulclaimcouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.Someofouremployeesbelongtolaborunions,andstrikesorworkstoppagescouldadverselyaffectouroperations.AsofDecember31,2007,wewereapartytosevencollectivebargainingagreementswithvariouslaborunionsthatcoveredapproximately550full-timeemployees.Ourinabilitytonegotiateacceptablecontractswiththeseunionscouldresultin,amongotherthings,strikes,workstoppagesorotherslowdownsbytheaffectedworkersandincreasedoperatingcostsasaresultofhigherwagesorbenefitspaidtounionmembers.Iftheunionizedworkersweretoengageinastrike,workstoppageorotherslowdown,orotheremployeesweretobecomeunionized,wecouldexperienceasignificantdisruptionofouroperationsandhigherongoinglaborcosts,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Weoperateandsourceinternationally,whichexposesustotherisksofdoingbusinessabroad.Ouroperationsaresubjecttotherisksofdoingbusinessabroad,includingthefollowing:(cid:129)fluctuationsincurrencyexchangerates;(cid:129)limitationsonownershipandonrepatriationofearnings;(cid:129)transportationdelaysandinterruptions;(cid:129)political,socialandeconomicinstabilityanddisruptions;(cid:129)governmentembargoesorforeigntraderestrictions;(cid:129)theimpositionofdutiesandtariffsandothertradebarriers;(cid:129)importandexportcontrols;(cid:129)laborunrestandcurrentandchangingregulatoryenvironments;(cid:129)thepotentialfornationalizationofenterprises;(cid:129)difficultiesinstaffingandmanagingmultinationaloperations;(cid:129)limitationsonourabilitytoenforcelegalrightsandremedies;and(cid:129)potentiallyadversetaxconsequences.Anyoftheseeventscouldhaveanadverseeffectonouroperationsinthefuturebyreducingthedemandforourproductsandservices,decreasingthepricesatwhichwecansellourproductsorotherwisehavinganadverseeffectonourbusiness,financialconditionorresultsofoperations.Wecannotassureyouthatwewillcontinuetooperateincompliancewithapplicablecustoms,currencyexchangecontrolregulations,transferpricingregulationsoranyotherlawsorregulationstowhichwemaybesubject.Wealsocannotassureyouthattheselawswillnotbemodified.10Unexpecteddelaysintheshipmentoflarge,long-leadindustrialequipmentcouldadverselyaffectourresultsofoperationsintheperiodinwhichshipmentwasanticipated.Long-leadindustrialequipmentcontractsareasignificantandgrowingpartofourbusiness.Weprimarilyusethepercentageofcompletionmethodtoaccountforthesecontracts.Nevertheless,underthismethod,alargeproportionofrevenuesandearningsonsuchcontractsarerecognizedclosetoshipmentoftheequipment.Unanticipatedshipmentdelaysonlargecontractscouldpostponerecognitionofrevenueandearningsintofutureperiods.Accordingly,ifshipmentwasanticipatedinthefourthquarterofayear,unanticipatedshipmentdelayscouldadverselyaffectresultsofoperationsinthatyear.Wearesubjecttosignificantenvironmental,healthandsafetylawsandregulationsandrelatedcomplianceexpendituresandliabilities.Ourbusinessesaresubjecttomanyforeign,federal,stateandlocalenvironmental,healthandsafetylawsandregulations,particularlywithrespecttotheuse,handling,treatment,storage,dischargeanddisposalofsubstancesandhazardouswastesusedorgeneratedinourmanufacturingprocesses.Com-pliancewiththeselawsandregulationsisasignificantfactorinourbusiness.Wehaveincurredandexpecttocontinuetoincursignificantexpenditurestocomplywithapplicableenvironmentallawsandregula-tions.Ourfailuretocomplywithapplicableenvironmentallawsandregulationsandpermitrequirementscouldresultincivilorcriminalfinesorpenaltiesorenforcementactions,includingregulatoryorjudicialordersenjoiningorcurtailingoperationsorrequiringcorrectivemeasures,installationofpollutioncontrolequipmentorremedialactions.Wearecurrently,andmayinthefuturebe,requiredtoincurcostsrelatingtotheinvestigationorremediationofproperty,includingpropertywherewehavedisposedofourwaste,andforaddressingenvironmentalconditions.Someenvironmentallawsandregulationsimposeliabilityandresponsibilityonpresentandformerowners,operatorsorusersoffacilitiesandsitesforcontaminationatsuchfacilitiesandsiteswithoutregardtocausationorknowledgeofcontamination.Inaddition,weoccasionallyevaluatevariousalternativeswithrespecttoourfacilities,includingpossibledispositionsorclosures.Investigationsundertakeninconnectionwiththeseactivitiesmayleadtodiscoveriesofcontaminationthatmustberemediated,andclosuresoffacilitiesmaytriggercompliancerequirementsthatarenotapplicabletooperatingfacilities.Consequently,wecannotassureyouthatexistingorfuturecircum-stances,thedevelopmentofnewfactsorthefailureofthirdpartiestoaddresscontaminationatcurrentorformerfacilitiesorpropertieswillnotrequiresignificantexpendituresbyus.Weexpecttocontinuetobesubjecttoincreasinglystringentenvironmentalandhealthandsafetylawsandregulations.Itisdifficulttopredictthefutureinterpretationanddevelopmentofenvironmentalandhealthandsafetylawsandregulationsortheirimpactonourfutureearningsandoperations.Weanticipatethatcompliancewillcontinuetorequireincreasedcapitalexpendituresandoperatingcosts.Anyincreaseinthesecosts,orunanticipatedliabilitiesarisingforexampleoutofdiscoveryofpreviouslyunknownconditionsormoreaggressiveenforcementactions,couldadverselyaffectourresultsofoperations,andthereisnoassurancethattheywillnotexceedourreservesorhaveamaterialadverseeffectonourfinancialcondition.Ifourinformationsystemsfail,ourbusinesswillbemateriallyaffected.WebelievethatourinformationsystemsareanintegralpartoftheSupplyTechnologiessegmentand,toalesserextent,theAluminumProductsandManufacturedProductssegments.Wedependonourinformationsystemstoprocessorders,manageinventoryandaccountsreceivablecollections,purchaseproducts,maintaincost-effectiveoperations,routeandre-routeordersandprovidesuperiorservicetoourcustomers.WecannotassureyouthatadisruptionintheoperationofourinformationsystemsusedbySupplyTechnologies,includingthefailureofthesupplychainmanagementsoftwaretofunctionproperly,orthoseusedbyAluminumProductsandManufacturedProductswillnotoccur.Anysuchdisruptioncouldhaveamaterialadverseeffectonourfinancialcondition,liquidityandresultsofoperations.11Operatingproblemsinourbusinessmaymateriallyadverselyaffectourfinancialcondi-tionandresultsofoperations.Theoccurrenceofmaterialoperatingproblemsatourfacilitiesmayhaveamaterialadverseeffectonouroperationsasawhole,bothduringandaftertheperiodofoperationaldifficulties.Wearesubjecttotheusualhazardsassociatedwithmanufacturingandtherelatedstorageandtransportationofrawmaterials,productsandwaste,includingexplosions,fires,leaks,discharges,inclementweather,naturaldisasters,mechanicalfailure,unscheduleddowntimeandtransportationinterruptionorcalamities.OurChairmanoftheBoardandChiefExecutiveOfficerandourPresidentandChiefOperatingOfficercollectivelybeneficiallyownasignificantportionofourcompany’sout-standingcommonstockandtheirinterestsmayconflictwithyours.AsofFebruary29,2008,EdwardCrawford,ourChairmanoftheBoardandChiefExecutiveOfficer,andMatthewCrawford,ourPresidentandChiefOperatingOfficer,collectivelybeneficiallyownedapproximately26%ofourcommonstock.Mr.E.CrawfordisMr.M.Crawford’sfather.Theirinterestscouldconflictwithyourinterests.Forexample,ifweencounterfinancialdifficultiesorareunabletopayourdebtsastheymature,theinterestsofMessrs.E.CrawfordandM.Crawfordmayconflictwithyourinterestsasashareholder.Item1B.UnresolvedStaffCommentsNone.Item2.PropertiesAsofDecember31,2007,ouroperationsincludednumerousmanufacturingandsupplychainlogisticsservicesfacilitieslocatedin23statesintheUnitedStatesandinPuertoRico,aswellasinAsia,Canada,EuropeandMexico.Approximately89%oftheavailablesquarefootagewaslocatedintheUnitedStates.Approximately45%oftheavailablesquarefootagewasowned.In2007,approximately33%oftheavailabledomesticsquarefootagewasusedbytheSupplyTechnologiessegment,45%wasusedbytheManufac-turedProductssegmentand23%bytheAluminumProductssegment.Approximately46%oftheavailableforeignsquarefootagewasusedbytheSupplyTechnologiessegmentand54%wasusedbytheManu-facturedProductssegment.Intheopinionofmanagement,ourfacilitiesaregenerallywellmaintainedandaresuitableandadequatefortheirintendeduses.12ThefollowingtableprovidesinformationrelativetoourprincipalfacilitiesasofDecember31,2007.RelatedIndustrySegmentLocationOwnedorLeasedApproximateSquareFootageUseSUPPLYTECHNOLOGIES(1)Cleveland,OHLeased60,450(2)SupplyTechnologiesCorporateOfficeDayton,OHLeased112,960LogisticsLawrence,PALeased116,000LogisticsandManufacturingSt.Paul,MNLeased104,425LogisticsAllentown,PALeased60,075LogisticsAtlanta,GALeased56,000LogisticsDallas,TXLeased49,985LogisticsMemphis,TNLeased48,750LogisticsLouisville,KYLeased30,000LogisticsNashville,TNLeased44,900LogisticsTulsa,OKLeased40,000LogisticsAustin,TXLeased30,000LogisticsKent,OHLeased225,000ManufacturingMississauga,Leased117,000ManufacturingOntario,CanadaSolon,OHLeased62,700LogisticsDublin,VALeased40,000LogisticsDelaware,OHOwned45,000ManufacturingALUMINUMConneaut,OH(3)Leased/Owned304,000ManufacturingPRODUCTSHuntington,INLeased132,000ManufacturingFremont,INOwned108,000ManufacturingWapakoneta,OHOwned188,000ManufacturingRichmond,INLeased/Owned97,300ManufacturingMANUFACTUREDCuyahogaHts.,OHOwned427,000ManufacturingPRODUCTS(4)Cicero,ILOwned450,000ManufacturingLeRoeulx,BelgiumOwned120,000ManufacturingEuclid,OHLeased60,000ManufacturingWickliffe,OHOwned110,000ManufacturingBoaz,ALOwned100,000ManufacturingWarren,OHOwned195,000ManufacturingCanton,OHLeased125,000ManufacturingMadisonHeights,MILeased128,000ManufacturingNewport,ARLeased200,000ManufacturingCleveland,OHLeased150,000ManufacturingShanghai,ChinaLeased20,500Manufacturing(1)SupplyTechnologieshas43otherfacilities,noneofwhichisdeemedtobeaprincipalfacility.(2)Includes20,150squarefeetusedbyPark-Ohio’scorporateoffice.(3)Includesthreeleasedpropertieswithsquarefootageof91,800,64,000and45,700,respectively,andtwoownedpropertieswith82,300and20,200squarefeet,respectively.(4)ManufacturedProductshas16otherownedandleasedfacilities,noneofwhichisdeemedtobeaprincipalfacility.Item3.LegalProceedingsWearesubjecttovariouspendingandthreatenedlawsuitsinwhichclaimsformonetarydamagesareassertedintheordinarycourseofbusiness.Whileanylitigationinvolvesanelementofuncertainty,intheopinionofmanagement,liabilities,ifany,arisingfromcurrentlypendingorthreatenedlitigationarenotexpectedtohaveamaterialadverseeffectonourfinancialcondition,liquidityorresultsofoperations.AtDecember31,2007,wewereaco-defendantinapproximately385casesassertingclaimsonbehalfofapproximately8,500plaintiffsallegingpersonalinjuryasaresultofexposuretoasbestos.These13asbestoscasesgenerallyrelatetoproductionandsaleofasbestos-containingproductsandallegevarioustheoriesofliability,includingnegligence,grossnegligenceandstrictliabilityandseekcompensatoryand,insomecases,punitivedamages.Ineveryasbestoscaseinwhichwearenamedasaparty,thecomplaintsarefiledagainstmultiplenameddefendants.Insubstantiallyalloftheasbestoscases,theplaintiffseitherclaimdamagesinexcessofaspecifiedamount,typicallyaminimumamountsufficienttoestablishjurisdictionofthecourtinwhichthecasewasfiled(jurisdictionalminimumsgenerallyrangefrom$25,000to$75,000),ordonotspecifythemonetarydamagessought.Totheextentthatanyspecificamountofdamagesissought,theamountappliestoclaimsagainstallnameddefendants.Thereareonlyfourasbestoscases,involving21plaintiffs,thatpleadspecifieddamages.Ineachofthefourcases,theplaintiffisseekingcompensatoryandpunitivedamagesbasedonavarietyofpotentiallyalternativecausesofaction.Inthreecases,theplaintiffhasallegedcompensatorydamagesintheamountof$3.0millionforfourseparatecausesofactionand$1.0millionforanothercauseofactionandpunitivedamagesintheamountof$10.0million.Inanothercase,theplaintiffhasallegedcompensatorydamagesintheamountof$20.0millionforthreeseparatecausesofactionand$5.0millionforanothercauseofactionandpunitivedamagesintheamountof$20.0million.Historically,wehavebeendismissedfromasbestoscasesonthebasisthattheplaintiffincorrectlysuedoneofoursubsidiariesorbecausetheplaintifffailedtoidentifyanyasbestos-containingproductmanufacturedorsoldbyusoroursubsidiaries.Weintendtovigorouslydefendtheseasbestoscases,andbelievewewillcontinuetobesuccessfulinbeingdismissedfromsuchcases.However,itisnotpossibletopredicttheultimateoutcomeofasbestos-relatedlawsuits,claimsandproceedingsduetotheunpredict-ablenatureofpersonalinjurylitigation.Despitethisuncertainty,andalthoughourresultsofoperationsandcashflowsforaparticularperiodcouldbeadverselyaffectedbyasbestos-relatedlawsuits,claimsandproceedings,managementbelievesthattheultimateresolutionofthesematterswillnothaveamaterialadverseeffectonourfinancialcondition,liquidityorresultsofoperations.Amongthefactorsmanagementconsideredinreachingthisconclusionwere:(a)ourhistoricalsuccessinbeingdismissedfromthesetypesoflawsuitsonthebasesmentionedabove;(b)manycaseshavebeenimproperlyfiledagainstoneofoursubsidiaries;(c)inmanycases,theplaintiffshavebeenunabletoestablishanycausalrelationshiptousorourproductsorpremises;(d)inmanycases,theplaintiffshavebeenunabletodemonstratethattheyhavesufferedanyidentifiableinjuryorcompensablelossatall,thatanyinjuriesthattheyhaveincurreddidinfactresultfromallegedexposuretoasbestos;and(e)thecomplaintsassertclaimsagainstmultipledefendantsand,inmostcases,thedamagesallegedarenotattributedtoindividualdefendants.Addi-tionally,wedonotbelievethattheamountsclaimedinanyoftheasbestoscasesaremeaningfulindicatorsofourpotentialexposurebecausetheamountsclaimedtypicallybearnorelationtotheextentoftheplaintiff’sinjury,ifany.Ourcostofdefendingtheselawsuitshasnotbeenmaterialtodateand,baseduponavailableinformation,ourmanagementdoesnotexpectitsfuturecostsforasbestos-relatedlawsuitstohaveamaterialadverseeffectonourresultsofoperations,liquidityorfinancialposition.Item4.SubmissionofMatterstoaVoteofSecurityHoldersTherewerenomatterssubmittedtoavoteofsecurityholdersduringthefourthquarterof2007.14Item4A.ExecutiveOfficersoftheRegistrantInformationwithrespecttotheexecutiveofficersoftheCompanyisasfollows:NameAgePositionEdwardF.Crawford..............68ChairmanoftheBoard,ChiefExecutiveOfficerandDirectorMatthewV.Crawford.............38PresidentandChiefOperatingOfficerandDirectorRichardP.Elliott.................51VicePresidentandChiefFinancialOfficerRobertD.Vilsack................47SecretaryandGeneralCounselPatrickW.Fogarty................46DirectorofCorporateDevelopmentMr.E.CrawfordhasbeenadirectorandourChairmanoftheBoardandChiefExecutiveOfficersince1992.HehasalsoservedastheChairmanofCrawfordGroup,Inc.,amanagementcompanyforagroupofmanufacturingcompanies,since1964andisalsoaDirectorofContinentalGlobalGroup,Inc.Mr.M.CrawfordhasbeenPresidentandChiefOperatingOfficersince2003andjoinedusin1995asAssistantSecretaryandCorporateCounsel.HewasalsoourSeniorVicePresidentfrom2001to2003.Mr.M.CrawfordbecameoneofourdirectorsinAugust1997andhasservedasPresidentofCrawfordGroup,Inc.since1995.Mr.E.CrawfordisthefatherofMr.M.Crawford.Mr.ElliotthasbeenVicePresidentandChiefFinancialOfficersincejoiningusinMay2000.Mr.Elliottheldvariouspositions,includingpartner,atErnst&YoungLLP,anaccountingfirm,fromJanuary1986toApril2000.AtErnst&Young,Mr.Elliottdidnotperformservicesforus.Mr.VilsackhasbeenSecretaryandGeneralCounselsincejoiningusin2002.From1999untilhisemploymentwithus,Mr.Vilsackwasengagedintheprivatepracticeoflaw.From1997to1999,Mr.VilsackwasVicePresident,GeneralCounselandSecretaryofMedusaCorporation,amanufacturerofPortlandcement,andpriortothathewasVicePresident,GeneralCounselandSecretaryofFiggieInternationalInc.,amanufacturingconglomerate.Mr.FogartyhasbeenDirectorofCorporateDevelopmentsince1997andservedasDirectorofFinancefrom1995to1997.15PartIIItem5.MarketfortheRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecuritiesTheCompany’scommonstock,parvalue$1.00pershare,tradesontheNasdaqGlobalMarketunderthesymbol“PKOH”.Thetablebelowpresentsthehighandlowsalespricesofthecommonstockduringtheperiodspresented.NodividendswerepaidduringthefiveyearsendedDecember31,2007.Thereisnopresentintentiontopaydividends.Additionally,thetermsoftheCompany’srevolvingcreditfacilityandtheindenturegoverningtheCompany’s8.375%seniorsubordinatednotesrestricttheCompany’sabilitytopaydividends.QuarterlyCommonStockPriceRangesQuarterHighLowHighLow200720061st$19.30$15.90$21.23$13.252nd28.5818.5321.3614.873rd32.0022.0118.3712.724th28.4020.4017.6112.96ThenumberofshareholdersofrecordfortheCompany’scommonstockasofFebruary29,2008was763.IssuerPurchasesofEquitySecuritiesSetforthbelowisinformationregardingtheCompany’sstockrepurchasesduringthefourthquarterofthefiscalyearendedDecember31,2007.PeriodTotalNumberofSharesPurchasedAveragePricePaidPerShareTotalNumberofSharesPurchasedasPartofPubliclyAnnouncedPlansMaximumNumberofSharesThatMayYetBePurchasedUnderthePlansorProgramOctober1—October31,2007..-0-$-0--0-1,000,000November1—November30,2007.....................55,51622.1854,412945,588December1—December31,2007.....................2,10822.761,434944,154TOTAL.....................57,624$22.2055,846944,154(1)TheCompanyhasasharerepurchaseprogramwherebytheCompanymayrepurchaseupto1.0millionsharesofitscommonstock.SharesacquiredthatwerenotpurchasedaspartofapubliclyannouncedplanconsistofsharesofcommonstocktheCompanyacquiredfromrecipientsofrestrictedstockawardsatthetimeofvestingofsuchawardsinordertosettlerecipientwithholdingtaxliabilities.16Item6.SelectedFinancialData(Dollarsinthousands,exceptpersharedata)20072006200520042003YearEndedDecember31,SelectedStatementofOperationsData(a):Netsales..........................$1,071,441$1,056,246$932,900$808,718$624,295Costofproductssold(b)..............912,337908,095796,283682,658527,586Grossprofit......................159,104148,151136,617126,06096,709Selling,generalandadministrativeexpenses........................98,67990,29682,13377,04862,667Restructuringandimpairmentcharges(credits)(b)......................-0-(809)943-0-18,808Gainonsaleofassetsheldforsale.....(2,299)-0--0--0--0-Operatingincome(b).................62,72458,66453,54149,01215,234Interestexpense(c)..................31,55131,26727,05631,41326,151Income(loss)beforeincometaxes...31,17327,39726,48517,599(10,917)Incometaxes(benefit)(d).............9,9763,218(4,323)3,400904Netincome(loss)...................$21,197$24,179$30,808$14,199$(11,821)Amountspercommonshare:Basic.............................$1.91$2.20$2.82$1.34$(1.13)Diluted...........................$1.82$2.11$2.70$1.27$(1.13)20072006200520042003YearEndedDecember31,OtherFinancialData:Netcashflowsprovidedbyoperatingactivities...........................$31,466$6,063$34,501$1,633$13,305Netcashflowsusedbyinvestingactivities..(21,991)(31,407)(31,376)(21,952)(3,529)Netcashflowsprovided(used)byfinancingactivities...........................(16,600)28,2858,41423,758(14,870)Depreciationandamortization............20,61120,14017,34615,46815,562Capitalexpenditures,net................21,87620,75620,29511,95510,869SelectedBalanceSheetData(asofperiodend):Cashandcashequivalents...............$14,512$21,637$18,696$7,157$3,718Workingcapital.......................270,939268,825208,051169,836148,919Property,plantandequipment............105,557101,085110,310107,17392,651Totalassets...........................769,189783,751662,854610,022507,452Totaldebt............................360,049374,800346,649338,307310,225Shareholders’equity....................171,478138,737103,52172,39356,02517(a)Theselectedconsolidatedfinancialdataisnotdirectlycomparableonayear-to-yearbasis,primarilyduetoacquisitionsanddivestitureswemadethroughoutthefiveyearsendedDecember31,2007,whichincludethefollowingacquisitions:2006—FoundryServiceandNABS2005—PPGandLectrotherm2004—AmcastComponentsGroupandJamcoAlloftheacquisitionswereaccountedforaspurchases.During2003,theCompanysoldsubstantiallyalloftheassetsofGreenBearingandSt.LouisScrewandBolt.(b)IneachoftheyearsendedDecember31,2007,2006,2005and2003,werecordedrestructuringandassetimpairmentchargesrelatedtoexitingproductlinesandclosingorconsolidatingoperatingfacilities.Therestructuringchargesrelatedtothewrite-downofinventoryhavenocashimpactandarereflectedbyanincreaseincostofproductssoldintheapplicableperiod.Therestructuringchargesrelatingtoassetimpairmentattributabletotheclosingorconsolidatingofoperatingfacilitieshavenocashimpactandarereflectedintherestructuringandimpairmentcharges.Thechargesforrestructuringandseveranceandpensioncurtailmentareaccrualsforcashexpenses.Wemadecashpaymentsof$.3million,$.3million,$.3million,$2.1millionand$2.5millionintheyearsendedDecember31,2007,2006,2005,2004and2003,respectively,relatedtoourseveranceandpensioncurtailmentaccruedliabilities.Thetablebelowprovidesasummaryoftheserestructuringandimpairmentcharges.2007200620052003YearEndedDecember31,(Dollarsinthousands)Non-cashcharges:Costofproductssold(inventorywrite-down)................$2,214$800$833$638Assetimpairment......................................-0--0-39116,051Restructuringandseverance..............................-0--0-400990Pensionandpostretirementbenefitscurtailment(credits)......-0-(809)1521,767Total...............................................$2,214$(9)$1,776$19,446Chargesreflectedasrestructuringandimpairmentcharges(credits)onincomestatement..........................$-0-$(809)$943$18,808(c)In2004,theCompanyissued$210millionof8.375%seniorsubordinatednotes.Proceedsfromtheissuanceofthisdebtwereusedtofundthetenderandearlyredemptionofthe9.25%seniorsubordinatednotesdue2007.TheCompanyincurreddebtextinguishmentcostsandwroteoffdeferredfinancingcostsassociatedwiththe9.25%seniorsubordinatednotestotaling$6.0million.(d)In2006and2005,theCompanyreversed$5.0and$7.3million,respectively,ofitsdomesticdeferredtaxassetvaluationallowancesasithasbeendeterminedtherealizationoftheseamountsismorelikelythannot.NodividendswerepaidduringthefiveyearsendedDecember31,2007.18Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsOurconsolidatedfinancialstatementsincludetheaccountsofPark-OhioHoldingsCorp.anditssubsidiaries.Allsignificantintercompanytransactionshavebeeneliminatedinconsolidation.Thehis-toricalfinancialinformationisnotdirectlycomparableonayear-to-yearbasis,primarilyduetoreversalsofataxvaluationallowancein2006and2005,restructuringandunusualchargesin2006and2005,andacquisitionsduringthethreeyearsendedDecember31,2007.ExecutiveOverviewWeareanindustrialTotalSupplyManagementTManddiversifiedmanufacturingbusiness,operatinginthreesegments:SupplyTechnologies,AluminumProductsandManufacturedProducts.InNovember2007,ourILSbusinesschangeditsnametoSupplyTechnologiestobetterreflectitsbreadthofservicesandfocusondrivingefficienciesthroughoutthetotalsupplymanagementprocess.OurSupplyTechnol-ogiesbusinessprovidesourcustomerswithTotalSupplyManagementTM,aproactivesolutionsapproachthatmanagestheefficienciesofeveryaspectofsupplyingproductionpartsandmaterialstoourcustomers’manufacturingfloor,fromstrategicplanningtoprogramimplementation.TotalSupplyManagementTMincludessuchservicesasengineeringanddesignsupport,partusageandcostanalysis,supplierselection,qualityassurance,barcoding,productpackagingandtracking,just-in-timeandpoint-of-usedelivery,electronicbillingservicesandongoingtechnicalsupport.TheprincipalcustomersofSupplyTechnologiesareintheheavy-dutytruck,automotiveandvehicleparts,electricaldistributionandcontrols,consumerelectronics,powersports/fitnessequipment,HVAC,agriculturalandconstructionequipment,semiconductorequipment,plumbing,aerospaceanddefense,andapplianceindustries.Alu-minumProductscastsandmachinesaluminumengine,transmission,brake,suspensionandothercomponentssuchaspumphousings,clutchretainers/pistons,controlarms,knuckles,mastercylinders,pinionhousings,brakecalipers,oilpansandflywheelspacersforautomotive,agriculturalequipment,constructionequipment,heavy-dutytruckandmarineequipmentOEMs,primarilyonasole-sourcebasis.AluminumProductsalsoprovidesvalue-addedservicessuchasdesignandengineeringandassembly.ManufacturedProductsoperatesadiversegroupofnichemanufacturingbusinessesthatdesignandmanufactureabroadrangeofhighly-engineeredproductsincludinginductionheatingandmeltingsystems,pipethreadingsystems,industrialovensystems,injectionmoldedrubbercomponents,andforgedandmachinedproducts.ManufacturedProductsalsoproducesandprovidesservicesandsparepartsfortheequipmentitmanufactures.TheprincipalcustomersofManufacturedProductsareOEMs,sub-assemblersandendusersinthesteel,coatings,forging,foundry,heavy-dutytruck,constructionequipment,bottling,automotive,oilandgas,railandlocomotivemanufacturingandaerospaceanddefenseindustries.Sales,earningsandotherrelevantfinancialdataforthesethreesegmentsareprovidedinNoteBtotheconsolidatedfinancialstatements.Salesandpre-taxincomecontinuedtogrowin2007,asgrowthintheManufacturedProductssegmentandnewcustomersintheSupplyTechnologiesandAluminumProductssegmentsexceededdeclinesinSupplyTechnologiessegmentsalestotheheavy-dutytruckmarketcausedbytheintroductionofnewenvironmentalstandardsatthebeginningof2007.NewcustomersintheSupplyTechnologiessegmentcamebothfromtheOctober,2006acquisitionofNABSandfromorganicsales,whilenewsalesintheAluminumProductssegmentprimarilyreflectnewcontracts.Salesincreased1%,whileoperatingincomeincreased7%andincomebeforeincometaxesincreased14%.Netincomedeclinedin2007because2006earningswereincreasedbythereversaloftheremaining$5.0millionoftheCompany’staxvaluationallowance.Netsalesincreased13%in2006comparedto2005,whileoperatingincomeincreased10%.Netincomedeclinedin2006becausethereversaloftheCompany’staxvaluationallowanceof$5.0millionin2006wassmallerthanthereversalofthevaluationallowanceof$7.3millionin2005,andbecauseofhigherinterestexpensein2006.ThetaxvaluationallowancewassubstantiallyeliminatedbyDecember31,2006,sonofurthersignificantreversalsoccurredtoaffectincomein2007orareanticipatedinlateryears.During2005,netsalesincreased15%,andoperatingincomeincreased9%ascomparedto2004.2005operating19incomewasreducedby$1.8millionofrestructuringcharges($.8millionreflectedinCostofproductssoldand$1.0millioninRestructuringandimpairmentcharges).Duringtheyears2004through2007,wereinforcedourlong-termavailabilityandattractivepricingoffundsbyrefinancingbothofourmajorsourcesofborrowedfunds:seniorsubordinatednotesandourrevolvingcreditfacility.InNovember2004,wesold$210.0millionof8.375%seniorsubordinatednotesdue2014.Wehaveamendedourrevolvingcreditfacility,mostrecentlyinJune2007,toextenditsmaturitytoDecember2010,increasethecreditlimitto$270.0millionsubjecttoanasset-basedformulaandprovidelowerinterestratelevels.InOctober2006,weacquiredallofthecapitalstockofNABSfor$21.2millionincash.NABSisapremierinternationalsupplychainmanagerofproductioncomponents,providingservicestohightechnologycompaniesinthecomputer,electronics,andconsumerproductsindustries.NABShad14internationaloperationsinChina,India,Taiwan,Singapore,Ireland,Hungary,ScotlandandMexicoplusfivelocationsintheUnitedStates.InJanuary2006,wecompletedtheacquisitionofallofthecapitalstockofFoundryServiceGmbHforapproximately$3.2millionincash,whichresultedinadditionalgoodwillof$2.3million.TheacquisitionwasfundedwithborrowingsfromforeignsubsidiariesoftheCompany.InDecember2005,weacquiredsubstantiallyalloftheassetsofLectrotherm,whichisprimarilyaprovideroffieldserviceandsparepartsforinductionheatingandmeltingsystems,locatedinCanton,Ohio,for$5.1millioncashfundedwithborrowingsunderourrevolvingcreditfacility.Thisacquisitionaugmentsourexisting,high-marginaftermarketinductionbusiness.InJuly2005,weacquiredsubstantiallyalltheassetsofPPG,aproviderofsupplychainmanagementservicesforabroadrangeofproductioncomponentsfor$7.0millioncashfundedwithborrowingsfromourrevolvingcreditfacility,$.5millioninashort-termnotepayableandtheassumptionofapproximately$13.3millionoftradeliabilities.Thisacquisitionaddedsignificantlytothecustomerandsupplierbases,andexpandedourgeographicpresenceofourSupplyTechnologiessegment.AccountingChangesandGoodwillOnDecember31,2006,theCompanyadoptedtherecognitionanddisclosureprovisionsofStatementofFinancialAccountingStandardsNo.158“Employers’AccountingforDefinedBenefitPensionandOtherPostretirementPlans”(“FAS158”).FAS158requiredtheCompanytorecognizethefundedstatus(i.e.,thedifferencebetweentheCompany’sfairvalueofplanassetsandtheprojectedbenefitobligations)ofitsdefinedbenefitpensionandpostretirementbenefitplans(collectively,the“postretirementbenefitplans”)intheDecember31,2006ConsolidatedBalanceSheet,withacorrespondingadjustmenttoaccumulatedothercomprehensiveincome,netoftax.Theadjustmenttoaccumulatedothercomprehensiveincomeatadoptionrepresentsthenetunrecognizedactuariallosses,unrecognizedpriorservicecostsandunrec-ognizedtransitionobligationremainingfromtheinitialadoptionofFAS87andFAS106,allofwhichwerepreviouslynettedagainsttheplans’fundedstatusintheCompany’sConsolidatedBalanceSheetinaccordancewiththeprovisionsofFAS87andFAS106.TheseamountswillbesubsequentlyrecognizedasnetperiodicbenefitcostinaccordancewiththeCompany’shistoricalaccountingpolicyforamortizingtheseamounts.Inaddition,actuarialgainsandlossesthatariseinsubsequentperiodsandarenotrecognizedasnetperiodicbenefitcostinthesameperiodswillberecognizedasacomponentofothercomprehensiveincome.ThoseamountswillbesubsequentlyrecognizedasacomponentofnetperiodicbenefitcostonthesamebasisastheamountsrecognizedinaccumulatedothercomprehensiveincomeatadoptionofFAS158.Weelectedtoaccountforstock-basedcompensationusingtheintrinsicvaluemethodprescribedinAccountingPrinciplesBoardOpinionNo.25,“AccountingforStockIssuedtoEmployees”(“APB25”),andrelatedinterpretations.UnderAPB25,becausetheexercisepriceofouremployeestockoptionsequalsthefairmarketvalueoftheunderlyingstockonthedateofgrant,nocompensationexpensewas20recognized.Compensationexpenseresultingfromfixedawardsofrestrictedshareswasmeasuredatthedateofgrantandexpensedoverthevestingperiod.Analternativemethodofaccountingforstock-basedcompensationwouldhavebeenthefairvaluemethoddefinedbyStatementofFinancialAccountingStandardsNo.123,“AccountingforStock-BasedCompensation”(“FAS123”).FAS123permitteduseoftheintrinsicvaluemethodanddidnotrequirecompaniestoaccountforemployeestockoptionsusingthefairvaluemethod.IfcompensationcostforstockoptionsgrantedhadbeendeterminedbasedonthefairvaluemethodofFAS123,ournetincomeanddilutedincomepersharewouldhavebeendecreasedby$0.2million($.02pershare)in2005.InDecember2004,theFinancialAccountingStandardsBoard(“FASB”)issuedStatementofFinancialAccountingStandardNo.123(revised),“Share-BasedPayment”(“FAS123R”).FAS123Rrequiresthatthecostresultingfromallshare-basedpaymenttransactionsberecognizedinthefinancialstatementsandestablishesafair-valuemeasurementobjectiveindeterminingthevalueofsuchacost.FAS123RwaseffectiveasofJanuary1,2006.FAS123RisarevisionofFAS123andsupersedesAPB25.Theadoptionoffair-valuerecognitionprovisionsforstockoptionsincreasedtheCompany’sfiscal2007and2006compensationexpenseby$0.4millionand$0.3million(beforetax),respectively.InaccordancewithStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets”(“FAS142”),wereviewgoodwillannuallyforpotentialimpairment.ThisreviewwasperformedasofOctober1,2007,2006and2005,usingforecasteddiscountedcashflows,anditwasdeterminedthatnoimpairmentisrequired.AtDecember31,2007,ourbalancesheetreflected$101.0mil-lionofgoodwill.In2007,discountratesusedrangedfrom11.0%to14.0%,andlong-termrevenuegrowthratesrangingfrom3.5%to4.0%wereused.OnJuly13,2006,theFASBissuedInterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes—AnInterpretationofFASBStatementNo.109”(“FIN48”).FIN48clarifiestheaccountingforuncertaintyinincometaxesrecognizedinanentity’sfinancialstatementsinaccordancewithSFASNo.109,“AccountingforIncomeTaxes,”andprescribesarecognitionthresholdandmeasurementattributesforfinancialstatementdisclosureoftaxpositionstakenorexpectedtobetakenonataxreturn.UnderFIN48,theimpactofanuncertainincometaxpositionontheincometaxreturnmustberecognizedatthelargestamountthatismore-likely-than-nottobesustaineduponauditbytherelevanttaxingauthority.Anuncertainincometaxpositionwillnotberecognizedifithasa50%orlesslikelihoodofbeingsustained.Additionally,FIN48providesguidanceonderecognition,classification,interestandpenalties,accountingininterimperiods,disclosureandtransition.TheCompanyadoptedFIN48asofJanuary1,2007.SeeNoteHtotheconsolidatedfinancialstatements,includedelsewhereherein,fortheimpactontheCompany’sfinancialstatementsandrelateddisclosures.ResultsofOperations2007versus2006NetSalesbySegment:20072006ChangePercentChangeAcquired/(Divested)SalesYear-EndedDecember31,SupplyTechnologies.......................$531.4$598.2$(66.8)(11)%$29.5AluminumProducts.......................169.1154.614.59%0.0ManufacturedProducts....................370.9303.467.522%0.0ConsolidatedNetSales....................$1,071.4$1,056.2$15.21%$29.5Consolidatednetsalesincreasedby1%in2007comparedto2006,asgrowthintheManufacturedProductssegmentandnewcustomersintheSupplyTechnologiesandAluminumProductssegmentsexceededdeclinesinSupplyTechnologiessegmentsalestotheheavy-dutytruckmarketcausedbytheintroductionofnewenvironmentalstandardsatthebeginningof2007.SupplyTechnologiessales21decreased11%primarilyduetovolumereductionsintheheavy-dutytruckindustry,partiallyoffsetby$29.5millionofadditionalsalesfromtheOctober2006acquisitionofNABS,theadditionofnewcustomersandincreasesinproductrangetoexistingcustomers.NewcustomersintheSupplyTechnologiessegmentcamefromorganicsales,whilenewsalesintheAluminumProductssegmentprimarilyreflectsalestonewcustomers.AluminumProductssalesincreased9%asthesalesvolumesfromnewcontractsstartingproductionramp-upexceededtheendofproductionofotherpartsandthegeneraldeclineinautoindustrysalesvolumes.ManufacturedProductssalesincreased22%,primarilyintheinductionequipment,pipethreadingequipmentandforgingbusinesses,duelargelytoworldwidestrengthinthesteel,oilandgas,aerospaceandrailindustries.Attheendoffourthquarter2007,theCompanyadjusteddownwardtheamountinitiallyrecordedforrevenuebyapproximately$18.0milliontoreflecttheexclusionofcertaincostsfromsuppliersandsubcontractorsfromthepercentageofcompletioncalculationthatisusedtoaccountforlong-termindustrialequipmentcontracts.SeeSelectedQuarterlyFinancialData(Unaudited)onpage63foradditionalinformation.CostofProductsSold&GrossProfit:20072006ChangePercentChangeYear-EndedDecember31,Consolidatedcostofproductssold........................$912.3$908.1$4.20%Consolidatedgrossprofit................................$159.1$148.1$11.07%Grossmargin.........................................14.8%14.0%Costofproductssoldwasrelativelyflatin2007comparedto2006,whilegrossmarginincreasedto14.8%from14.0%in2006.SupplyTechnologiesgrossmarginincreasedslightly,asthemarginbenefitfromsalesfromtheNABSacquisitionandnewcustomersoutweighedtheeffectofreducedheavy-trucksalesvolumeandhigherrestructuringchargesin2007.SupplyTechnologies2006and2007costofproductssoldincluded$.8millionand$2.2million,respectivelyofinventoryrelatedrestructuringchargesassociatedwiththeclosureofamanufacturingplant.AluminumProductsgrossmargindecreasedprimarilyduetothecostsassociatedwithstartingupnewcontractsandtheslowramp-upofnewcontractvolume.GrossmarginintheManufacturedProductssegmentincreasedprimarilyduetoincreasedsalesvolume.Selling,General&Administrative(“SG&A”)Expenses:20072006ChangePercentChangeYear-EndedDecember31,ConsolidatedSG&Aexpenses..............................$98.7$90.3$8.49%SG&Apercent...........................................9.2%8.5%ConsolidatedSG&Aexpensesincreased$8.4millionin2007comparedto2006,representinga.7%increaseinSG&Aexpensesasapercentofsales.SG&Aincreasedapproximately$5.3millionduetotheacquisitionofNABS.SG&Aincreasedfurtherprimarilyduetoincreasedexpensesrelatedtostockoptionsandrestrictedstock,thenewofficebuilding,legalandprofessionalfeesandfranchisetaxes,partiallyoffsetbya$1.1millionincreaseinnetpensioncredits,reflectinghigherreturnonpensionplanassets.InterestExpense:20072006ChangePercentChangeYear-EndedDecember31,Interestexpense...................................$31.6$31.3$0.31%Averageoutstandingborrowings......................$383.6$376.5$7.12%Averageborrowingrate.............................8.23%8.31%8basispoints22Interestexpenseincreased$.3millionin2007comparedto2006,duetohigheraverageoutstandingborrowings,partiallyoffsetbyloweraverageinterestratesduring2007.Theincreaseinaveragebor-rowingsin2007resultedprimarilyfromhigherworkingcapitalandthepurchaseofNABSinOctober2006.Theloweraverageborrowingratein2007wasdueprimarilytodecreasedinterestratesunderourrevolvingcreditfacilitycomparedto2006,whichincreasedasaresultofactionsbytheFederalReserve.IncomeTaxes:20072006Year-EndedDecember31,Incomebeforeincometaxes...............................................$31.2$27.4Incometaxes...........................................................$10.0$3.2Reversaloftaxvaluationallowanceincludedinincome.........................0.0(5.0)Incometaxesexcludingreversaloftaxvaluationallowance......................$10.0$8.2Effectiveincometaxrate..................................................32%12%Effectiveincometaxrateexcludingreversaloftaxvaluationallowance(Non-GAAP)..32%30%Inthefourthquarterof2006,theCompanyreversed$5.0millionofitsdeferredtaxassetvaluationallowance,increasingnetincomeforthatyearandsubstantiallyeliminatingthisreserve.Basedonstrongrecentandprojectedearnings,theCompanydeterminedthatitwasmorelikelythannotthatitsdeferredtaxassetwouldberealized.Theprovisionforincometaxeswas$10.0millionin2007comparedto$3.2millionin2006,whichwasreducedbythe$5.0millionreversalofourdeferredtaxassetvaluationallowance.Theeffectiveincometaxratewas32%in2007,comparedto12%in2006.Excludingthereversalofthetaxvaluationallowancein2006,theCompanyprovided$8.2millionofincometaxes,a30%effectiveincometaxrate.Wearepresentingtaxesandtaxrateswithoutthetaxbenefitofthetaxvaluationallowancereversaltofacilitatecomparisonbetweentheperiods.TheCompany’snetoperatinglosscarryforwardprecludedthepaymentofmostcashfederalincometaxesinboth2007and2006,andshouldsimilarlyprecludesuchpaymentsin2008andsubstantiallyreducethemin2009.AtDecember31,2007,theCompanyhadnetoperatinglosscarryforwardsforfederalincometaxpurposesofapproximately$41.6million,whichwillexpirebetween2021and2027.ResultsofOperations2006versus2005NetSalesbySegment:20062005ChangePercentChangeAcquired/(Divested)SalesYearEndedDecember31,SupplyTechnologies........................$598.2$532.6$65.612%$38.7Aluminumproducts.........................154.6159.1(4.5)(3)%0.0Manufacturedproducts......................303.4241.262.226%22.9ConsolidatedNetSales......................$1,056.2$932.9$123.313%$61.6Netsalesincreasedby13%in2006comparedto2005.SupplyTechnologiessalesincreasedprimarilyduetotheOctober2006acquisitionofNABS,afullyearofsalesofPPGin2006(acquiredinJuly2005),generaleconomicgrowth,particularlyasaresultofsignificantgrowthintheheavy-dutytruckindustry,theadditionofnewcustomersandincreasesinproductrangetoexistingcustomers.AluminumProductssalesdecreasedin2006primarilyduetocontractionofautomobileandlighttruckproductioninNorthAmerica.ManufacturedProductssalesincreasedin2006primarilyintheinductionequipment,pipe23threadingequipmentandforgingbusinesses.Ofthisincrease,$22.9millionwasduetotheacquisitionsofLectrothermandFoundryServicebytheinductionbusinessinDecember2005andJanuary2006,respectively.CostofProductsSold&GrossProfit:20062005ChangePercentChangeYearEndedDecember31,Consolidatedcostofproductssold........................$908.1$796.3$111.814%Consolidatedgrossprofit................................$148.1$136.6$11.58%GrossMargin.........................................14.0%14.6%Costofproductssoldincreased14%in2006comparedto2005,whilegrossmargindecreasedto14.0%from14.6%in2005.SupplyTechnologiesgrossmargindecreasedprimarilyduetoPPGrestructuringcosts.AluminumProductsgrossmargindecreasedduetovolumereductions,productmixandpricingchanges,plusthecostofpreparationsfornewcontractsduetostartproductioninearly2007.GrossmarginintheManufacturedProductssegmentdecreasedslightly,primarilyasaresultofoperationalandpricingissuesintheCompany’srubberproductsbusiness.SG&AExpenses:20062005ChangePercentChangeYearEndedDecember31,ConsolidatedSG&Aexpenses..............................$90.3$82.1$8.210%SG&Apercent...........................................8.5%8.8%ConsolidatedSG&Aexpensesincreasedby10%,or$8.2million,in2006comparedto2005,repre-sentinga.3%reductioninSG&Aexpensesasapercentofsales.Approximately$5.7millionoftheSG&Aincreasewasduetoacquisitions,primarilyNABS,FoundryService,LectrothermandPPG.SG&Aexpensesincreasedin2006comparedto2005bya$.8milliondecreaseinnetpensioncreditsreflectingreducedreturnsonpensionplanassets.TheseincreasesinSG&Aexpensesfromacquisitionsandreducedpensioncreditswerepartiallyoffsetbycostreductions.InterestExpense:20062005ChangePercentChangeYearEndedDecember31,Interestexpense...................................$31.3$27.1$4.215%Averageoutstandingborrowings......................$376.5$357.1$19.45%Averageborrowingrate.............................8.31%7.59%72basispointsInterestexpenseincreasedin2006comparedto2005,duetobothhigheraverageoutstandingborrowingsandhigheraverageinterestratesduring2006.Theincreaseinaverageborrowingsin2006resultedprimarilyfromgrowth-drivenhigherworkingcapitalrequirementsandthepurchaseofNABS,FoundryService,LectrothermandPPGinOctoberandJanuary2006,andDecemberandJuly2005,respectively.Thehigheraverageborrowingratein2006wasdueprimarilytoincreasedinterestratesunderourrevolvingcreditfacilitycomparedto2005,whichincreasedasaresultofactionsbytheFederalReserve.24IncomeTaxes:20062005YearEndedDecember31,Incomebeforeincometaxes...............................................$27.4$26.5Incometaxes(benefit)....................................................$3.2$(4.3)Reversaloftaxvaluationallowanceincludedinincome.........................(5.0)(7.3)Incometaxes,excludingreversaloftaxvaluationallowance—(nonGAAP).........$8.2$3.0Effectiveincometaxrate(benefit)..........................................12%(16)%Effectiveincometaxrateexcludingreversaloftaxvaluationallowance—(NonGAAP)...............................................................30%11%Inthefourthquartersof2006and2005,theCompanyreversed$5.0millionand$7.3million,respectively,ofitsdeferredtaxassetvaluationallowance,substantiallyeliminatingthisreserve.Basedonstrongrecentandprojectedearnings,theCompanyhasdeterminedthatitismorelikelythannotthatitsdeferredtaxassetwillberealized.Thetaxvaluationallowancereversalsresultedinincreasestonetincomeforbothofthesequarters.In2006,theCompanybeganrecordingaquarterlyprovisionforfederalincometaxes,resultinginatotaleffectiveincometaxrateofapproximately30%.TheCompany’snetoperatinglosscarryforwardprecludedthepaymentofcashfederalincometaxesin2006.Theprovisionforincometaxeswas$3.2millionin2006whileincometaxbenefitswere$4.3millionin2005,includingthereversalsofourdeferredtaxassetvaluationallowance.Theeffectiveincometaxratewas12%in2006comparedtoaneffectivetaxbenefitrateof(16%)in2005.Excludingreversalsofthetaxvaluationallowance,in2006,theCompanyprovided$8.2millionofincometaxes,a30%effectiveincometaxrate,comparedtoproviding$3.0millionofincometaxesin2005,an11%effectiveincometaxrate.In2006,thesetaxesconsistedoffederal,stateandforeignincometaxes,whilefederalincometaxwasnotprovidedin2005.AtDecember31,2006,oursubsidiarieshad$34.9millionofnetoperatinglosscarryforwardsforfederaltaxpurposes.Wearepresentingtaxesandtaxrateswithoutthetaxbenefitofthetaxvaluationallowancereversaltofacilitatecomparisonbetweentheperiods.LiquidityandSourcesofCapitalOurliquidityneedsareprimarilyforworkingcapitalandcapitalexpenditures.Ourprimarysourcesofliquidityhavebeenfundsprovidedbyoperationsandfundsavailablefromexistingbankcreditarrange-mentsandthesaleofourseniorsubordinatednotes.In2003,weenteredintoarevolvingcreditfacilitywithagroupofbankswhich,assubsequentlyamended,maturesatDecember31,2010andprovidesforavailabilityofupto$270millionsubjecttoanasset-basedformula.TherevolvingcreditfacilityissecuredbysubstantiallyallourassetsintheUnitedStates,CanadaandtheUnitedKingdom.Borrowingsfromthisrevolvingcreditfacilitywillbeusedforgeneralcorporatepurposes.AmountsborrowedundertherevolvingcreditfacilitymaybeborrowedattheCompany’selectionateither(i)LIBORplus.75%to1.75%or(ii)thebank’sprimelendingrate.TheLIBOR-basedinterestrateisdependentontheCompany’sdebtservicecoverageratio,asdefinedintherevolvingcreditfacility.Undertherevolvingcreditfacility,adetailedborrowingbaseformulaprovidesborrowingavailabilitytotheCompanybasedonpercentagesofeligibleaccountsreceivable,inventoryandfixedassets.AsofDecember31,2007,theCompanyhad$145.4millionoutstandingundertherevolvingcreditfacility,andapproximately$70.4millionofunusedborrowingavailability.Currentfinancialresources(workingcapitalandavailablebankborrowingarrangements)andanticipatedfundsfromoperationsareexpectedtobeadequatetomeetcurrentcashrequirements.ThefutureavailabilityofbankborrowingsundertherevolvingcreditfacilityisbasedontheCompany’sabilitytomeetadebtserviceratiocovenant,whichcouldbemateriallyimpactedbynegativeeconomictrends.Failuretomeetthedebtserviceratiocouldmateriallyimpacttheavailabilityandinterestrateoffutureborrowings.25AtDecember31,2007,theCompanywasincompliancewiththedebtserviceratiocovenantandothercovenantscontainedintherevolvingcreditfacility.Theratioofcurrentassetstocurrentliabilitieswas2.40atDecember31,2007versus2.24atDecember31,2006.Workingcapitalincreasedby$2.1millionto$270.9millionatDecember31,2007from$268.8millionatDecember31,2006.During2007,theCompanyprovided$31.5millionfromoperatingactivitiesascomparedtoproviding$6.1millionin2006.Theincreaseincashprovisionof$25.4millionwasprimarilytheresultofasmallerincreaseinnetoperatingassetsin2007comparedto2006($19.0millioncomparedto$35.0million,respectively),adeferredincometaxprovisionof$4.3millionin2007comparedtoa$4.4milliondeferredtaxbenefitin2006,partiallyoffsetbyadecreaseinnetincomeof$3.0million.Thedecreaseinnetincomewaspartiallyoffsetbyapproximately$2.2millionofnoncashrestructuringandimpairmentchargesin2007.During2007,theCompanyalsoinvested$21.9millionincapitalexpenditures,received$4.4millionfromthesaleofassetsheldforsale,paidback$14.8milliononitsbankandotherdebt,invested$5.1millioninmarketablesecuritiesandpurchased$2.2millionoftreasurystock.During2006,theCompanyprovided$6.1millionfromoperatingactivitiesascomparedtoproviding$34.5millionin2005.Thedecreaseincashprovisionof$28.4millionwasprimarilytheresultofamuchlargerincreaseinnetoperatingassets,netoftheimpactofacquisitions,in2006comparedto2005($34.9millioncomparedto$9.2million,respectively),andadecreaseinnetincomeof$6.6million.Approximately$4.3millionofthedecreaseinnetincomewasduetononcashchangesindeferredincometaxes,partiallyoffsetbynoncashrestructuringandimpairmentcharges.During2006,theCompanyalsoinvested$20.8millionincapitalexpenditures,received$9.4millionfromthesaleoffacilitieswhichweresubsequentlyleasedback,received$3.2millionfromthesaleofassetsheldforsale,borrowedanadditional$28.2millionunderitsrevolvingcreditfacilitiesandinvested$23.3millioninacquisitions.Off-BalanceSheetArrangementsWedonothaveoff-balancesheetarrangements,financingorotherrelationshipswithunconsolidatedentitiesorotherpersons.Thereareoccasionswhereuponweenterintoforwardcontractsonforeigncurrencies,primarilytheeuro,purelyforthepurposeofhedgingexposuretochangesinthevalueofaccountsreceivableinthosecurrenciesagainsttheU.S.dollar.AtDecember31,2007,nonewereoutstanding.Wecurrentlyhavenootherderivativeinstruments.Thefollowingtablesummarizesourprincipalcontractualobligationsandothercommercialcom-mitmentsovervariousfutureperiodsasofDecember31,2007:(InThousands)TotalLessThan1Year1-3Years4-5YearsMorethan5YearsPaymentsDueorCommitmentExpirationPerPeriodLong-termdebtobligations..............$360,048$2,362$147,662$24$210,000Interestobligations(1)..................120,91517,58835,17535,17532,977Capitalleaseobligations................-0--0--0--0--0-Operatingleaseobligations..............54,76013,40019,4449,11712,799Purchaseobligations...................141,731141,373358-0--0-Postretirementobligations(2)............19,0572,2424,4084,0898,318Standbylettersofcredit................24,69120,4734,218-0--0-Total................................$721,202$197,438$211,265$48,405$264,094(1)Interestobligationsareincludedonthe8.375%seniorsubordinatednotesdue2014onlyandassumenotesarepaidatmaturity.Thecalculationofinterestondebtoutstandingunderourrevolvingcreditfacilityandothervariableratedebt($8,957basedon6.16%averageinterestrateandoutstanding26borrowingsof$145,400atDecember31,2007)isnotincludedaboveduetothesubjectivityandestimationrequired.(2)Postretirementobligationsincludeprojectedpostretirementbenefitpaymentstoparticipantsonlythrough2017.ThetableaboveexcludestheliabilityforunrecognizedincometaxbenefitsdisclosedinNoteHtotheconsolidatedfinancialstatements,sincetheCompanycannotpredictwithreasonablereliability,thetimingofpotentialcashsettlementswiththerespectivetaxingauthorities.Weexpectthatfundsprovidedbyoperationsplusavailableborrowingsunderourrevolvingcreditfacilitytobeadequatetomeetourcashrequirementsforatleastthenexttwelvemonths.CriticalAccountingPoliciesPreparationoffinancialstatementsinconformitywithGAAPrequiresmanagementtomakecertainestimatesandassumptionswhichaffectamountsreportedinourconsolidatedfinancialstatements.Managementhasmadetheirbestestimatesandjudgmentsofcertainamountsincludedinthefinancialstatements,givingdueconsiderationtomateriality.Wedonotbelievethatthereisgreatlikelihoodthatmateriallydifferentamountswouldbereportedunderdifferentconditionsorusingdifferentassumptionsrelatedtotheaccountingpoliciesdescribedbelow.However,applicationoftheseaccountingpoliciesinvolvestheexerciseofjudgmentanduseofassumptionsastofutureuncertaintiesand,asaresult,actualresultscoulddifferfromtheseestimates.RevenueRecognition:TheCompanyrecognizesrevenue,otherthanfromlong-termcontracts,whentitleistransferredtothecustomer,typicallyuponshipment.Revenuefromlong-termcontracts(approximately10%ofconsolidatedrevenue)isaccountedforunderthepercentageofcompletionmethod,andrecognizedonthebasisofthepercentageeachcontract’scosttodatebearstothetotalestimatedcontractcost.Revenueearnedoncontractsinprocessinexcessofbillingsisclassifiedinothercurrentassetsintheaccompanyingconsolidatedbalancesheet.TheCompany’srevenuerecognitionpoliciesareinaccordancewiththeSEC’sStaffAccountingBulletin(“SAB”)No.104,“RevenueRecognition.”AllowanceforDoubtfulAccounts:Accountsreceivablehavebeenreducedbyanallowanceforamountsthatmaybecomeuncollectibleinthefuture.Allowancesaredevelopedbytheindividualoperatingunitsbasedonhistoricallosses,adjustingforeconomicconditions.Ourpolicyistoidentifyandreserveforspecificcollectibilityconcernsbasedoncustomers’financialconditionandpaymenthistory.Theestablishmentofreservesrequirestheuseofjudgmentandassumptionsregardingthepotentialforlossesonreceivablebalances.Writeoffsofaccountsreceivablehavehistoricallybeenlow.AllowanceforObsoleteandSlowMovingInventory:Inventoriesarestatedatthelowerofcostormarketvalueandhavebeenreducedbyanallowanceforobsoleteandslow-movinginventories.Theestimatedallowanceisbasedonmanagement’sreviewofinventoriesonhandwithminimalsalesactivity,whichiscomparedtoestimatedfutureusageandsales.Inventoriesidentifiedbymanagementasslow-movingorobsoletearereservedforbasedonestimatedsellingpriceslessdisposalcosts.Thoughweconsidertheseallowancesadequateandproper,changesineconomicconditionsinspecificmarketsinwhichweoperatecouldhaveamaterialeffectonreserveallowancesrequired.ImpairmentofLong-LivedAssets:Long-livedassetsarereviewedbymanagementforimpairmentwhenevereventsorchangesincircumstancesindicatethecarryingamountmaynotberecoverable.During2005and2003,theCompanydecidedtoexitcertainunder-performingproductlinesandtocloseorconsolidatecertainoperatingfacilitiesand,accordingly,recordedrestructuringandimpairmentchargesasdiscussedaboveandinNoteOtotheconsolidatedfinancialstatementsincludedelsewhereherein.Restructuring:WerecognizecostsinaccordancewithEmergingIssuesTaskForceIssueNo.94-3,“LiabilityRecognitionforCertainEmployeeTerminationBenefitsandOtherCoststoExitanActivity(includingCertainCostsincurredinaRestructuring)”(“EITF94-3”),andSECStaffAccountingBulle-tinNo.100,“RestructuringandImpairmentCharges,”forchargespriorto2003.Detailedcontemporaneous27documentationismaintainedandupdatedonaquarterlybasistoensurethataccrualsareproperlysupported.Ifmanagementdeterminesthatthereisachangeintheestimate,theaccrualsareadjustedtoreflectthechanges.TheCompanyadoptedStatementofFinancialAccountingStandardsNo.146,“AccountingforCostsAssociatedwithExitorDisposalActivities”(“FAS146”),whichnullifiedEITF94-3andrequiresthataliabilityforacostassociatedwithanexitordisposalactivityberecognizedandmeasuredinitiallyatthefairvalueonlywhentheliabilityisincurred.FAS146hasnoeffectonchargesrecordedforexitactivitiesbegunpriorto2002.Goodwill:WeadoptedFAS142asofJanuary1,2002.UnderFAS142,wearerequiredtoreviewgoodwillforimpairmentannuallyormorefrequentlyifimpairmentindicatorsarise.WehavecompletedtheannualimpairmenttestasofOctober1,2007,2006,2005and2004andhavedeterminedthatnogoodwillimpairmentexistedasofthosedates.DeferredIncomeTaxAssetsandLiabilities:Weaccountforincometaxesundertheliabilitymethod,wherebydeferredtaxassetsandliabilitiesaredeterminedbasedontemporarydifferencesbetweenthefinancialreportingandthetaxbasesofassetsandliabilitiesandaremeasuredusingthecurrentlyenactedtaxrates.Indeterminingtheseamounts,managementdeterminedtheprobabilityofrealizingdeferredtaxassets,takingintoconsiderationfactorsincludinghistoricaloperatingresults,expectationsoffutureearningsandtaxableincomeandtheextendedperiodoftimeoverwhichthepostretirementbenefitswillbepaidandaccordinglyrecordsataxvaluationallowanceif,basedontheweightofavailableevidenceitismorelikelythannotthatsomeportionorallofourdeferredtaxassetswillnotberealizedasrequiredbyFAS109.PensionandOtherPostretirementBenefitPlans:Weandoursubsidiarieshavepensionplans,principallynoncontributorydefinedbenefitornoncontributorydefinedcontributionplansandpostre-tirementbenefitplanscoveringsubstantiallyallemployees.Themeasurementofliabilitiesrelatedtotheseplansisbasedonmanagement’sassumptionsrelatedtofutureevents,includinginterestrates,returnonpensionplanassets,rateofcompensationincreases,andhealthcarecosttrends.Pensionplanassetperformanceinthefuturewilldirectlyimpactournetincome.Wehaveevaluatedourpensionandotherpostretirementbenefitassumptions,consideringcurrenttrendsininterestratesandmarketconditionsandbelieveourassumptionsareappropriate.Stock-BasedCompensation:Weelectedtoaccountforstock-basedcompensationusingtheintrin-sicvaluemethodprescribedinAPB25,andrelatedinterpretations.UnderAPB25,becausetheexercisepriceofouremployeestockoptionsequalsthefairmarketvalueoftheunderlyingstockonthedateofgrant,nocompensationexpensewasrecognized.Compensationexpenseresultingfromfixedawardsofrestrictedshareswasmeasuredatthedateofgrantandexpensedoverthevestingperiod.Analternativemethodofaccountingforstock-basedcompensationwouldhavebeenthefairvaluemethoddefinedbyFAS123.FAS123permitsuseoftheintrinsicvaluemethodanddidnotrequirecompaniestoaccountforemployeestockoptionsusingthefairvaluemethod.IfcompensationcostforstockoptionsgrantedhadbeendeterminedbasedonthefairvaluemethodofFAS123,ournetincomeanddilutedincomepersharewouldhavebeendecreasedby$(0.2)million(($.02)pershare)in2005.InDecember2004,theFASBissuedFAS123R.FAS123Rrequiresthatthecostresultingfromallshare-basedpaymenttransactionsberecognizedinthefinancialstatementsandestablishesafair-valuemeasurementobjectiveindeterminingthevalueofsuchacost.FAS123RwaseffectiveasofJanuary1,2006.FAS123RisarevisionofFAS123andsupersedesAPB25.Theadoptionoffair-valuerecognitionprovisionsforstockoptionsincreasedtheCompany’s2007and2006compensationexpenseby$.4millionand$.3million(before-tax),respectively.AccountingChanges:InMay2005,theFASBissuedSFASNo.154,“AccountingChangesandErrorCorrections,”whichreplacesAPBOpinionNo.20,“AccountingChanges,”andSFASNo.3,“ReportingAccountingChangesinInterimFinancialStatements.”Thestatementchangestherequirementsfortheaccountingandreportingofachangeinaccountingprincipleandisapplicabletoallvoluntarychangesin28accountingprinciple.Italsoappliestochangesrequiredbyanaccountingpronouncementifthatpronouncementdoesnotincludespecifictransitionprovisions.Thestatementrequiresretrospectiveapplicationtopriorperiods’financialstatementsofchangesinaccountingprincipleunlessitisimpracticaltodeterminetheperiodspecificeffectsorthecumulativeeffectofthechange.Thecorrectionofanerrorbytherestatementofpreviouslyissuedfinancialstatementsisalsoaddressedbythestatement.TheCompanyadoptedthisstatementeffectiveJanuary1,2006asprescribedanditsadoptiondidnothaveanyimpactontheCompany’sresultsofoperationsorfinancialcondition.RecentAccountingPronouncementsInSeptember2006,theFASBissuedSFASNo.157,“FairValueMeasurements,”whichdefinesfairvalueinGAAPandexpandsdisclosuresaboutfairvaluemeasurements.ThisstatementappliesunderotheraccountingpronouncementsthatrequireorpermitfairvaluemeasurementsandiseffectivefortheCompanyin2008.TheCompanyiscurrentlyevaluatingtheimpactofadoptingthisstatementontheCompany’sfinancialpositionandresultsofoperations.InFebruary2007,theFASBissuedSFASNo.159,“FairValueOptionforFinancialAssetsandFinancialLiabilities—IncludinganAmendmentofFASBStatementNo.115”(“FAS159”).FAS159permitsanentitytoelectfairvalueastheinitialandsubsequentmeasurementattributeformanyfinancialassetsandliabilities.Entitieselectingthefairvalueoptionwouldberequiredtorecognizechangesinfairvalueinearnings.Entitieselectingthefairvalueoptionwouldalsoberequiredtodistinguish,onthefaceofthestatementoffinancialposition,thefairvalueofassetsandliabilitiesforwhichthefairvalueoptionhasbeenelectedandsimilarassetsandliabilitiesmeasuredusinganothermeasurementattribute.FAS159iseffectivefortheCompanyin2008.Theadjustmenttoreflectthedifferencebetweenthefairvalueandthecarryingamountwouldbeaccountedforasacumulative-effectadjustmenttoretainedearningsasofthedateofinitialadoption.TheCompanyiscurrentlyevaluatingtheimpactofadoptionofFAS159ontheCompany’sfinancialpositionandresultsofoperations.InDecember2007,theFASBissuedSFASNo.141(revised2007),“BusinessCombinations”(“FAS141(R)”).FAS141(R)providesrevisedguidanceonhowacquirersrecognizeandmeasuretheconsiderationtransferred,identifiableassetsacquired,liabilitiesassumed,noncontrollinginterestsandgoodwillacquiredinabusinesscombination.FAS141(R)alsoexpandsrequireddisclosuressurroundingthenatureandfinancialeffectsofbusinesscombinations.FAS141(R)iseffective,onaprospectivebasis,fortheCompanyin2009.TheCompanyiscurrentlyevaluatingtheimpactofadoptingFAS141(R)ontheCompany’sfinancialpositionandresultsofoperations.InDecember2007,theFASBissuedSFASNo.160,“NoncontrollingInterestsinConsolidatedFinancialStatements”(“FAS160”).FAS160establishesrequirementsforownershipinterestsinsubsid-iariesheldbypartiesotherthantheCompany(sometimescalled“minorityinterests”)beclearlyidentified,presented,anddisclosedintheconsolidatedstatementoffinancialpositionwithinequity,butseparatefromtheparent’sequity.Allchangesintheparent’sownershipinterestsarerequiredtobeaccountedforconsistentlyasequitytransactionsandanynoncontrollingequityinvestmentsindeconsolidatedsubsid-iariesmustbemeasuredinitiallyatfairvalue.FAS160iseffective,onaprospectivebasis,fortheCompanyin2009.However,presentationanddisclosurerequirementsmustberetrospectivelyappliedtocompar-ativefinancialstatements.TheCompanyiscurrentlyevaluatingtheimpactofadoptingFAS160ontheCompany’sfinancialpositionandresultsofoperations.EnvironmentalWehavebeenidentifiedasapotentiallyresponsiblepartyatthird-partysitesundertheCompre-hensiveEnvironmentalResponse,CompensationandLiabilityActof1980,asamended,orcomparablestatelaws,whichprovideforstrictand,undercertaincircumstances,jointandseveralliability.Weareparticipatinginthecostofcertainclean-upeffortsatseveralofthesesites.However,ourshareofsuchcostshasnotbeenmaterialandbasedonavailableinformation,ourmanagementdoesnotexpectour29exposureatanyoftheselocationstohaveamaterialadverseeffectonitsresultsofoperations,liquidityorfinancialcondition.Wehavebeennamedasoneofmanydefendantsinanumberofasbestos-relatedpersonalinjurylawsuits.Ourcostofdefendingsuchlawsuitshasnotbeenmaterialtodateand,baseduponavailableinformation,ourmanagementdoesnotexpectourfuturecostsforasbestos-relatedlawsuitstohaveamaterialadverseeffectonourresultsofoperations,liquidityorfinancialcondition.Wecaution,however,thatinherentinmanagement’sestimatesofourexposureareexpectedtrendsinclaimsseverity,frequencyandotherfactorsthatmaymateriallyvaryasclaimsarefiledandsettledorotherwiseresolved.Seasonality;VariabilityofOperatingResultsOurresultsofoperationsaretypicallystrongerinthefirstsixmonthsthanthelastsixmonthsofeachcalendaryearduetoscheduledplantmaintenanceinthethirdquartertocoincidewithcustomerplantshutdownsandduetoholidaysinthefourthquarter.Thetimingofordersplacedbyourcustomershasvariedwith,amongotherfactors,ordersforcustomers’finishedgoods,customerproductionschedules,competitiveconditionsandgeneraleconomicconditions.Thevariabilityofthelevelandtimingofordershas,fromtimetotime,resultedinsignificantperiodicandquarterlyfluctuationsintheoperationsofourbusinessunits.Suchvariabilityisparticularlyevidentatthecapitalequipmentbusinesses,includedintheManufacturedProductssegment,whichtypicallyshipafewlargesystemsperyear.Forward-LookingStatementsThisannualreportonForm10-Kcontainscertainstatementsthatare“forward-lookingstatements”withinthemeaningofSection27AoftheSecuritiesActandSection21EoftheExchangeAct.Thewords“believes”,“anticipates”,“plans”,“expects”,“intends”,“estimates”andsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Theseforward-lookingstatementsinvolveknownandunknownrisks,uncertaintiesandotherfactorsthatmaycauseouractualresults,performanceandachievements,orindustryresults,tobemateriallydifferentfromanyfutureresults,performanceorachievementsexpressedorimpliedbysuchforwardlookingstatements.Thesefactorsinclude,butarenotlimitedtothefollowing:oursubstantialindebtedness;generalbusinessconditionsandcompetitivefactors,includingpricingpressuresandproductinnovation;dependenceontheautomotiveandheavy-dutytruckindustries,whicharehighlycyclical;demandforourproductsandservices;rawmaterialavailabilityandpricing;componentpartavailabilityandpricing;adversechangesinourrelationshipswithcustomersandsuppliers;thefinancialconditionofourcustomers,includingtheimpactofanybankruptcies;ourabilitytosuccessfullyintegraterecentandfutureacquisitionsintoexistingoperations;changesingeneraldomesticeconomicconditionssuchasinflationrates,interestrates,taxratesandadverseimpactstous,oursuppliersandcustomersfromactsofterrorismorhostilities;ourabilitytomeetvariouscovenants,includingfinancialcovenants,containedinourrevolvingcreditfacilityandtheindenturegoverningthe8.375%seniorsubordinatednotesdue2014;increasinglystringentdomesticandforeigngovernmentalregulations,includingthoseaffectingtheenvironment;inherentuncertaintiesinvolvedinassessingourpotentialliabilityforenvironmentalremediation-relatedactivities;theoutcomeofpendingandfuturelitigationandotherclaims,including,withoutlimitationasbestosclaims;ourabilitytonegotiateaccept-ablecontractswithlaborunions;dependenceonkeymanagement;dependenceoninformationsystems;andtheotherfactorswedescribeunderthe“Item1A.RiskFactors”.Anyforward-lookingstatementspeaksonlyasofthedateonwhichsuchstatementismade,andweundertakenoobligationtopubliclyupdateorreviseanyforward-lookingstatement,whetherasaresultofnewinformation,futureeventsor30otherwise.Inlightoftheseandotheruncertainties,theinclusionofaforward-lookingstatementhereinshouldnotberegardedasarepresentationbyusthatourplansandobjectiveswillbeachieved.Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRiskWeareexposedtomarketriskincludingchangesininterestrates.Wearesubjecttointerestrateriskonourfloatingraterevolvingcreditfacility,whichconsistedofborrowingsof$145.4millionatDecem-ber31,2007.A100basispointincreaseintheinterestratewouldhaveresultedinanincreaseininterestexpenseofapproximately$1.4millionfortheyearendedDecember31,2007.Ourforeignsubsidiariesgenerallyconductbusinessinlocalcurrencies.During2007,werecordedafavorableforeigncurrencytranslationadjustmentof$7.3millionrelatedtonetassetslocatedoutsidetheUnitedStates.ThisforeigncurrencytranslationadjustmentresultedprimarilyfromtheweakeningoftheU.S.dollarinrelationtotheCanadiandollar.Ourforeignoperationsarealsosubjecttoothercustomaryrisksofoperatinginaglobalenvironment,suchasunstablepoliticalsituations,theeffectoflocallawsandtaxes,tariffincreasesandregulationsandrequirementsforexportlicenses,thepotentialimpositionoftradeorforeignexchangerestrictionsandtransportationdelays.Ourlargestexposurestocommoditypricesrelatetosteelandnaturalgasprices,whichhavefluctuatedwidelyinrecentyears.Wedonothaveanycommodityswapagreements,forwardpurchaseorhedgecontractsforsteelbuthaveenteredintoforwardpurchasecontractsforaportionofouranticipatednaturalgasusagethroughApril2008.31Item8.FinancialStatementsandSupplementaryDataIndextoConsolidatedFinancialStatementsandSupplementaryFinancialDataPageReportofIndependentRegisteredPublicAccountingFirm...............................33ReportofIndependentRegisteredPublicAccountingFirm...............................34ConsolidatedBalanceSheets—December31,2007and2006.............................35ConsolidatedStatementsofIncome—YearsEndedDecember31,2007,2006and2005........36ConsolidatedStatementsofShareholders’Equity—YearsEndedDecember31,2007,2006and2005........................................................................37ConsolidatedStatementsofCashFlows—YearsEndedDecember31,2007,2006and2005.....38NotestoConsolidatedFinancialStatements..........................................39SupplementaryFinancialDataSelectedQuarterlyFinancialData(Unaudited)—YearsEndedDecember31,2007and2006....63ScheduleII—ValuationandQualifyingaccounts......................................6432REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMBoardofDirectorsandShareholdersPark-OhioHoldingsCorp.WehaveauditedtheaccompanyingconsolidatedbalancesheetsofPark-OhioHoldingsCorp.andsubsidiariesasofDecember31,2007and2006,andtherelatedconsolidatedstatementsofincome,shareholders’equityandcashflowsforeachofthethreeyearsintheperiodendedDecember31,2007.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewithstandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionofPark-OhioHoldingsCorp.andsubsidiariesatDecember31,2007and2006andtheconsolidatedresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2007inconformitywithU.S.generallyacceptedaccountingprinciples.AsdiscussedinNoteItotheconsolidatedfinancialstatements,theCompanyadoptedStatementofFinancialAccountingStandardsNo.123(R),“Share-BasedPayment,”effectiveJanuary1,2006.Asdis-cussedinNoteKtotheconsolidatedfinancialstatements,theCompanyadoptedStatementofFinancialAccountingStandardsNo.158,“Employers’AccountingforDefinedBenefitPensionandOtherPostRetirementPlans”,effectiveDecember31,2006.AsdiscussedinNoteHtotheconsolidatedfinancialstatements,theCompanyadoptedFinancialAccountingStandardsBoardInterpretationNo.48,“Account-ingforUncertaintyinIncomesTaxes”,effectiveJanuary1,2007.Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),Park-OhioHoldingsCorp.andsubsidiariesinternalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedintheInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionandourreportdatedMarch13,2008expressedanadverseopinionthereon.Cleveland,OhioMarch13,200833REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTheBoardofDirectorsandShareholdersofPark-OhioHoldingsCorp.WehaveauditedPark-OhioHoldingCorp.’sinternalcontroloverfinancialreportingasofDecember31,2007,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(theCOSOcriteria).Park-OhioHoldingsCorp.’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreportingincludedintheaccompanyingReportofManagementonInternalControloverFinancialReporting.OurresponsibilityistoexpressanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat:(1)pertaintothemainte-nanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinci-ples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Amaterialweaknessisadeficiency,orcombinationofdeficiencies,ininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheCompany’sannualorinterimfinancialstatementswillnotbepreventedordetectedonatimelybasis.Thefollowingmaterialweaknesshasbeenidentifiedandincludedinmanagement’sassessment.(cid:129)ManagementhasidentifiedamaterialweaknessincontrolsrelatedtotheCompany’srevenuerecognitionprocess.Thematerialweaknesswasconsideredindeterminingthenature,timing,andextentofaudittestsappliedinourauditofthe2007consolidatedfinancialstatements,andthisreportdoesnotaffectourreportdatedMarch13,2008,onthosefinancialstatements.Inouropinion,becauseoftheeffectofthematerialweaknessdescribedaboveontheachievementoftheobjectivesoftheinternalcontrolcriteria,Park-OhioHoldingsCorp.hasnotmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2007basedontheCOSOcriteria.Cleveland,OhioMarch13,200834Park-OhioHoldingsCorp.andSubsidiariesConsolidatedBalanceSheets20072006December31,(Dollarsinthousands)ASSETSCurrentAssetsCashandcashequivalents...........................................$14,512$21,637Accountsreceivable,lessallowancesfordoubtfulaccountsof$3,724in2007and$4,305in2006................................................172,357181,893Inventories........................................................215,409223,936Deferredtaxassets.................................................21,89734,142Unbilledcontractrevenue............................................24,81716,886Othercurrentassets................................................15,2327,332TotalCurrentAssets..............................................464,224485,826Property,plantandequipment:Landandlandimprovements.........................................3,4523,464Buildings.........................................................41,43737,656Machineryandequipment............................................221,333206,945266,222248,065Lessaccumulateddepreciation........................................160,665146,980105,557101,085OtherAssets:Goodwill.........................................................100,99798,180Netassetsheldforsale..............................................3,3306,568Other............................................................95,08192,092$769,189$783,751LIABILITIESANDSHAREHOLDERS’EQUITYCurrentLiabilitiesTradeaccountspayable..............................................$121,875$132,864Accruedexpenses..................................................67,00778,264Currentportionoflong-termdebt......................................2,3623,310Currentportionofotherpostretirementbenefits..........................2,0412,563TotalCurrentLiabilities............................................193,285217,001Long-TermLiabilities,lesscurrentportion8.375%seniorsubordinatednotesdue2014..............................210,000210,000Revolvingcredit....................................................145,400156,700Otherlong-termdebt................................................2,2874,790Deferredtaxliability................................................22,72232,089Otherpostretirementbenefitsandotherlong-termliabilities................24,01724,434404,426428,013Shareholders’EquityCapitalstock,parvalue$1pershareSerialpreferredstock:Authorized—632,470shares;Issuedandoutstanding—none.............-0--0-Commonstock:Authorized—40,000,000shares;Issued—12,232,859sharesin2007and12,110,275in2006...............................................12,23312,110Additionalpaid-incapital............................................61,95659,676Retainedearnings..................................................90,78270,193Treasurystock,atcost,828,661sharesin2007and736,408sharesin2006.....(11,255)(9,066)Accumulatedothercomprehensiveloss.................................17,7625,824171,478138,737$769,189$783,751Seenotestoconsolidatedfinancialstatements.35Park-OhioHoldingsCorp.andSubsidiariesConsolidatedStatementsofIncome200720062005YearEndedDecember31,(Dollarsinthousands,exceptpersharedata)Netsales.............................................$1,071,441$1,056,246$932,900Costofproductssold...................................912,337908,095796,283Grossprofit...........................................159,104148,151136,617Selling,generalandadministrativeexpenses.................98,67990,29682,133Restructuringandimpairmentcharges(credits)..............-0-(809)943Gainonsaleofassetsheldforsale........................(2,299)-0--0-Operatingincome......................................62,72458,66453,541Interestexpense.......................................31,55131,26727,056Incomebeforeincometaxes.............................31,17327,39726,485Incometaxes(benefit)..................................9,9763,218(4,323)Netincome.........................................$21,197$24,179$30,808Amountspercommonshare:Basic................................................$1.91$2.20$2.82Diluted...............................................$1.82$2.11$2.70Seenotestoconsolidatedfinancialstatements.36Park-OhioHoldingsCorp.andSubsidiariesConsolidatedStatementsofShareholders’EquityCommonStockAdditionalPaid-InCapitalRetainedEarningsTreasuryStockAccumulatedOtherComprehensiveIncome(Loss)UnearnedCompensationTotal(Dollarsinthousands)BalanceatJanuary1,2005.........$11,547$56,530$15,206$(8,864)$(1,676)$(350)$72,393Comprehensiveincome(loss):Netincome...................30,80830,808Foreigncurrencytranslationadjustment.................9494Minimumpensionliability........(520)(520)Comprehensiveincome..........30,382Restrictedstockaward............56861(917)-0-Amortizationofrestrictedstock.....674674Purchaseoftreasurystock.........(145)(145)Exerciseofstockoptions(99,668shares)................100117217BalanceatDecember31,2005.......11,70357,50846,014(9,009)(2,102)(593)103,521ReclassificationatJanuary1,2006...(593)593-0-Comprehensiveincome(loss):Netincome...................24,17924,179Foreigncurrencytranslationadjustment.................2,1282,128Minimumpensionliability........5,3585,358Comprehensiveincome..........31,665AdjustmentrecognizeduponadoptionofFAS158(netofincometaxof$404)...........440440Restrictedstockaward............340(340)-0-Amortizationofrestrictedstock.....787787Share-basedcompensation.........299299Taxvaluationallowancereversal....1,8891,889Purchaseoftreasurystock.........(57)(57)Exerciseofstockoptions(69,364shares)................67126193BalanceatDecember31,2006.......12,11059,67670,193(9,066)5,824-0-138,737AdjustmentrelatingtoadoptionofFIN48......................(608)(608)Comprehensiveincome:Netincome...................21,19721,197Foreigncurrencytranslationadjustment.................7,3287,328Unrealizedlossonmarketablesecurities,netofincometaxof$182......................(323)(323)Pensionandpostretirementbenefitadjustments,netofincometaxof$2,834.....................4,9334,933Comprehensiveincome..........33,135Restrictedstockaward............17(17)-0-Amortizationofrestrictedstock.....1,6511,651Purchaseoftreasurystock(92,253shares)................(2,189)(2,189)Exerciseofstockoptions(106,084shares)...............106234340Share-basedcompensation.........412412BalanceatDecember31,2007.......$12,233$61,956$90,782$(11,255)$17,762$-0-$171,478Seenotestoconsolidatedfinancialstatements.37Park-OhioHoldingsCorp.andSubsidiariesConsolidatedStatementsofCashFlows200720062005YearEndedDecember31,(Dollarsinthousands)OPERATINGACTIVITIESNetincome..............................................$21,197$24,179$30,808Adjustmentstoreconcilenetincometonetcashprovidedbyoperations:Depreciationandamortization.............................20,61120,14017,346Restructuringandimpairmentcharges(credits)................2,214(9)1,776Deferredincometaxes....................................4,342(4,361)(6,946)Stockbasedcompensationexpense.........................2,0631,086674Changesinoperatingassetsandliabilitiesexcludingacquisitionsofbusinesses:Accountsreceivable......................................9,536(16,219)5,507Inventories.............................................8,527(28,443)(1,699)Accountspayableandaccruedexpenses.....................(22,246)16,956(959)Other..................................................(14,778)(7,266)(12,006)Netcashprovidedbyoperatingactivities.....................31,4666,06334,501INVESTINGACTIVITIESPurchasesofproperty,plantandequipment,net.................(21,876)(20,756)(20,295)Businessacquisitions,netofcashacquired.....................-0-(23,271)(12,181)Proceedsfromsale-leasebacktransactions.....................-0-9,420-0-Purchasesofmarketablesecurities............................(5,142)-0--0-Salesofmarketablesecurities................................662-0--0-Proceedsfromthesaleofassetsheldforsale...................4,3653,2001,100Netcashusedbyinvestingactivities..........................(21,991)(31,407)(31,376)FINANCINGACTIVITIESProceedsfrombankarrangements,net........................-0-28,1508,342Paymentsonbankarrangementsandlong-termdebt,net..........(14,751)-0--0-Issuanceofcommonstockunderstockoptionplan..............340193217Purchaseoftreasurystock..................................(2,189)(58)(145)Netcash(used)providedbyfinancingactivities...............(16,600)28,2858,414(Decrease)Increaseincashandcashequivalents..............(7,125)2,94111,539Cashandcashequivalentsatbeginningofyear................21,63718,6967,157Cashandcashequivalentsatendofyear.....................$14,512$21,637$18,696Incometaxespaid.........................................$6,170$5,291$881Interestpaid..............................................30,19428,99724,173Seenotestoconsolidatedfinancialstatements.38PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTSDecember31,2007,2006and2005(Dollarsinthousands,exceptpersharedata)NOTEA—SummaryofSignificantAccountingPoliciesConsolidationandBasisofPresentation:TheconsolidatedfinancialstatementsincludetheaccountsoftheCompanyandallofitssubsidiaries.Allsignificantintercompanyaccountsandtransac-tionshavebeeneliminateduponconsolidation.TheCompanydoesnothaveoff-balancesheetarrange-mentsorfinancingswithunconsolidatedentitiesorotherpersons.Intheordinarycourseofbusiness,theCompanyleasescertainrealpropertiesasdescribedinNoteL.Transactionswithrelatedpartiesareintheordinarycourseofbusiness,areconductedonanarm’s-lengthbasis,andarenotmaterialtotheCompany’sfinancialposition,resultsofoperationsorcashflows.AccountingEstimates:ThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesrequiresmanagementtomakeestimatesandassump-tionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.CashEquivalents:TheCompanyconsidersallhighlyliquidinvestmentswithamaturityofthreemonthsorlesswhenpurchasedtobecashequivalents.MarketableSecurities:Marketablesecuritieswhichconsistofequitysecuritiesareclassifiedasavailableforsaleandareincludedinothercurrentassets.Thesecuritiesarecarriedattheirfairvalueandnetunrealizedholdinggainsandlosses,netoftax,arecarriedasacomponentofaccumulatedothercomprehensiveearnings(loss).Inventories:Inventoriesarestatedattheloweroffirst-in,first-out(FIFO)costormarketvalue.Inventoryreserveswere$20,432and$22,978atDecember31,2007and2006,respectively.MajorClassesofInventories20072006December31,Finishedgoods.............................................$129,074$143,071Workinprocess............................................26,24942,405Rawmaterialsandsupplies...................................60,08638,460$215,409$223,936Property,PlantandEquipment:Property,plantandequipmentarecarriedatcost.Additionsandassociatedinterestcostsarecapitalizedandexpendituresforrepairsandmaintenancearechargedtooperations.Depreciationoffixedassetsiscomputedprincipallybythestraight-linemethodbasedontheestimatedusefullivesoftheassetsrangingfrom25to60yearsforbuildings,andthreeto16yearsformachineryandequipment.TheCompanyreviewslong-livedassetsforimpairmentwheneventsorchangesinbusinessconditionsindicatethattheirfullcarryingvaluemaynotberecoverable.SeeNoteO.GoodwillandOtherIntangibleAssets:InaccordancewithStatementofFinancialAccountingStandards(“SFAS”)No.142,“GoodwillandOtherIntangibleAssets”(“FAS142”),theCompanydoesnotamortizegoodwillrecordedinconnectionwithbusinessacquisitions.TheCompanycompletedtheannualimpairmenttestsrequiredbyFAS142asofOctober1andthesetestsconfirmedthatthefairvalueoftheCompany’sgoodwillexceedtheirrespectivecarryingvaluesandnoimpairmentlosswasrequiredtoberecognized.Otherintangibleassets,whichconsistprimarilyofnon-contractualcustomerrelationships,areamortizedovertheirestimatedusefullives.39PensionsandOtherPostretirementBenefits:TheCompanyanditssubsidiarieshavepensionplans,principallynoncontributorydefinedbenefitornoncontributorydefinedcontributionplans,cover-ingsubstantiallyallemployees.Inaddition,theCompanyhastwounfundedpostretirementbenefitplans.Forthedefinedbenefitplans,benefitsarebasedontheemployee’syearsofservice.Forthedefinedcontributionplans,thecostschargedtooperationsandtheamountfundedarebaseduponapercentageofthecoveredemployees’compensation.Stock-BasedCompensation:EffectiveJanuary1,2006,theCompanyadoptedSFASNo.123(revised2004),“Share-BasedPayment”(“FAS123(R)”),usingthe“modifiedprospective”method.Underthismethod,compensationcostisrecognizedbeginningwiththeeffectivedate(a)basedontherequirementsofFAS123(R)forallshare-basedpaymentsgrantedaftertheeffectivedateand(b)basedontherequirementsofFAS123forallawardsgrantedtoemployeespriortotheeffectivedateofFAS123(R)thatremainunvestedontheeffectivedate.FAS123(R)wasissuedonDecember16,2004andisarevisionofFAS123,“AccountingforStock-BasedCompensation.”FAS123(R)supersedesAccountingPrinciplesBoard(“APB”)OpinionNo.25,“AccountingforStockIssuedtoEmployees”(“APBOpinion25”)andamendsFAS95,“StatementofCashFlows.”Generally,theapproachinFAS123(R)issimilartotheapproachdescribedinFAS123.However,FAS123(R)requiresallshare-basedpaymentstoemployees,includinggrantsofemployeestockoptions,toberecognizedintheincomestatementbasedontheirfairvalues.Proformadisclosureisnolongeranalternative.TheadoptionoffairvaluerecognitionprovisionsforstockoptionsincreasedtheCompany’sfiscal2007and2006compensationexpenseby$412and$299(beforetax),respectively.AspermittedbyFAS123,theCompanypreviouslyaccountedforshare-basedpaymentstoemployeesusingAPBOpinion25’sintrinsicvaluemethodand,assuch,generallyrecognizednocompensationcostforemployeestockoptions.FAS123(R)alsorequiresthebenefitsoftaxdeductionsinexcessofrecognizedcompensationcosttobereportedasafinancingcashflow,ratherthanasanoperatingcashflowasrequiredundercurrentaccountingguidance.Thisrequirementwillreducenetoperatingcashflowsandincreasenetfinancingcashflowsinperiodsafteradoption.WhiletheCompanycannotestimatewhatthoseamountswillbeinthefuture(becausetheydependon,amongotherthings,whenemployeesexercisestockoptions),theamountofoperatingcashflowsrecognizedinprioryearswaszerobecausetheCompanydidnotowefederalincometaxesduetotherecognitionofnetoperatinglosscarryforwardsforwhichvaluationallowanceshadbeenprovided.ThefairvalueofstockoptionsisestimatedasofthegrantdateusingtheBlack-Scholesoptionpricingmodelwiththefollowingweightedaverageassumptionsforoptionsgrantedinthefollowingfiscalyears:20072005YearsEndedDecember31,Risk—freeinterestrate..................................4.62%4.15%Expectedlifeofoptioninyears............................6.06.0Expecteddividendyield..................................0%0%Expectedstockvolatility..................................57%55%TheweightedaveragefairmarketvalueofoptionsissuedforthefiscalyearendedDecember31,2007and2005wasestimatedtobe$12.92and$8.20pershare,respectively.TherewerenooptionsissuedfortheyearendedDecember31,2006.Additionalinformationregardingourshare-basedcompensationprogramisprovidedinNoteI.AccountingforAssetRetirementObligations:InaccordancewithFINNo.47,“AccountingforConditionalAssetRetirementObligations—aninterpretationofFASBStatementNo.143”,“AccountingforAssetRetirementObligations”,theCompanyhasidentifiedcertainconditionalassetretirement40PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)obligationsatvariouscurrentmanufacturingfacilities.Theseobligationsrelateprimarilytoasbestosabatement.Usinginvestigative,remediation,anddisposalmethodsthatarecurrentlyavailabletotheCompany,theestimatedcostoftheseobligationsisnotsignificantandmanagementdoesnotbelievethatanypotentialliabilityultimatelyattributedtotheCompanyforitsconditionalassetretirementobligationswillhaveamaterialadverseeffectontheCompany’sfinancialcondition,liquidity,orcashflowduetotheextendedperiodoftimeduringwhichinvestigationandremediationtakesplace.AnestimateofthepotentialimpactontheCompany’soperationscannotbemadeduetotheaforementioneduncertainties.Managementexpectsthesecontingentassetretirementobligationstoberesolvedoveranextendedperiodoftime.Managementisunabletoprovideamorespecifictimeframeduetotheindefiniteamountoftimetoconductinvestigationactivitiesatanysite,theindefiniteamountoftimetoobtaingovernmentalagencyapproval,asnecessary,withrespecttoinvestigationandremediationactivities,andtheindefiniteamountoftimenecessarytoconductremediationactivities.IncomeTaxes:TheCompanyaccountsforincometaxesundertheliabilitymethod,wherebydeferredtaxassetsandliabilitiesaredeterminedbasedontemporarydifferencesbetweenthefinancialreportingandthetaxbasesofassetsandliabilitiesandaremeasuredusingthecurrentenactedtaxrates.Indeterminingtheseamounts,managementdeterminedtheprobabilityofrealizingdeferredtaxassets,takingintoconsiderationfactorsincludinghistoricaloperatingresults,expectationsoffutureearnings,taxableincomeandtheextendedperiodoftimeoverwhichthepostretirementbenefitswillbepaidandaccordinglyrecordsvaluationallowancesif,basedontheweightofavailableevidenceitismorelikelythannotthatsomeportionorallofourdeferredtaxassetswillnotberealizedasrequiredbySFASNo.109(“FAS109”),“AccountingforIncomeTaxes.”RevenueRecognition:TheCompanyrecognizesrevenue,otherthanfromlong-termcontracts,whentitleistransferredtothecustomer,typicallyuponshipment.Revenuefromlong-termcontracts(approximately10%ofconsolidatedrevenue)isaccountedforunderthepercentageofcompletionmethod,andrecognizedonthebasisofthepercentageeachcontract’scosttodatebearstothetotalestimatedcontractcost.Revenueearnedoncontractsinprocessinexcessofbillingsisclassifiedinothercurrentassetsintheaccompanyingconsolidatedbalancesheet.TheCompany’srevenuerecognitionpoliciesareinaccordancewiththeSEC’sStaffAccountingBulletin(“SAB”)No.104,“RevenueRecognition.”AccountsReceivableandAllowanceforDoubtfulAccounts:Accountsreceivablearerecordedatnetrealizablevalue.Accountsreceivablearereducedbyanallowanceforamountsthatmaybecomeuncollectibleinthefuture.TheCompany’spolicyistoidentifyandreserveforspecificcollectibilityconcernsbasedoncustomers’financialconditionandpaymenthistory.OnNovember16,2007,theCompanyenteredintoafive-yearAccountsReceivablePurchaseAgreementwherebyonespecificcustomer’saccountsreceivablemaybesoldwithoutrecoursetoathird-partyfinancialinstitutiononarevolvingbasis.During2007,wesoldapproximately$10,400ofaccountsreceivabletomitigateaccountsreceivableconcentrationriskandtoprovideadditionalfinancingcapacity.IncompliancewithSFASNo.140,“AccountingforTransfersandServicingofFinancialAssetsandExtinguishmentsofLiabilities(“FAS140”)salesofaccountsreceivablearereflectedasareductionofaccountsreceivableintheConsolidatedBalanceSheetsandtheproceedsareincludedinthecashflowsfromoperatingactivitiesintheConsol-idatedStatementsofCashflows.In2007,alossintheamountof$84relatedtothesaleofaccountsreceivableisrecordedintheConsolidatedStatementsofIncome.Thislossrepresentedimplicitinterestonthetransactions.SoftwareDevelopmentCosts:Softwaredevelopmentcostsincurredsubsequenttoestablishingfeasibilitythroughthegeneralreleaseofthesoftwareproductsarecapitalizedandincludedinotherassetsintheconsolidatedbalancesheet.Technologicalfeasibilityisdemonstratedbythecompletionofaworkingmodel.Allcostspriortothedevelopmentoftheworkingmodelareexpensedasincurred.41PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Capitalizedcostsareamortizedonastraight-linebasisoverfiveyears,whichistheestimatedusefullifeofthesoftwareproduct.ConcentrationofCreditRisk:TheCompanysellsitsproductstocustomersindiversifiedindus-tries.TheCompanyperformsongoingcreditevaluationsofitscustomers’financialconditionbutdoesnotrequirecollateraltosupportcustomerreceivables.TheCompanyestablishesanallowancefordoubtfulaccountsbaseduponfactorssurroundingthecreditriskofspecificcustomers,historicaltrendsandotherinformation.AsofDecember31,2007,theCompanyhaduncollateralizedreceivableswithfivecustomersintheautomotiveandheavy-dutytruckindustries,eachwithseverallocations,aggregating$22,703,whichrepresentedapproximately13%oftheCompany’stradeaccountsreceivable.During2007,salestothesecustomersamountedtoapproximately$179,367,whichrepresentedapproximately16%oftheCompany’snetsales.ShippingandHandlingCosts:AllshippingandhandlingcostsareincludedincostofproductssoldintheConsolidatedIncomeStatements.Environmental:TheCompanyaccruesenvironmentalcostsrelatedtoexistingconditionsresultingfrompastorcurrentoperationsandfromwhichnocurrentorfuturebenefitisdiscernible.Coststhatextendthelifeoftherelatedpropertyormitigateorpreventfutureenvironmentalcontaminationarecapitalized.TheCompanyrecordsaliabilitywhenenvironmentalassessmentsand/orremedialeffortsareprobableandcanbereasonablyestimated.TheestimatedliabilityoftheCompanyisnotdiscountedorreducedforpossiblerecoveriesfrominsurancecarriers.ForeignCurrencyTranslation:ThefunctionalcurrencyforallsubsidiariesoutsidetheUnitedStatesisthelocalcurrency.FinancialstatementsforthesesubsidiariesaretranslatedintoU.S.dollarsatyear-endexchangeratesastoassetsandliabilitiesandweighted-averageexchangeratesastorevenuesandexpenses.Theresultingtranslationadjustmentsarerecordedinaccumulatedcomprehensiveincome(loss)inshareholders’equity.RecentAccountingPronouncementsInJuly2006,theFinancialAccountingStandardsBoard(“FASB”)issuedInterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes,”AnInterpretationofFASBStatementNo.109(“FIN48”)”thatprescribesarecognitionthresholdandmeasurementattributeforthefinancialstatementrecognitionandmeasurementofataxpositiontakenorexpectedtobetakeninataxreturn.UnderFIN48,acontingenttaxassetonlywillberecognizedifitismorelikelythannotthatataxpositionultimatelywillbesustained.Afterthisthresholdismet,ataxpositionisreportedatthelargestamountofbenefitthatismorelikelythannottoberealized.FIN48iseffectiveforfiscalyearsbeginningafterDecember15,2006.FIN48requiresthecumulativeeffectofapplyingtheprovisionstobereportedseparatelyasanadjustmenttotheopeningbalanceofretainedearningsintheyearofadoption.TheCompanyadoptedFIN48asofJanuary1,2007.SeeNoteHfortheimpactofsuchadoptionontheCompany’sfinancialstatementsandrelateddisclosures.InSeptember2006,theFASBissuedSFASNo.157,“FairValueMeasurements,”whichdefinesfairvalueinGAAPandexpandsdisclosuresaboutfairvaluemeasurements.ThisstatementappliesunderotheraccountingpronouncementsthatrequireorpermitfairvaluemeasurementsandiseffectivefortheCompanyin2008.TheCompanyiscurrentlyevaluatingtheimpactofadoptingthisstatementontheCompany’sfinancialpositionandresultsofoperations.InFebruary2007,theFASBissuedSFASNo.159,“FairValueOptionforFinancialAssetsandFinancialLiabilities—IncludinganAmendmentofFASBStatementNo.115”(“FAS159”).FAS159permitsanentitytoelectfairvalueastheinitialandsubsequentmeasurementattributeformanyfinancialassetsandliabilities.Entitieselectingthefairvalueoptionwouldberequiredtorecognizechangesinfairvaluein42PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)earnings.Entitieselectingthefairvalueoptionwouldalsoberequiredtodistinguish,onthefaceofthestatementoffinancialposition,thefairvalueofassetsandliabilitiesforwhichthefairvalueoptionhasbeenelectedandsimilarassetsandliabilitiesmeasuredusinganothermeasurementattribute.FAS159iseffectivefortheCompanyin2008.Theadjustmenttoreflectthedifferencebetweenthefairvalueandthecarryingamountwouldbeaccountedforasacumulative-effectadjustmenttoretainedearningsasofthedateofinitialadoption.TheCompanyiscurrentlyevaluatingtheimpactofadoptionofFAS159ontheCompany’sfinancialpositionandresultsofoperations.InDecember2007,theFASBissuedSFASNo.141(revised2007),“BusinessCombinations”(“FAS141(R)”).FAS141(R)providesrevisedguidanceonhowacquirersrecognizeandmeasuretheconsiderationtransferred,identifiableassetsacquired,liabilitiesassumed,noncontrollinginterestsandgoodwillacquiredinabusinesscombination.FAS141(R)alsoexpandsrequireddisclosuressurroundingthenatureandfinancialeffectsofbusinesscombinations.FAS141(R)iseffective,onaprospectivebasis,fortheCompanyin2009.TheCompanyiscurrentlyevaluatingtheimpactofadoptingFAS141(R)ontheCompany’sfinancialpositionandresultsofoperations.InDecember2007,theFASBissuedSFASNo.160,“NoncontrollingInterestsinConsolidatedFinancialStatements.”FAS160establishesrequirementsforownershipinterestsinsubsidiariesheldbypartiesotherthantheCompany(sometimescalled“minorityinterests”)beclearlyidentified,presentedanddisclosedintheconsolidatedstatementoffinancialpositionwithinequity,butseparatefromtheparent’sequity.Allchangesintheparent’sownershipinterestsarerequiredtobeaccountedforconsis-tentlyasequitytransactionsandanynoncontrollingequityinvestmentsindeconsolidatedsubsidiariesmustbemeasuredinitiallyatfairvalue.FAS160iseffective,onaprospectivebasis,fortheCompanyin2009.However,presentationanddisclosurerequirementsmustberetrospectivelyappliedtocomparativefinancialstatements.TheCompanyiscurrentlyevaluatingtheimpactofadoptingFAS160ontheCompany’sfinancialpositionandresultsofoperations.Reclassification:Certainamountsintheprioryears’financialstatementshavebeenreclassifiedtoconformtothecurrentyearpresentation.NOTEB—IndustrySegmentsTheCompanyoperatesthroughthreesegments:SupplyTechnologies,AluminumProductsandManufacturedProducts.InNovember2007,ourIntegratedLogisticsSolutionssegmentchangeditsnametoSupplyTechnologiestobetterreflectitsbreadthofservicesandfocusondrivingefficienciesthroughoutthetotalsupplymanagementprocess.SupplyTechnologiesprovidesourcustomerswithTotalSupplyManagementTMservicesforabroadrangeofhigh-volume,specialtyproductioncomponents.TotalSupplyManagementTMmanagestheefficienciesofeveryaspectofsupplyingproductionpartsandmaterialstoourcustomers’manufacturingfloor,fromstrategicplanningtoprogramimplementationandincludessuchservicesasengineeringanddesignsupport,partusageandcostanalysis,supplierselection,qualityassurance,barcoding,productpackagingandtracking,just-in-timeandpoint-of-usedelivery,electronicbillingservicesandongoingtechnicalsupport.TheprincipalcustomersofSupplyTechnologiesareintheheavy-dutytruck,automotiveandvehicleparts,electricaldistributionandcontrols,consumerelectronics,powersports/fitnessequipment,HVAC,agriculturalandconstructionequipment,semiconductorequip-ment,plumbing,aerospaceanddefense,andapplianceindustries.AluminumProductsmanufacturescastaluminumcomponentsforautomotive,agriculturalequipment,constructionequipment,heavy-dutytruckandmarineequipmentindustries.AluminumProductsalsoprovidesvalue-addedservicessuchasdesignandengineering,machiningandassembly.ManufacturedProductsoperatesadiversegroupofnichemanufacturingbusinessesthatdesignandmanufactureabroadrangeofhighqualityproductsengineeredforspecificcustomerapplications.TheprincipalcustomersofManufacturedProductsareoriginalequipmentmanufacturersandendusersinthesteel,coatings,forging,foundry,heavy-dutytruck,43PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)constructionequipment,bottling,automotive,oilandgas,railandlocomotivemanufacturingandaero-spaceanddefenseindustries.TheCompany’ssalesaremadethroughitsownsalesorganization,distributorsandrepresentatives.Intersegmentsalesareimmaterialandeliminatedinconsolidationandarenotincludedinthefigurespresented.Intersegmentsalesareaccountedforatvaluesbasedonmarketprices.Incomeallocatedtosegmentsexcludescertaincorporateexpensesandinterestexpense.Identifiableassetsbyindustrysegmentincludeassetsdirectlyidentifiedwiththoseoperations.Corporateassetsgenerallyconsistofcashandcashequivalents,deferredtaxassets,propertyandequipment,andotherassets.200720062005YearEndedDecember31,Netsales:SupplyTechnologies..................................$531,417$598,228$532,624AluminumProducts...................................169,118154,639159,053ManufacturedProducts................................370,906303,379241,223$1,071,441$1,056,246$932,900Incomebeforeincometaxes:SupplyTechnologies..................................$27,175$38,383$34,814AluminumProducts...................................3,0203,9219,103ManufacturedProducts................................45,79828,99120,63075,99371,29564,547Corporatecosts......................................(13,269)(12,631)(11,006)Interestexpense.....................................(31,551)(31,267)(27,056)$31,173$27,397$26,48544PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)200720062005YearEndedDecember31,Identifiableassets:SupplyTechnologies..................................$354,165$382,101$323,176AluminumProducts...................................98,52498,041101,489ManufacturedProducts................................231,459205,698169,004Generalcorporate....................................85,04197,91169,185$769,189$783,751$662,854Depreciationandamortizationexpense:SupplyTechnologies..................................$4,832$4,365$4,575AluminumProducts...................................8,5637,8927,484ManufacturedProducts................................6,7236,9604,986Generalcorporate....................................493923301$20,611$20,140$17,346Capitalexpenditures:SupplyTechnologies..................................$7,751$2,447$2,070AluminumProducts...................................4,7755,52810,473ManufacturedProducts................................6,53412,5487,266Generalcorporate....................................2,816233486$21,876$20,756$20,295TheCompanyhadsalesof$77,389in2007,$146,849in2006and$107,853in2005toInternationalTruck,whichrepresentedapproximately7%,14%and12%ofconsolidatednetsalesforeachrespectiveyear.TheCompany’sapproximatepercentageofnetsalesbygeographicregionwereasfollows:200720062005YearEndedDecember31,UnitedStates.......................................................70%76%79%Asia..............................................................9%5%5%Canada............................................................5%9%7%Mexico............................................................6%4%3%Europe............................................................6%4%2%Other.............................................................4%2%4%100%100%100%AtDecember31,2007,2006and2005,approximately85%,90%and86%,respectively,oftheCompany’sassetsweremaintainedintheUnitedStates.NOTEC—AcquisitionsInOctober2006,theCompanyacquiredallofthecapitalstockofNABS,Inc.(“NABS”)for$21,201incash.NABSisapremierinternationalsupplychainmanagerofproductioncomponents,providingservices45PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)tohightechnologycompaniesinthecomputer,electronics,andconsumerproductsindustries.NABShas19operationsacrossEurope,Asia,MexicoandtheUnitedStates.TheacquisitionwasfundedwithborrowingsundertheCompany’srevolvingcreditfacility.ThepurchasepriceandresultsofoperationsofNABSpriortoitsdateofacquisitionwerenotdeemedsignificantasdefinedinRegulationS-X.TheresultsofoperationsforNABShavebeenincludedsinceOctober18,2006.Thefinalallocationofthepurchasepricehasbeenperformedbasedontheassignmentsoffairvaluestoassetsacquiredandliabilitiesassumed.Thefinalallocationofthepurchasepriceisasfollows:Cashacquisitionprice,lesscashacquired......................................$20,053AssetsAccountsreceivable.....................................................(11,460)Inventories.............................................................(4,326)Othercurrentassets.....................................................(201)Equipment.............................................................(365)Intangibleassetssubjecttoamortization.....................................(8,020)Otherassets............................................................(724)LiabilitiesAccountspayable........................................................9,905Accruedexpensesandothercurrentliabilities................................4,701Deferredtaxliability.....................................................3,128Goodwill................................................................$12,691TheCompanyhasaplanforintegrationactivities.InaccordancewithFASBEITFIssueNo.95-3,“RecognitionofLiabilitiesinConnectionwithaPurchaseBusinessCombination,”theCompanyrecordedaccrualsforseverance,exitandrelocationcostsinthepurchasepriceallocation.Areconciliationofthebeginningandendingaccrualbalancesisasfollows:SeveranceandPersonnelExitandRelocationTotalBalanceatOctober18,2006........................$-0-$-0-$-0-Add:Accruals...................................650250900Less:Payments..................................(136)(46)(182)BalanceatDecember31,2006......................514204718Add:Accruals...................................-0--0--0-Less:Payments..................................(514)(204)(718)BalanceatDecember31,2007......................$-0-$-0-$-0-InJanuary2006,theCompanycompletedtheacquisitionofallofthecapitalstockofFoundryServiceGmbH(“FoundryService”)forapproximately$3,219,whichresultedinadditionalgoodwillof$2,313.TheacquisitionwasfundedwithborrowingsfromforeignsubsidiariesoftheCompany.TheacquisitionwasnotdeemedsignificantasdefinedinRegulationS-X.OnDecember23,2005,theCompanycompletedtheacquisitionoftheassetsofLectrotherm,Inc.(“Lectrotherm”)for$5,125incash.TheacquisitionwasfundedwithborrowingsundertheCompany’srevolvingcreditfacility.ThepurchasepriceandtheresultsofoperationsofLectrothermpriortoitsdateofacquisitionwerenotdeemedsignificantasdefinedinRegulationS-X.Theresultsofoperationsfor46PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)LectrothermhavebeenincludedsinceDecember23,2005.In2006,theallocationofthepurchasepricewasfinalizedbasedontheassignmentsoffairvaluestoassetsacquiredandliabilitiesassumed.Theallocationofthepurchasepriceisasfollows:Cashacquisitionprice,lesscashacquired................................$4,698AssetsAccountsreceivable...............................................(2,465)Inventories......................................................-0-Prepaidexpenses.................................................(97)Equipment.......................................................(1,636)LiabilitiesAccruedexpenses.................................................846Goodwill..........................................................$1,346OnJuly20,2005,theCompanycompletedtheacquisitionoftheassetsofPurchasedPartsGroup,Inc.(“PPG”)for$7,000incash,$1,346inashort-termnotepayableandtheassumptionofapproximately$12,787oftradeliabilities.TheacquisitionwasfundedwithborrowingsundertheCompany’srevolvingcreditfacility.ThepurchasepriceandtheresultsofoperationsofPPGpriortoitsdateofacquisitionwerenotdeemedsignificantasdefinedinRegulationS-X.TheresultsofoperationsforPPGhavebeenincludedintheCompany’sfinancialstatementssinceJuly20,2005.Thefinalallocationofthepurchasepriceisasfollows:Cashacquisitionprice..............................................$7,000AssetsAccountsreceivable..............................................(10,835)Inventories.....................................................(10,909)Prepaidexpenses................................................(1,201)Equipment......................................................(407)LiabilitiesAccountspayable................................................12,783Accruedexpenses................................................2,270Notepayable....................................................1,299Goodwill.........................................................$-0-47PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)TheCompanyhasaplanforintegrationactivities.InaccordancewithFASBEITFIssueNo.95-3,“RecognitionofLiabilitiesinConnectionwithaPurchaseBusinessCombination,”theCompanyrecordedaccrualsforseverance,exitandrelocationcostsinthepurchasepriceallocation.Areconciliationofthebeginningandendingaccrualbalanceisasfollows:SeveranceandPersonnelExitandRelocationTotalBalanceatJune30,2005.........................$-0-$-0-$-0-Add:Accruals..................................2501,7502,000Less:Payments.................................(551)(594)(1,145)Transfers.....................................400(400)-0-BalanceatDecember31,2005.....................$99$756$855Less:Paymentsandadjustments...................(43)(417)(460)Transfers.....................................(17)17-0-BalanceatDecember31,2006.....................$39$356$395Less:Paymentsandadjustments...................(39)(356)(395)BalanceatDecember31,2007.....................$-0-$-0-$-0-NOTED—FAS142,“GoodwillandOtherIntangibleAssets”InaccordancewiththeprovisionsofFAS142,theCompanyhascompleteditsannualgoodwillimpairmenttestsasofOctober1,2007,2006and2005,andhasdeterminedthatnoimpairmentofgoodwillexistedasofthosedates.ThefollowingtablesummarizesthecarryingamountofgoodwillfortheyearsendedDecember31,2007andDecember31,2006byreportingsegment.ReportingSegmentGoodwillatDecember31,2007GoodwillatDecember31,2006SupplyTechnologies............................$80,249$77,732AluminumProducts............................16,51516,515ManufacturedProducts.........................4,2333,933$100,997$98,180TheincreaseinthegoodwillintheManufacturedProductssegmentduring2007resultsfromforeigncurrencyfluctuations.TheincreaseinthegoodwillintheSupplyTechnologiessegmentduring2007resultsfromthefinalpurchasepriceadjustmentoftheNABSacquisitionof$1,714andforeigncurrencyfluctuations.OtherintangibleassetswereacquiredinconnectionwiththeacquisitionofNABS.InformationregardingotherintangibleassetsasofDecember31,2007follows:AcquisitionCostsAccumulatedAmortizationNetNon-contractualcustomerrelationships..............$7,200$600$6,600Other.........................................820124696$8,020$724$7,29648PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)NOTEE—OtherAssetsOtherassetsconsistsofthefollowing:20072006December31,Pensionassets...............................................$70,558$60,109Deferredfinancingcosts.......................................4,2255,618Tooling.....................................................5431,501Softwaredevelopmentcosts....................................3,4616,368Deferredtaxassets............................................-0-6,555Intangibleassetssubjecttoamortization...........................7,5048,779Other.......................................................8,7903,162Totals.....................................................$95,081$92,092NOTEF—AccruedExpensesAccruedexpensesincludethefollowing:20072006December31,Accruedsalaries,wagesandbenefits.............................$17,399$17,349Advancebillings..............................................16,38726,729Warrantyandprojectaccruals...................................7,3224,820Interestpayable..............................................2,6833,232Stateandlocaltaxes..........................................5,6075,746Sundry......................................................17,60920,388Totals.....................................................$67,007$78,264Substantiallyalladvancebillings,warrantyandprojectaccrualsrelatetotheCompany’scapitalequipmentbusinesses.ThechangesintheaggregateproductwarrantyliabilityareasfollowsfortheyearendedDecember31,2007,2006and2005:200720062005Balanceatbeginningofyear............................$3,557$3,566$4,281Claimspaidduringtheyear.............................(2,402)(2,984)(3,297)Warrantyexpense.....................................4,5262,7972,593Acquiredwarrantyliabilities............................-0-178-0-Other...............................................118-0-(11)Balanceatendofyear.................................$5,799$3,557$3,56649PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)NOTEG—FinancingArrangementsLong-termdebtconsistsofthefollowing:20072006December31,8.375%seniorsubordinatednotesdue2014.......................$210,000$210,000RevolvingcreditfacilitymaturingonDecember31,2010............145,400156,700Industrialdevelopmentrevenuebondsmaturingin2012atinterestratesfrom2.00%to4.15%...................................-0-3,114Other.....................................................4,6494,986360,049374,800Lesscurrentmaturities.......................................2,3623,310Total....................................................$357,687$371,490Maturitiesoflong-termdebtduringeachofthefiveyearsfollowingDecember31,2007areapprox-imately$2,362in2008,$330in2009,$147,332in2010,$24in2011and$-0-in2012.TheCompanyisapartytoacreditandsecurityagreementdatedNovember5,2003,asamended(“CreditAgreement”),withagroupofbanks,underwhichitmayborroworissuestandbylettersofcreditorcommerciallettersofcreditupto$270,000.Thecreditagreement,asrecentlyamended,provideslowerinterestratebracketsandmodifiedcertaincovenantstoprovidegreaterflexibility.TheCreditAgreementcurrentlycontainsadetailedborrowingbaseformulathatprovidesborrowingcapacitytotheCompanybasedonnegotiatedpercentagesofeligibleaccountsreceivable,inventoryandfixedassets.AtDecem-ber31,2007,theCompanyhadapproximately$70,429ofunusedborrowingcapacityavailableundertheCreditAgreement.Interestispayablequarterlyateitherthebank’sprimelendingrate(7.25%atDecem-ber31,2007)or,attheCompany’selection,atLIBORplus.75%to1.75%.TheCompany’sabilitytoelectLIBOR-basedinterestratesaswellastheoverallinterestratearedependentontheCompany’sDebtServiceCoverageRatio,asdefinedintheCreditAgreement.Upto$40,000instandbylettersofcreditandcommerciallettersofcreditmaybeissuedundertheCreditAgreement.AsofDecember31,2007,inadditiontoamountsborrowedundertheCreditAgreement,therewas$12,723outstandingprimarilyforstandbylettersofcredit.Anannualfeeof.25%isimposedbythebankontheunusedportionofavailableborrowings.TheCreditAgreementexpiresonDecember31,2010andborrowingsaresecuredbysubstantiallyalloftheCompany’sassets.AforeignsubsidiaryoftheCompanyhadoutstandingstandbylettersofcreditof$11,968atDecem-ber31,2007underitscreditarrangement.The8.375%seniorsubordinatednotesdue2014(“8.375%Notes”)aregeneralunsecuredseniorsubordinatedobligationsoftheCompanyandarefullyandunconditionallyguaranteedonajointandseveralbasisbyallmaterialdomesticsubsidiariesoftheCompany.Provisionsoftheindenturegoverningthe8.375%NotesandtheCreditAgreementcontainrestrictionsontheCompany’sabilitytoincuradditionalindebtedness,tocreateliensorotherencumbrances,tomakecertainpayments,investments,loansandguaranteesandtosellorotherwisedisposeofasubstantialportionofassetsortomergeorconsolidatewithanunaffiliatedentity.AtDecember31,2007,theCompanywasincompliancewithallfinancialcovenantsoftheCreditAgreement.Theweightedaverageinterestrateonalldebtwas7.4%atDecember31,2007.Thecarryingvalueofcashandcashequivalents,accountsreceivable,accountspayable,borrowingsundertheCreditAgreementandthe8.375%NotesapproximatefairvalueatDecember31,2007and2006.50PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Theapproximatefairvalueofthe8.375%Noteswas$189,000and$195,300atDecember31,2007and2006,respectively.NOTEH—IncomeTaxesIncometaxesconsistedofthefollowing:200720062005YearEndedDecember31,Currentpayable(benefit):Federal............................................$(9)$2,355$165State..............................................299432198Foreign............................................5,3444,7922,2605,6347,5792,623Deferred:Federal............................................3,639(1,093)(7,300)State..............................................198(1,521)-0-Foreign............................................505(1,747)3544,342(4,361)(6,946)Incometaxes(benefit)..................................$9,976$3,218$(4,323)Thereasonsforthedifferencebetweenincometaxexpenseandtheamountcomputedbyapplyingthestatutoryfederalincometaxratetoincomebeforeincometaxesareasfollows:RateReconciliation200720062005Taxatstatutoryrate..................................$10,911$9,571$9,189Effectofstateincometaxes,net........................266(1,240)129Effectofforeignoperations............................(1,082)(1,441)(151)Medicaresubsidy....................................196(126)(795)FIN48.............................................471-0--0-Valuationallowance..................................238(4,806)(12,093)Prioryearsadjustments...............................(848)88950Researchanddevelopmentcredit.......................(206)(250)(237)Nondeductibleexpenses..............................57241753Foreigntaxcredit....................................(501)-0--0-Other,net..........................................(41)204(468)Total..............................................$9,976$3,218$(4,323)51PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)SignificantcomponentsoftheCompany’snetdeferredtaxassetsandliabilitiesareasfollows:20072006December31,Deferredtaxassets:Postretirementbenefitobligation......................................$7,604$9,409Inventory.........................................................10,96912,493Netoperatinglossandcreditcarryforwards.............................21,54418,626Other—net.......................................................9,22311,616Totaldeferredtaxassets...........................................49,34052,144Deferredtaxliabilities:Taxoverbookdepreciation..........................................13,35412,858Pension..........................................................26,07122,693Inventory.........................................................864889Intangibleassets...................................................2,9553,127Deductiblegoodwill.................................................4,7043,452Totaldeferredtaxliabilities.........................................47,94843,019Netdeferredtaxassetspriortovaluationallowances........................1,3929,125Valuationallowances..................................................(2,217)(316)Netdeferredtax(liability)asset.........................................$(825)$8,809AtDecember31,2007,theCompanyhasfederal,stateandforeignnetoperatinglosscarryforwardsforincometaxpurposes.TheU.S.federalnetoperatinglosscarryforwardisapproximately$41,602whichexpiresbetween2021and2027.Foreignnetoperatinglossesof$1,389havenoexpirationdate.ThetaxbenefitoftheU.S.federalnetoperatinglossis$13,053,whichhasbeenreducedby$1,508ofFIN48liabilities.TheCompanyalsohas$1,614ofstatetaxbenefitrelatedtostatenetoperatinglosseswhichexpirebetween2011and2027.Theultimaterealizationofdeferredtaxassetsisdependentuponthegenerationoffuturetaxableincome(includingreversalsofdeferredtaxliabilities).TheCompanyissubjecttotaxationintheU.S.andvariousstateandforeignjurisdictions.TheCompany’staxyearsfor2004through2007remainopenforexaminationbytheU.S.andvariousstateandforeigntaxingauthorities.AsofDecember31,2004,theCompanywasinacumulativethree-yearlosspositionanddetermineditwasnotmorelikelythannotthatitsnetdeferredtaxassetswillberealized.Therefore,asofDecember31,2004,theCompanyhadafullvaluationallowanceagainstitsU.S.netdeferredtaxassetandaportionofitsforeignnetoperatinglosscarryforwards.AsofDecember31,2005,theCompanywasnolongerinathree-yearcumulativelosspositionandafterconsiderationoftherelevantpositiveandnegativeevidence,theCompanydeterminedafullvaluationallowancewasnolongerappropriate.Accordingly,theCompanyreversedaportionofitsvaluationallowanceandrecognizeda$7,300taxbenefitrelatedtoitsUSnetdeferredtaxassetasithasbeendeterminedtherealizationofthisamountwasmorelikelythannot.AsofDecember31,2006,theCompanydeterminedthatitwasmorelikelythannotthatitwouldbeabletorealizemostofitsdeferredtaxassetsinthefutureandreleased$4,806ofthevaluationallowance.AsofDecember31,2006,theCompanyalsorecognizedataxbenefitfornetoperatinglossesof$1,284forstateincometaxeswhichithasdeterminedaremorelikelythannotwillbefullyrealizedinthefuture.TheCompanyrecordedadeferredtaxassetforacapitallosscarryforwardthatwasgeneratedin2005intheamountof$4,750whichexpiresin2010.During2007,theCompanywasabletooffsetthelosswith52PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)capitalgainsintheamountof$1,772.TheCompanyhasrecordedavaluationallowanceagainsttheremainingbalanceofthecapitallosscarryforwardof$2,978asitisnotconsideredmorelikelythannotthatthisamountwillbefullyrealizedinthefuture.TheCompanyadoptedtheprovisionsofFIN48onJanuary1,2007.AsaresultoftheimplementationofFIN48,theCompanyrecognizeda$608increaseintheliabilityforunrecognizedtaxbenefitswhichwasaccountedforasareductioninretainedearnings.Thetotalamountofunrecognizedtaxbenefitsasofthedateofadoptionwasapproximately$4,691.Areconciliationofthebeginningandendingamountofunrecognizedtaxbenefitsisasfollows:UnrecognizedTaxBenefit—January1,2007.................................$4,691GrossIncreases—TaxPositionsinPriorPeriod..............................72GrossDecreases—TaxPositionsinPriorPeriod.............................(133)GrossIncreases—TaxPositionsinCurrentPeriod............................625Settlements...........................................................-0-LapseofStatuteofLimitations............................................-0-UnrecognizedTaxBenefit—December31,2007..............................$5,255TheCompanyrecognizesinterestandpenaltiesaccruedrelatedtounrecognizedtaxbenefitsinincometaxexpense.DuringtheyearendedDecember31,2007,theCompanyrecognizedapproximately$57innetinterestandpenalties.TheCompanyhadapproximately$537and$480forthepaymentofinterestandpenaltiesaccruedatDecember31,2007andJanuary1,2007,respectively.AtDecember31,2007,theCompanyhadtotalrecognizedtaxbenefitsof$5,255,ofwhich$4,311wouldimpacttheeffectivetaxrateifrecognized.TheCompanydoesnotexpectthattheunrecognizedtaxbenefitwillchangesignificantlywithinthenexttwelvemonths.AtDecember31,2007,theCompanyhasresearchanddevelopmentcreditcarryforwardsofapprox-imately$2,689,whichexpirebetween2010and2027.TheCompanyalsohasforeigntaxcreditcarryfor-wardsof$1,213,whichexpirebetween2015and2017,andalternativeminimumtaxcreditcarryforwardsof$1,214,whichhavenoexpirationdate.DeferredtaxeshavenotbeenprovidedonundistributedearningsoftheCompany’sforeignsubsid-iariesasitistheCompany’spolicytopermanentlyreinvestsuchearnings.TheCompanyhasdeterminedthatitisnotpracticaltodeterminethedeferredtaxliabilityonsuchundistributedearnings.NOTEI—StockPlanUndertheprovisionsoftheCompany’s1998Long-TermIncentivePlan,asamended(“1998Plan”),whichisadministeredbytheCompensationCommitteeoftheCompany’sBoardofDirectors,incentivestockoptions,non-statutorystockoptions,stockappreciationrights(“SARs”),restrictedshares,perfor-mancesharesorstockawardsmaybeawardedtodirectorsandallemployeesoftheCompanyanditssubsidiaries.Stockoptionswillbeexercisableinwholeorininstallmentsasmaybedeterminedprovidedthatnooptionswillbeexercisablemorethantenyearsfromdateofgrant.Theexercisepricewillbethefairmarketvalueatthedateofgrant.TheaggregatenumberofsharesoftheCompany’scommonstockthatmaybeawardedunderthe1998Planis2,650,000,allofwhichmaybeincentivestockoptions.Nomorethan500,000sharesshallbethesubjectofawardstoanyindividualparticipantinanyonecalendaryear.OnJanuary1,2006,theCompanyadoptedtheprovisionsofFAS123(R)andelectedtousethemodifiedprospectivetransitionmethod.Themodifiedprospectivetransitionmethodrequiresthatcom-pensationcostberecognizedinthefinancialstatementsforallstockoptionawardsgrantedafterthedate53PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)ofadoptionandforallunvestedstockoptionawardsgrantedpriortothedateofadoption.InaccordancewithFAS123(R),priorperiodamountswerenotrestated.Additionally,theCompanyelectedtocalculateitsinitialpoolofexcesstaxbenefitsusingthesimplifiedalternativeapproachdescribedinFASBStaffPositionNo.FAS123(R)-3,“TransitionElectionRelatedtoAccountingfortheTaxEffectsofShare-BasedPaymentAwards.”PriortotheadoptionofFAS123(R),theCompanyutilizedtheintrinsic-valuebasedmethodofaccountingunderAPBOpinion25,“AccountingforStockIssuedtoEmployees,”andrelatedinterpretations,andadoptedthedisclosurerequirementsofFAS123,“AccountingforStock-BasedCompensation.”PriortoJanuary1,2006,nostock-basedcompensationexpensewasrecognizedforstockoptionawardsundertheintrinsic-valuebasedmethod.TheadoptionofFAS123(R)reducedoperatingincomebeforeincometaxesfor2007and2006by$412and$299,andreducednetincomefor2007and2006by$280and$187($.02perdilutedshareineachyear).Thefairvalueofsignificantstockoptionawardsgrantedduring2007and2005wasestimatedatthedateofgrantusingaBlack-Scholesoption-pricingmethodwiththefollowingassumptions:Assumptions:20072005Weightedaveragefairvalueperoption...............................$12.92$8.20Risk-freeinterestrate............................................4.62%4.15%Dividendyield..................................................0%0%Expectedstockvolatility..........................................57%55%Expectedlife—years............................................6.06.0TherewerenooptionsawardedduringtheyearendedDecember31,2006.Historicalinformationwastheprimarybasisfortheselectionoftheexpecteddividendyield,andexpectedvolatility.TheSECsimplifiedmethodperStaffAccountingBulletin107isthebasisfortheassumptionsoftheexpectedlivesoftheoptions.Therisk-freeinterestratewasbaseduponyieldsofU.S.zerocouponissuesandU.S.Treasuryissues,withatermequaltotheexpectedlifeoftheoptionbeingvalued.Forfeitureswereestimatedat3%for2006and2007.AsummaryofoptionactivityasofDecember31,2007and2006changesduringtheyearsthenendedispresentedbelow:NumberofSharesWeightedAverageExercisePriceWeightedAverageRemainingContractualTermAggregateIntrinsicValueNumberofSharesWeightedAverageExercisePriceWeightedAverageRemainingContractualTermAggregateIntrinsicValue20072006Outstanding—beginningofyear.............926,386$3.59997,751$3.55Granted..............56,25022.30-0--0-Exercised.............(106,084)3.21(69,364)2.78CanceledorExpired.....(833)14.12(2,001)13.06Outstanding—endofyear...............875,719$4.834.8years$17,752926,386$3.595.4years$11,607OptionsExercisable.....785,6463.164.7years17,240855,3842.705.2years11,478ExercisepricesforoptionsoutstandingasofDecember31,2007rangefrom$1.91to$6.28,$14.12to$14.90and$20.00to$24.92.ThenumberofoptionsoutstandingatDecember31,2007,whichcorrespond54PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)withtheseranges,are721,303,98,166and56,250,respectively.ThenumberofoptionsexercisableatDecember31,2007,whichcorrespondtotheserangesare721,304,64,432and-0-,respectively.Theweighted-averageremainingcontractuallifeoftheseoptionsis4.8years.ExercisepricesforoptionsoutstandingasofDecember31,2006rangefrom$1.91to$6.28and$7.77to$14.90.ThenumberofoptionsoutstandingatDecember31,2006,whichcorrespondwiththeseranges,are814,053and112,333,respectively.ThenumberofoptionsexercisableatDecember31,2006,whichcorrespondtotheserangesare814,053and41,331,respectively.Theweighted-averageremainingcon-tractuallifeoftheseoptionsis5.4years.ThenumberofsharesavailableforfuturegrantsforallplansatDecember31,2007is674,484.ThetotalintrinsicvalueofoptionsexercisedduringtheyearsendedDecember31,2007,2006and2005was$2,318,$992and$1,911,respectively.Netcashproceedsfromtheexerciseofstockoptionswere$340,$193and$217,respectively.TherewerenoincometaxbenefitsbecausetheCompanyhadanetoperatinglosscarryforward.AsummaryofrestrictedshareactivityfortheyearsendedDecember31,2007and2006isasfollows:NumberofSharesWeightedAverageGrantDateFairValueNumberofSharesWeightedAverageGrantDateFairValue20072006Outstanding—beginningofyear.........362,204$14.0651,633$14.91Granted............................16,50024.92340,00014.06Vested..............................(116,761)14.23(27,429)15.67Canceledorexpired...................-0--0-(2,000)-0-Outstanding—endofyear.............261,94314.67362,20414.06TheCompanyrecognizescompensationcostofallshare-basedawardsasanexpenseonastraight-linebasisoverthevestingperiodoftheawards.TheCompanyrecognizedcompensationexpenseof$1,651,$787and$674fortheyearsendedDecember31,2007,2006and2005,respectively,relatingtorestrictedshares.ThetotalfairvalueofrestrictedstockunitsvestedduringtheyearsendedDecember31,2007,2006and2005was$2,953,$467and$340,respectively.AsofDecember31,2007,theCompanyhadunrecognizedcompensationexpenseof$4,044,beforetaxes,relatedtostockoptionawardsandrestrictedshares.Theunrecognizedcompensationexpenseisexpectedtoberecognizedoveratotalweightedaverageperiodof2.5years.NOTEJ—LegalProceedingsTheCompanyissubjecttovariouspendingandthreatenedlawsuitsinwhichclaimsformonetarydamagesareassertedintheordinarycourseofbusiness.Whileanylitigationinvolvesanelementofuncertainty,intheopinionofmanagement,liabilities,ifany,arisingfromcurrentlypendingorthreatenedlitigationisnotexpectedtohaveamaterialadverseeffectontheCompany’sfinancialcondition,liquidityandresultsofoperations.NOTEK—PensionsandPostretirementBenefitsOnDecember31,2006,theCompanyadoptedtherecognitionanddisclosureprovisionsofFAS158.FAS158requiredtheCompanytorecognizethefundedstatus(i.e.,thedifferencebetweentheCompany’s55PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)fairvalueofplanassetsandtheprojectedbenefitobligations)ofitsdefinedbenefitpensionandpostretirementbenefitplans(collectively,the“postretirementbenefitplans”)intheDecember31,2006ConsolidatedBalanceSheet,withacorrespondingadjustmenttoaccumulatedothercomprehensiveincome,netoftax.Theadjustmenttoaccumulatedothercomprehensiveincomeatadoptionrepresentsthenetunrecognizedactuariallosses,unrecognizedpriorservicecostsandunrecognizedtransitionobligationremainingfromtheinitialadoptionofFAS87andFAS106,allofwhichwerepreviouslynettedagainsttheplans’fundedstatusinthecompany’sConsolidatedBalanceSheetinaccordancewiththeprovisionsofFAS87andFAS106.TheseamountswillbesubsequentlyrecognizedasnetperiodicbenefitcostinaccordancewiththeCompany’shistoricalaccountingpolicyforamortizingtheseamounts.Inaddition,actuarialgainsandlossesthatariseinsubsequentperiodsandarenotrecognizedasnetperiodicbenefitcostinthesameperiodswillberecognizedasacomponentofothercomprehensiveincome.ThoseamountswillbesubsequentlyrecognizedasacomponentofnetperiodicbenefitcostonthesamebasisastheamountsrecognizedinaccumulatedothercomprehensiveincomeatadoptionofFAS158.TheincrementaleffectsofadoptingtheprovisionsofFAS158onthecompany’sConsolidatedBalanceSheetatDecember31,2006arepresentedinthefollowingtable.TheadoptionofFAS158hadnoeffectontheCompany’sConsolidatedStatementofIncomefortheyearendedDecember31,2006and2005,respectively,anditwillnoteffecttheCompany’soperatingresultsinsubsequentperiods.PriortoAdoptingFASNo.158EffectofAdoptingFASNo.158AsReportedatDecember31,2006AtDecember31,2006AssetsOthernon-currentassets.......................$80,708$7,884$88,592Totalassets...............................$776,258$7,884$784,142LiabilitiesandShareholders’Equity:Pensionandpostretirementbenefitliabilities......$15,951$7,040$22,989Deferredincometaxes........................12,88040413,284Accumulatedothercomprehensiveincome........-0-440440Totalliabilitiesandshareholders’equity.........$776,258$7,884$784,142Inthetablepresentedabove,deferredincometaxesrepresentcurrentandnon-currentdeferredincometaxassetsontheConsolidatedBalanceSheetasofDecember31,2006.Inaddition,pensionandpostretirementbenefitliabilitiesrepresentsalaries,wagesandbenefits,accruedpensioncostandaccruedpostretirementbenefitscostsontheConsolidatedBalanceSheetasofDecember31,2006.Theestimatednet(gain),priorservicecostandnettransition(asset)forthedefinedbenefitpensionplansthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostovertheyearendingDecember31,2008are$(117),$137and$(47),respectively.TheestimatednetlossandpriorservicecreditforthepostretirementplansthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostovertheyearendingDecember31,2008are$200and$(52),respectively.56PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Thefollowingtablessetforththechangeinbenefitobligation,planassets,fundedstatusandamountsrecognizedintheconsolidatedbalancesheetforthedefinedbenefitpensionandpostretirementbenefitplansasofDecember31,2006and2005:2007200620072006PensionPostretirementBenefitsChangeinbenefitobligationBenefitobligationatbeginningofyear...............$52,387$54,734$22,989$22,843Servicecost....................................334426180199Curtailmentandsettlement........................8012-0-(254)Interestcost....................................2,8422,9151,1031,292Amendments....................................-0--0--0-(1,106)Actuariallosses(gains)...........................(2,571)(580)(2,990)3,047Benefitsandexpensespaid,netofcontributions.......(4,752)(5,120)(2,571)(3,032)Benefitobligationatendofyear....................$48,320$52,387$18,711$22,989ChangeinplanassetsFairvalueofplanassetsatbeginningofyear..........$112,496$101,639$-0-$-0-Actualreturnonplanassets.......................11,13415,977-0--0-Companycontributions...........................-0--0-2,5713,032Curtailmentsandsettlement.......................-0--0--0--0-Benefitsandexpensespaid,netofcontributions.......(4,752)(5,120)(2,571)(3,032)Fairvalueofplanassetsatendofyear...............$118,878$112,496$-0-$-0-Funded(underfunded)statusoftheplan.............$70,558$60,109$(18,711)$(22,989)Amountsrecognizedintheconsolidatedbalancesheetsconsistof:2007200620072006PensionPostretirementBenefitsNoncurrentassets..................................$70,558$60,109$-0-$-0-Noncurrentliabilities...............................-0--0-12,78613,387Currentliabilities..................................-0--0-2,0412,564Accumulatedothercomprehensive(income)loss.........(12,756)(8,144)3,8847,038Netamountrecognizedattheendoftheyear............$57,802$51,965$18,711$22,989AmountsrecognizedinaccumulatedothercomprehensiveincomeNetactuarialloss/(gain).............................$(13,005)$(8,452)$3,936$7,153Netpriorservicecost(credit)........................509646(52)(115)Nettransitionobligation(asset).......................(260)(338)-0--0-Accumulatedothercomprehensiveincome..............$(12,756)$(8,144)$3,884$7,038AsofDecember31,2007and2006,theCompany’sdefinedbenefitpensionplansdidnotholdamaterialamountofsharesoftheCompany’scommonstock.57PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Thepensionplanweighted-averageassetallocationatDecember31,2007and2006andtargetallocationfor2008areasfollows:Target200820072006PlanAssetsAssetCategoryEquitysecurities........................................60-70%64.8%65.1%Debtsecurities.........................................20-3024.225.7Other.................................................7-1511.09.2100%100%100%Thefollowingtablessummarizetheassumptionsusedbytheconsultingactuaryandtherelatedcostinformation.200720062005200720062005PensionPostretirementBenefitsWeighted-AverageassumptionsasofDecember31,Discountrate..............................6.25%5.75%5.50%6.25%5.75%5.50%Expectedreturnonplanassets................8.25%8.50%8.75%N/AN/AN/ARateofcompensationincrease................N/AN/AN/AN/AN/AN/AIndeterminingitsexpectedreturnonplanassetsassumptionfortheyearendedDecember31,2007,theCompanyconsideredhistoricalexperience,itsassetallocation,expectedfuturelong-termratesofreturnforeachmajorassetclass,andanassumedlong-terminflationrate.Basedonthesefactors,theCompanyderivedanexpectedreturnonplanassetsfortheyearendedDecember31,2007of8.25%.Thisassumptionwassupportedbytheassetreturngenerationmodel,whichprojectedfutureassetreturnsusingsimulationandassetclasscorrelation.58PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Formeasurementpurposes,a9.0%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2007.Theratewasassumedtodecreasegraduallyto5.0%for2011andremainatthatlevelthereafter.200720062005200720062005PensionBenefitsOtherBenefitsComponentsofnetperiodicbenefitcostServicecosts.......................$334$426$364$180$199$145Interestcosts.......................2,8422,9153,1941,1031,2921,281Expectedreturnonplanassets.........(9,049)(8,408)(8,804)-0--0--0-Transitionobligation.................(38)(48)(49)-0--0--0-FAS88one-timecharge...............80297-0--0--0--0-Amortizationofpriorservicecost......138182163(63)(63)(69)Recognizednetactuarial(gain)loss.....1399(224)227374106Benefit(income)costs...............$(5,680)$(4,537)$(5,356)$1,447$1,802$1,463Otherchangesinplanassetsandbenefitobligationsrecognizedinothercomprehensiveincome(a)AOCIatbeginningofyear.............$(8,144)$5,358N/A$7,038$-0-N/ANetloss/(gain)......................(4,499)(2,990)Recognitionofpriorservicecost/(credit)......................(138)-0-N/A63-0-N/ARecognitionofloss/(gain).............25-0-N/A(227)-0-N/ADecreasepriortoadoptionofSFASNo.158.....................-0-(5,358)N/A-0--0-N/AIncrease(decrease)duetoadoptionofSFASNo.158.....................-0-(8,144)N/A-0-7,038N/ATotalrecognizedinothercomprehensiveincomeatendofyear..............$(12,756)$(8,144)N/A$3,884$7,038N/A(a)Thesedisclosuresarenotapplicableto2005definedbenefitpensionplansandpostretirementplansduetoFASNo.158beingeffectivefortheyearendedDecember31,2006.BelowisatablesummarizingtheCompany’sexpectedfuturebenefitpaymentsandtheexpectedpaymentsduetoMedicaresubsidyoverthenexttenyears:PensionBenefitsGrossExpectedMedicareSubsidyNetincludingMedicareSubsidyPostretirementBenefits2008..........................$4,235$2,243$202$2,0412009..........................4,2172,2232052,0182010..........................4,1382,1852041,9812011..........................4,0532,1171981,9192012..........................3,9571,9721951,7772013to2017....................19,0798,3188267,49259PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)TheCompanyhastwopostretirementbenefitplans.Underbothoftheseplans,healthcarebenefitsareprovidedonbothacontributoryandnoncontributorybasis.Theassumedhealthcarecosttrendratehasasignificanteffectontheamountsreported.Aone-percentage-pointchangeintheassumedhealthcarecosttrendratewouldhavethefollowingeffects:1-PercentagePointIncrease1-PercentagePointDecreaseEffectontotalofserviceandinterestcostcomponentsin2007..$121$(103)EffectonpostretirementbenefitobligationasofDecember31,2007...............................................$1,463$(1,274)ThetotalcontributionchargedtopensionexpensefortheCompany’sdefinedcontributionplanswas$2,068in2007,$1,831in2006and$1,753in2005.TheCompanyexpectstohavenocontributionstoitsdefinedbenefitplansin2008.NOTEL—LeasesandSale-leasebackTransactionsFutureminimumleasecommitmentsduringeachofthefiveyearsfollowingDecember31,2007andthereafterareasfollows:$13,400in2008,$11,106in2009,$8,338in2010,$5,305in2011,$3,812in2012and$12,799thereafter.Rentalexpensefor2007,2006and2005was$14,687,$15,370and$13,494,respectively.In2006,theCompanyenteredintotwosale-leasebackarrangements.Underthearrangements,land,buildingandequipmentwithanetbookvalueofapproximately$7,988weresoldfor$9,420andleasedbackundertwooperatingleaseagreementsrangingfromfivetotwelveyears.Thegainonthesetransactionsofapproximately$1,400wasdeferredandisbeingamortizedoverthetermsoftheleaseagreements.NOTEM—EarningsPerShareThefollowingtablesetsforththecomputationofbasicanddilutedearningspershare:200720062005YearEndedDecember31,NUMERATORNetincome.........................................$21,197$24,179$30,808DENOMINATORDenominatorforbasicearningspershare—weightedaverageshares............................................11,10610,99710,908Effectofdilutivesecurities:Employeestockoptions.............................545464501Denominatorfordilutedearningspershare—weightedaveragesharesandassumedconversions................11,65111,46111,409Amountspercommonshare:Basic............................................$1.91$2.20$2.82Diluted...........................................$1.82$2.11$2.70(a)Stockoptionsfor32,000and104,000sharesofcommonstockwereexcludedintheyearsendedDecember31,2007and2006,respectively,becausetheywereanti-dilutive.60PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)NOTEN—AccumulatedComprehensiveLossThecomponentsofaccumulatedcomprehensivelossatDecember31,2007and2006areasfollows:20072006December31,Foreigncurrencytranslationadjustment............................$12,712$5,384Unrealizednetlossesonmarketablesecurities,netoftax..............(323)-0-Pensionandpostretirementbenefitadjustments,netoftax.............5,373440Total......................................................$17,762$5,824NOTEO—RestructuringandUnusualChargesDuringthefourthquarterof2005,theCompanyrecordedrestructuringandassetimpairmentchargesassociatedwithexecutingrestructuringactionsintheAluminumProductsandManufacturedProductssegmentsinitiatedinprioryears.Thechargeswerecomposedof$833ofinventoryimpairmentincludedinCostofProductsSold,$391ofassetimpairment,$152ofmulti-employerpensionplanwithdrawalcostsand$400ofrestructuringchargesrelatedtotheclosureoftwoManufacturedProductsmanufacturingfacilities.Belowisasummaryofthesechargesbysegment.CostofProductsSoldAssetImpairmentRestructuring&SeverancePensionCurtailmentTotalManufacturedProducts.............$833$-0-$400$152$1,385AluminumProducts................-0-391-0--0-391$833$391$400$152$1,776In2006,theCompanyrecordedrestructuringandassetimpairmentchargesassociatedwithitsplannedclosureofamanufacturingfacilityintheSupplyTechnologiessegment.Thecharges(credits)werecomposedof$800ofinventoryandtoolingincludedinCostofProductsSold,$297ofpensioncurtailmentand$(1,106)ofpostretirementbenefitcurtailment.In2007,theCompanyrecordedanadditional$2,214chargeforinventoryrelatedrestructuringchargeswhichareincludedinCostofProductsSold.Theaccruedliabilityforseveranceandexitcostsandrelatedcashpaymentsconsistedof:BalanceatJanuary1,2005................................................$462Exitchargesrecordedin2005.............................................400Cashpaymentsmadein2005..............................................(266)BalanceatDecember31,2005.............................................596Cashpaymentsmadein2006..............................................(312)BalanceatDecember31,2006.............................................284Cashpaymentsmadein2007..............................................(284)BalanceatDecember31,2007.............................................$-0-AsofDecember31,2006,allofthe525employeesidentifiedin2001andallofthe490employeesidentifiedin2002hadbeenterminated.Theworkforcereductionsundertherestructuringplanconsistedofhourlyandsalariedemployeesatvariousoperatingfacilitiesduetoeitherclosureorconsolidation.AsofDecember31,2007,theCompanyhadanaccruedliabilityof$-0-forfutureestimatedemployeeseveranceandplantclosingpayments.61PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)AtDecember31,2007,theCompany’sbalancesheetreflectedassetsheldforsaleattheirestimatedcurrentvalueof$3,330forproperty,plantandequipment.Netsalesforthebusinessesthatwereincludedinnetassetsheldforsalewere$-0-in2007,2006and2005.NOTEP—DerivativesandHedgingTheCompanyrecognizesallderivativefinancialinstrumentsaseitherassetsorliabilitiesatfairvalue.TheCompanyhasnoderivativeinstrumentsthatareclassifiedasfairvaluehedges.Changesinthefairvalueofderivativeinstrumentsthatareclassifiedascashflowhedgesarerecognizedinothercompre-hensiveincomeuntilsuchtimeasthehedgeditemsarerecognizedinnetincome.During2006,theCompanyenteredintoforwardcontractsforthepurposeofhedgingexposuretochangesinthevalueofaccountsreceivableineurosagainsttheU.S.dollar,foranotionalamountof$1,000,ofwhich$-0-wasoutstandingatDecember31,2006.TheCompanyrecognized$61offoreigncurrencylossesuponsettlementoftheforwardcontractsin2006.TheCompanyusednoderivativeinstrumentsin2007,andtherewerenosuchcurrencyhedgecontractsoutstandingatDecember31,2007.62PARK-OHIOHOLDINGSCORP.ANDSUBSIDIARIESNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)SupplementaryFinancialDataSelectedQuarterlyFinancialData(Unaudited)March31June30Sept.30Dec.31QuarterEnded(Dollarsinthousands,exceptpersharedata)2007Netsales...............................$267,886$286,636$269,104$247,815Grossprofit.............................38,60942,38042,22435,891Netincome.............................$5,205$5,849$6,228$3,916Amountspercommonshare:Basic................................$.47$.53$.56$.35Diluted...............................$.45$.50$.53$.342006Netsales...............................$260,221$268,453$257,167$270,405Grossprofit.............................36,88737,71536,20037,349Netincome.............................$4,757$4,901$3,736$10,785Amountspercommonshare:Basic................................$.43$.45$.34$.98Diluted...............................$.42$.43$.33$.94Note1—Inthefourthquarterof2006,theCompanyacquiredallofthecapitalstockofNABSfor$21,200incash.Note2—Inthefourthquarterof2006,theCompanyreversed$5,000ofitsdomesticdeferredtaxassetvaluationallowancesasithasbeendeterminedtherealizationofthisamountismorelikelythannot.Note3—Attheendoffourthquarter2007,theCompanyadjusteddownwardtheamountsinitiallyrecordedforrevenue,grossprofitandnetincomebyapproximately$18,000,$4,000and$2,600,respectively.Theseadjustmentsweremadetoexcludecertaincostsfromsuppliersandsubcontractorsfromthepercentageofcompletioncalculationthatisusedtoaccountforlong-termindustrialequipmentcontracts.Weperformedanevaluationtodetermineiftheseadjustmentsrecordedinthefourthquarterof2007werematerialtoanyindividualpriorperiod,takingintoaccounttherequirementsofSECStaffAccountingBulletinNo.108,“ConsideringtheEffectsofPriorYearMisstatementswhenQuantifyingMisstatementsinCurrentYearFinancialStatements”(SABNo.108),whichwasadoptedin2006.Basedonthisanalysis,weconcludedtheerrorswerenotmaterialtoanyindividualpriorperiodsand,thereforeasprovidedbySABNo.108,thecorrectionoftheerrordoesnotrequirepreviouslyfiledreportstobeamended.63ScheduleIIPARK-OHIOHOLDINGSCORP.SCHEDULEII—VALUATIONANDQUALIFYINGACCOUNTSANDRESERVESDescriptionBalanceatBeginningofPeriodChargedtoCostsandExpensesDeductionsandOtherBalanceatEndofPeriod(Dollarsinthousands)YearEndedDecember31,2007:Allowancesdeductedfromassets:Tradereceivableallowances...............$4,305$1,609$(2,190)(A)$3,724InventoryObsolescencereserve............22,9784,383(6,929)(B)20,432Taxvaluationallowances..................3161,90102,217Productwarrantyliability...................3,5574,526(2,284)(C)5,799YearEndedDecember31,2006:Allowancesdeductedfromassets:Tradereceivableallowances...............$5,120$2,330$(3,145)(A)$4,305InventoryObsolescencereserve............19,1667,216(3,404)(B)22,978Taxvaluationallowances..................7,011(4,806)(1,889)(D)316Productwarrantyliability...................3,5662,797(2,806)(C)3,557YearEndedDecember31,2005:Allowancesdeductedfromassets:Tradereceivableallowances...............$3,976$3,230$(2,086)(A)$5,120InventoryObsolescencereserve............18,6046,704(6,142)(B)19,166Taxvaluationallowances..................19,231(12,220)7,011Productwarrantyliability...................4,2812,593(3,308)(C)3,566Note(A)-Uncollectibleaccountswrittenoff,netofrecoveries.Note(B)-Amountswrittenofforpaymentsincurred,netofacquiredreserves.Note(C)-Lossandlossadjustment.Note(D)-Excesstaxbenefitinitiallyrecordedinconnectionwiththeexerciseofstockoptions.Item9.ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosureTherewerenochangesinordisagreementswiththeCompany’sindependentauditorsonaccountingandfinancialdisclosurematterswithinthetwo-yearperiodendedDecember31,2007.Item9A.ControlsandProceduresEvaluationofdisclosurecontrolsandproceduresAsofDecember31,2007,management,includingourChiefExecutiveOfficerandChiefFinancialOfficer,evaluatedtheeffectivenessofthedesignandoperationoftheCompany’sdisclosurecontrolsandprocedures.AsdefinedinRule13a-15(e)undertheSecuritiesExchangeActof1934(the“ExchangeAct”),disclosurecontrolsandproceduresaredesignedtoprovidereasonableassurancethatinformationrequiredtobedisclosedinreportsfiledorsubmittedundertheExchangeActisrecorded,processed,summarizedandreportedonatimelybasis,andthatsuchinformationisaccumulatedandcommunicatedtomanagement,includingtheCompany’sChiefExecutiveOfficerandChiefFinancialOfficer,as64appropriatetoallowtimelydecisionsregardingrequireddisclosure.TheCompany’sdisclosurecontrolsandproceduresincludecomponentsoftheCompany’sinternalcontroloverfinancialreporting.Baseduponthisevaluation,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthattheCompany’sdisclosurecontrolsandprocedureswerenoteffective,asofDecember31,2007,duesolelytothematerialweaknessintheCompany’sinternalcontroloverfinancialreportingdescribedbelowin“Management’sassessmentoftheeffectivenessoftheCompany’sinternalcontroloverfinancialreport-ing.”Inlightofthismaterialweakness,theCompanyperformedadditionalanalysisasdeemednecessarytoensurethattheconsolidatedfinancialstatementswerepreparedinaccordancewithU.S.generallyacceptedaccountingprinciples.ManagementbelievesthattheconsolidatedfinancialstatementsincludedinthisannualreportonForm10-KpresentfairlyinallmaterialrespectstheCompany’sfinancialposition,resultsofoperationsandcashflowsfortheperiodspresented.Management’sassessmentoftheeffectivenessoftheCompany’sinternalcontroloverfinan-cialreportingManagementoftheCompanyisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting,assuchtermisdefinedinRule13a-15(f)undertheExchangeAct.AsrequiredbyRule13a-15(c)undertheExchangeAct,managementcarriedoutanevaluation,withpartic-ipationoftheCompany’sChiefExecutiveOfficerandChiefFinancialOfficer,oftheeffectivenessofitsinternalcontroloverfinancialreportingasofDecember31,2007.Theframeworkonwhichsuchevaluationwasbasediscontainedinthereportentitled“InternalControl—IntegratedFramework”issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(the“COSOReport”).BasedupontheevaluationdescribedaboveundertheframeworkcontainedintheCOSOReport,theCompany’smanagementhasconcludedthattheCompanydidnotmaintaineffectiveinternalcontrolsoverfinancialreportingsolelyasaresultofthefollowingmaterialweakness:(cid:129)TheCompanydidnotmaintaineffectivecontrolsovertherevenuerecognitionprocess.TheCompanyprimarilyusesthepercentageofcompletionmethodtoaccountforitslong-leadindustrialequipmentcontracts.TheCompany’scontrolsdidnotidentifythatwheninitiallycalculatingthepercentageofcompletionin2007,costsofpurchasesfromcertainsuppliersandsubcontractorswereincludedincostsincurredpriortotheCompanybeinginvoiced.Thisresultedinadjustmentsin2007toexcludesuchcostsfromthepercentageofcompletioncalculation.Managementbelievesthatthecon-solidatedfinancialstatementsincludedinthisannualreportonForm10-KpresentfairlyinallmaterialrespectstheCompany’sfinancialposition,resultsofoperationsandcashflowsfortheperiodspresented.Ernst&YoungLLP,theCompany’sindependentregisteredpublicaccountingfirm,hasissuedanattestationreportontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingasofDecember31,2007.Thisattestationreportisincludedatpage34ofthisannualreportonForm10-Kandisincorporatedhereinbyreference.ChangesininternalcontroloverfinancialreportingTherehavebeennochangesintheCompany’sinternalcontroloverfinancialreportingthatoccurredduringthefourthquarterof2007thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,theCompany’sinternalcontroloverfinancialreporting.TheCompanyisevaluatingappropriatechangesininternalcontrolstoaddressthematerialweaknessdescribedabove.Item9B.OtherInformationNone.65PartIIIItem10.Directors,ExecutiveOfficersandCorporateGovernanceTheinformationconcerningdirectors,theidentificationoftheauditcommitteeandtheauditcommitteefinancialexpertandtheCompany’scodeofethicsrequiredunderthisitemisincorporatedhereinbyreferencefromthematerialcontainedunderthecaptions“ElectionofDirectors”and“CertainMattersPertainingtotheBoardofDirectorsandCorporateGovernance,”asapplicable,intheregistrant’sdefinitiveproxystatementforthe2008annualmeetingofshareholderstobefiledwiththeSECpursuanttoRegulation14Anotlaterthan120daysafterthecloseofthefiscalyear(the“ProxyStatement”).TheinformationconcerningSection16(a)beneficialownershipreportingcomplianceisincorporatedhereinbyreferencefromthematerialcontainedunderthecaption“PrincipalShareholders—Section16(a)BeneficialOwnershipReportingCompliance”intheProxyStatement.InformationrelatingtoexecutiveofficersiscontainedinPartIofthisannualreportonForm10-K.Item11.ExecutiveCompensationTheinformationrelatingtoexecutiveofficeranddirectorcompensationandthecompensationcommitteereportcontainedundertheheading“ExecutiveCompensation”intheProxyStatementisincorporatedhereinbyreference.Theinformationrelatingtocompensationcommitteeinterlockscon-tainedundertheheading“CertainMattersPertainingtotheBoardofDirectorsandCorporateGover-nance—CompensationCommitteeInterlocksandInsiderParticipation”intheProxyStatementisincorporatedhereinbyreference.Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMattersTheinformationrequiredunderthisitemisincorporatedhereinbyreferencefromthematerialcontainedunderthecaption“PrincipalShareholders”intheProxyStatement,exceptthatinformationrequiredbyItem201(d)ofRegulationS-Kcanbefoundbelow.ThefollowingtableprovidesinformationabouttheCompany’scommonstockthatmaybeissuedundertheCompany’sequitycompensationplanasofDecember31,2007.EquityCompensationPlanInformationPlanCategoryNumberofsecuritiestobeissueduponexercisepriceofoutstandingoptionswarrantsandrightsWeighted-averageexercisepriceofoutstandingoptions,warrantsandrightsNumberofsecuritiesremainingavailableforfutureissuanceunderequitycompensationplans(excludingsecuritiesreflectedincolumn(a))(a)(b)(c)Equitycompensationplansapprovedbysecurityholders(1)..875,719$4.83674,484Equitycompensationplansnotapprovedbysecurityholders....-0--0--0-Total.........................875,719$4.83674,484(1)IncludestheCompany’sAmendedandRestated1998Long-TermIncentivePlan.66Item13.CertainRelationshipsandRelatedTransactions,andDirectorIndependenceTheinformationrequiredunderthisitemisincorporatedhereinbyreferencetothematerialcontainedunderthecaptions“CertainMattersPertainingtotheBoardofDirectorsandCorporateGovernance—CompanyAffiliationswiththeBoardofDirectorsandNominees”and“TransactionsWithRelatedPersons”intheProxyStatement.Item14.PrincipalAccountantFeesandServicesTheinformationrequiredunderthisitemisincorporatedhereinbyreferencetothematerialcontainedunderthecaption“AuditCommittee—IndependentAuditorFeeInformation”intheProxyStatement.67PartIVItem15.ExhibitsandFinancialStatementSchedules(a)(1)ThefollowingfinancialstatementsareincludedinPartII,Item8ofthisannualreportonForm10-K:PageReportofIndependentRegisteredPublicAccountingFirm..........................33ReportofIndependentRegisteredPublicAccountingFirm..........................34ConsolidatedBalanceSheets—December31,2007and2006........................35ConsolidatedStatementsofIncome—YearsEndedDecember31,2007,2006and2005....36ConsolidatedStatementsofShareholders’Equity—YearsEndedDecember31,2007,2006and2005................................................................37ConsolidatedStatementsofCashFlows—YearsEndedDecember31,2007,2006and2005....................................................................38NotestoConsolidatedFinancialStatements......................................39SelectedQuarterlyFinancialData(Unaudited)—YearsEndedDecember31,2007and2006....................................................................63(2)FinancialStatementSchedulesThefollowingconsolidatedfinancialstatementscheduleofPark-OhioHoldingsCorp.isincludedinItem8:ScheduleII—ValuationandQualifyingaccounts..................................64AllotherschedulesforwhichprovisionismadeintheapplicableaccountingregulationsoftheSECarenotrequiredundertherelatedinstructionsorarenotapplicableand,therefore,havebeenomitted.(3)Exhibits:TheexhibitsfiledaspartofthisannualreportonForm10-KarelistedontheExhibitIndeximmediatelyprecedingsuchexhibitsandareincorporatedhereinbyreference.68SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.PARK-OHIOHOLDINGSCORP.(Registrant)By:/s/RICHARDP.ELLIOTTRichardP.Elliott,VicePresidentandChiefFinancialOfficerDate:March17,2008PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbythefollowingpersonsinthecapacitiesandonthedatesindicated.*EdwardF.CrawfordChairman,ChiefExecutiveOfficerandDirectorMarch17,2008*RichardP.ElliottVicePresidentandChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)*MatthewV.CrawfordPresident,ChiefOperatingOfficerandDirector*PatrickV.AulettaDirector*KevinR.GreeneDirector*DanT.MooreDirector*RonnaRomneyDirector*JamesW.WertDirector*Theundersigned,pursuanttoaPowerofAttorneyexecutedbyeachofthedirectorsandofficersidentifiedaboveandfiledwiththeSecuritiesandExchangeCommission,bysigninghisnamehereto,doesherebysignandexecutethisreportonbehalfofeachofthepersonsnotedabove,inthecapacitiesindicated.March17,2008By:/s/ROBERTD.VILSACK,RobertD.Vilsack,Attorney-in-FactSIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.PARK-OHIOHOLDINGSCORP.(Registrant)By:/s/RICHARDP.ELLIOTTRichardP.Elliott,VicePresidentandChiefFinancialOfficerDate:March17,2008PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbythefollowingpersonsinthecapacitiesandonthedatesindicated.*EdwardF.CrawfordChairman,ChiefExecutiveOfficerandDirectorMarch17,2008*RichardP.ElliottVicePresidentandChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)*MatthewV.CrawfordPresident,ChiefOperatingOfficerandDirector*PatrickV.AulettaDirector*KevinR.GreeneDirector*DanT.MooreDirector*RonnaRomneyDirector*JamesW.Wert(cid:2)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:4)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:5)Director*Theundersigned,pursuanttoaPowerofAttorneyexecutedbyeachofthedirectorsandofficersidentifiedaboveandfiledwiththeSecuritiesandExchangeCommission,bysigninghisnamehereto,doesherebysignandexecutethisreportonbehalfofeachofthepersonsnotedabove,inthecapacitiesindicated.March17,2008By:/s/ROBERTD.VILSACK,RobertD.Vilsack,Attorney-in-Fact69ANNUALREPORTONFORM10-KPARK-OHIOHOLDINGSCORP.FortheYearEndedDecember31,2007EXHIBITINDEXExhibit3.1AmendedandRestatedArticlesofIncorporationofPark-OhioHoldingsCorp.(filedasExhibit3.1totheForm10-KofPark-OhioHoldingsCorp.fortheyearendedDecember31,1998,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof)3.2CodeofRegulationsofPark-OhioHoldingsCorp.(filedasExhibit3.2totheForm10-KofPark-OhioHoldingsCorp.fortheyearendedDecember31,1998,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof)4.1SecondAmendedandRestatedCreditAgreement,datedJune20,2007,amongPark-OhioIndustries,Inc.,theotherloanpartiesthereto,thelenderstheretoandJPMorganChaseBank,N.A.(successorbymergertoBankOne,NA),asagent(filedasexhibit4.1toForm8-KofPark-OhioHoldingsCorp.onJune26,2007,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof).4.2Indenture,datedasofNovember30,2004,amongPark-OhioIndustries,Inc.,theGuarantors(asdefinedtherein)andWellsFargoBank,NA,astrustee(filedasExhibit4.1totheForm8-KofPark-OhioHoldingsCorp.filedonDecember6,2004,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.1FormofIndemnificationAgreemententeredintobetweenPark-OhioHoldingsCorp.andeachofitsdirectorsandcertainofficers(filedasExhibit10.1totheForm10-KofPark-OhioHoldingsCorp.fortheyearendedDecember31,1998,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof)10.2*AmendedandRestated1998Long-TermIncentivePlan(filedasAppendixAtotheDefinitiveProxyStatementofPark-OhioHoldingsCorp.,filedonApril23,2001,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof)10.3*FormofRestrictedShareAgreementbetweentheCompanyandeachnon-employeedirector(filedasExhibit10.1toForm8-KofPark-OhioHoldingsCorp.filedonJanuary25,2005,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.4*FormofRestrictedShareAgreementforEmployees(filedasExhibit10.1toForm10-QforPark-OhioHoldingsCorp.forthequarterendedSeptember30,2006,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.5*FormofIncentiveStockOptionAgreement(filedasExhibit10.5toForm10-KofPark-OhioHoldingsCorp.fortheyearendedDecember31,2004,SECFileNo.000-03134andincorporatedbyreferenceandmadeaparthereof)10.6*FormofNon-StatutoryStockOptionAgreement(filedasExhibit10.6toForm10-KofPark-OhioHoldingsCorp.fortheyearendedDecember31,2004,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.7*SummaryofAnnualCashBonusPlanforChiefExecutiveOfficer(filedasExhibit10.1toForm10-QforPark-OhioHoldingsCorp.forthequarterendedMarch31,2005,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.8*SummaryofAnnualCashBonusPlanforPresidentandChiefOperatingOfficer(filedasExhibit10.2toForm10-QforPark-OhioHoldingsCorp.forthequarterendedSeptember30,2006,SECFileNo.000-03134andincorporatedhereinbyreferenceandmadeaparthereof)10.9*SupplementalExecutiveRetirementPlanforEdwardF.Crawford,effectiveasofMarch10,2008.Exhibit10.10*Non-qualifiedDefinedContributionRetirementBenefitLetterAgreementforEdwardF.Crawford,datedMarch10,2008.21.1ListofSubsidiariesofPark-OhioHoldingsCorp.23.1ConsentofIndependentRegisteredPublicAccountingFirm24.1PowerofAttorney31.1PrincipalExecutiveOfficer’sCertificationPursuanttoSection302oftheSarbanes-OxleyActof200231.2PrincipalFinancialOfficer’sCertificationPursuanttoSection302oftheSarbanes-OxleyActof200232.1CertificationrequirementunderSection906oftheSarbanes-OxleyActof2002*ReflectsmanagementcontractorothercompensatoryarrangementrequiredtobefiledasanexhibitpursuanttoItem15(c)ofthisReport.[THISPAGEINTENTIONALLYLEFTBLANK]Exhibit31.1PRINCIPALEXECUTIVEOFFICER’SCERTIFICATIONSPURSUANTTOSECTION302OFTHESARBANES-OXLEYACTOF2002I,EdwardF.Crawford,ChairmanandChiefExecutiveOfficer,certifythat:1.IhavereviewedthisannualreportonForm10-KofPark-OhioHoldingsCorp.;2.Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;3.Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;4.Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:a.Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;b.Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;c.Evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;andd.Disclosedinthisreportanychangesintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscalquarter(theregistrant’sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting;and5.Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeofregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):a.Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;andb.Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.Date:March17,2008/s/EDWARDF.CRAWFORDEdwardF.Crawford,ChairmanandChiefExecutiveOfficerExhibit31.2PRINCIPALFINANCIALOFFICER’SCERTIFICATIONSPURSUANTTOSECTION302OFTHESARBANES-OXLEYACTOF2002I,RichardP.Elliott,VicePresidentandChiefFinancialOfficer,certifythat:1.IhavereviewedthisannualreportonForm10-KofPark-OhioHoldingsCorp.;2.Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;3.Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;4.Theregistrant’sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclo-surecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))andinternalcontroloverfinancialreporting(asdefinedinExchangeActRules13a-15(f)and15d-15(f))fortheregistrantandhave:a.Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared.b.Designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursupervision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;c.Evaluatedtheeffectivenessoftheregistrant’sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;andd.Disclosedinthisreportanychangesintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscalquarter(theregistrant’sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting;and5.Theregistrant’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant’sauditorsandtheauditcommitteeofregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):a.Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;andb.Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.Date:March17,2008/s/RICHARDP.ELLIOTTRichardP.Elliott,VicePresidentandChiefFinancialOfficerExhibit32.1CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002InconnectionwiththeAnnualReportofPark-OhioHoldingsCorp.(the“Company”)onForm10-KfortheperiodendedDecember31,2006,asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the“Report”),eachoftheundersignedofficersoftheCompanycertifies,pursuantto18U.S.C.§1350,asadoptedpursuantto§906oftheSarbanes-OxleyActof2002,that,tosuchofficer’sknowledge:(1)TheReportfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934;and(2)TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompanyasofthedatesandfortheperiodsexpressedintheReport.Dated:March17,2008By:/s/EDWARDF.CRAWFORDName:EdwardF.CrawfordTitle:ChairmanandChiefExecutiveOfficerBy:/s/RICHARDP.ELLIOTTName:RichardP.ElliottTitle:VicePresidentandChiefFinancialOfficerTheforegoingcertificationisbeingfurnishedsolelypursuantto18U.S.C.§1350andisnotbeingfiledaspartoftheReportorasaseparatedisclosuredocument.THEFOLLOWINGDOESNOTCONSTITUTEPARTOFTHEFORM10-K.ComparisonofFive-YearCumulativeTotalReturnsPark-Ohio,NASDAQStockMarket(U.S.Companies)andSelf-DeterminedPeerGroupProducedon03/14/2008includingdatato12/31/2007$0$100$200$300$400$500$600$700$80012/31/0712/31/0612/31/0512/31/0412/31/0312/31/02LegendCRSPTotalReturnsIndexfor:12/200212/200312/200412/200512/200612/2007Park-OhioHoldingsCorp.100.0177.9620.4338.9387.5603.4NasdaqStockMarket(USCompanies)100.0149.5162.7166.2182.6198.0S&PSmallCapPerformance600100.0137.5167.2178.3203.4201.0Notes:A.Thelinesrepresentmonthlyindexlevelsderivedfromcompoundeddailyreturnsthatincludealldividends.B.Theindexesarereweighteddaily,usingthemarketcapitalizationontheprevioustradingday.C.Ifthemonthlyinterval,basedonthefiscalyear-end,isnotatradingday,theprevioustradingdayisused.D.Theindexlevelforallserieswassetto$100.0on12/31/2002.E.DataforthecompanyandPeergroupprovidedbytheclient.Note:NASDAQ(USCompanies)ReturnspreparedbyCRSP(www.crsp.uchicago.edu),CenterforResearchinSecurityPrices,GraduateSchoolofBusiness,TheUniversityofChicago.Allrightsreserved.Copyright·2007BBOOAARRDD OOFF DDIIRREECCTTOORRSSEdward F. Crawford (a)Chairman and Chief Executive Officer Matthew V. CrawfordPresident and Chief Operating Officer(a) Executive Committee(b) Audit Committee(c) Compensation Committee(d) Nominating and Corporate Governance CommitteeSSHHAARREEHHOOLLDDEERR IINNFFOORRMMAATTIIOONN AANNDD PPRREESSSS RREELLEEAASSEESSPark-Ohio files Forms 10-K and 10-Q with the Securities andExchange Commission. Shareholders may obtain copies of thesereports, including Park-Ohio’s Annual Report on Form 10-K for2007, and copies of Park-Ohio’s Annual Report to Shareholders,without charge, by accessing the Company’s website atwww.pkoh.com or by writing or calling:Corporate SecretaryPark-Ohio Holdings Corp.6065 Parkland BoulevardCleveland, Ohio 44124(440) 947-2000www.pkoh.comPark-Ohio’s recent news releases may also be accessed throughits website.Patrick V. Auletta (a) (b) (d)President EmeritusKeyBank National AssociationKevin R. Greene (b) (d)Chairman and Chief Executive OfficerKR Group LLCDan T. Moore III (c) (d)Chief Executive OfficerDan T. Moore Co.Ronna Romney (c) (d)Director Molina Healthcare, Inc. James W. Wert (a) (b) (c) (d)Chief Executive Officer and PresidentClanco Management CorporationPatrick W. FogartyDirector of Corporate DevelopmentRobert D. VilsackSecretary and General CounselOOFFFFIICCEERRSSEdward F. CrawfordChairman and Chief Executive Officer Matthew V. CrawfordPresident and Chief Operating OfficerRichard P. ElliottVice President and Chief Financial OfficerPPaarrkk--OOhhiioo HHoollddiinnggss CCoorrpp.. ~~ 66006655 PPaarrkkllaanndd BBoouulleevvaarrdd ~~ CClleevveellaanndd,, OOHH 4444112244 ~~ 444400--994477--22000000 -- wwwwww..ppkkoohh..ccoommPPaarrkk--OOhhiioo WWoorrlldd HHeeaaddqquuaarrtteerrssPPlleeaassee sseenndd yyoouurr ssuuggggeessttiioonnss oorr rreeccoommmmeennddaattiioonnss ttoo iinnvveessttoorr@@ppkkoohh..ccoommoorr mmaaiill tthheemm ttoo uuss aatt oouurr hheeaaddqquuaarrtteerrss..

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