PARK OHIO HOLDINGS CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2003, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM____________ TO ____________

COMMISSION FILE NO. 0-3134

PARK-OHIO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)

OHIO 34-1867219
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23000 EUCLID AVENUE, CLEVELAND, OHIO 44117
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(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 216/692-7200

PARK-OHIO HOLDINGS CORP. IS A SUCCESSOR ISSUER TO PARK-OHIO INDUSTRIES, INC.

Indicate by check mark whether the registrant:

(1) Has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the registrant was required to file
such reports) and

(2) Has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2).

YES [ ] NO [X]

Number of shares outstanding of registrant's Common Stock, par value $1.00 per
share, as of September 30, 2003: 10,501,186.

The Exhibit Index is located on page 24.

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

INDEX

PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated balance sheets -- September 30, 2003 and
December 31, 2002
Consolidated statements of operations -- Three months and
nine months ended September 30, 2003 and 2002
Consolidated statement of shareholders' equity -- Nine
months ended September 30, 2003
Consolidated statements of cash flows -- Nine months ended
September 30, 2003 and 2002
Notes to consolidated financial statements -- September 30,
2003
Independent accountants' review report
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K

SIGNATURES

EXHIBIT INDEX

2

PART I

FINANCIAL INFORMATION

3

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, as restated for the Company's change in
accounting for inventories at certain subsidiaries as discussed in Note B.
However, it does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements.

See notes to consolidated financial statements.

4

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to consolidated financial statements.

5

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

See notes to consolidated financial statements.

6

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements.

7

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS -- EXCEPT PER SHARE DATA)

NOTE A -- BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Park-Ohio
Holdings Corp. and its subsidiaries ("the Company"). All significant
intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.

Certain amounts have been reclassified to conform to current year
presentation.

NOTE B -- ACCOUNTING CHANGE

As described in Note A to the consolidated financial statements for the
year ended December 31, 2002, inventories are stated at the lower of cost or
market value. The first-in, first-out (FIFO) method was used to determine cost
for 85% of inventories and the last-in, first-out (LIFO) method was used to
determine cost for the remaining 15% of inventories.

Effective June 30, 2003, the Company changed the method of accounting for
the 15% of its inventories utilizing the LIFO method to the FIFO method. The
Company believes that this change is preferable for the following reasons: 1)
the change conforms all of its inventories to one method of determining cost,
which is the FIFO method; 2) the costs of the Company's inventories have
remained fairly level during the past several years, which has substantially
negated the benefits of the LIFO method (a better matching of current costs with
current revenues in periods of rising costs); 3) the impact of utilizing the
LIFO method has had an insignificant impact on the Company's consolidated net
income (loss) during the past several years; and 4) the FIFO method results in
the valuation of inventories at current costs on the consolidated balance sheet,
which provides a more meaningful presentation for investors and financial
institutions.

As required under accounting principles generally accepted in the United
States, the Company has restated the consolidated balance sheet as of December
31, 2002 to increase inventories by the recorded LIFO reserve ($4.4 million),
increase deferred tax liabilities ($1.7 million), and increase shareholders'
equity ($2.7 million). Previously reported results of operations have not been
restated because the impact of utilizing the LIFO method had an insignificant
impact on the Company's reported amounts for consolidated net income (loss).

NOTE C -- ACQUISITION AND DISPOSITIONS

During the first quarter of 2003, the Company completed the sale of
substantially all of the assets of Green Bearing ("Green") and St. Louis Screw
and Bolt ("St. Louis Screw") for cash of approximately $7.3 million. No gain or
loss was recorded on the sale. Green and St. Louis Screw were non-core
businesses in the ILS Segment and Manufactured Products Segment, respectively,
and had been identified as businesses the Company was selling as part of its
restructuring activities during 2002 and 2001.

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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

On September 10, 2002, the Company acquired substantially all of the assets
of Ajax Magnethermic Corporation ("Ajax"), a manufacturer of induction heating
and melting equipment. The purchase price of approximately $5.5 million and the
results of operations of Ajax prior to its date of acquisition were not deemed
significant as defined in Regulation S-X.

On April 26, 2002, the Company completed the sale of substantially all of
the assets of Castle Rubber Company ("Castle Rubber") for cash of approximately
$2.5 million. Castle Rubber, a non-core business in the Manufactured Products
Segment, had been identified as a business the Company was discontinuing as part
of its restructuring activities during 2001.

NOTE D -- INVENTORIES

The components of inventory consist of the following:

NOTE E -- ADOPTION OF FAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"

Effective January 1, 2002, the Company adopted FAS 142, "Goodwill and Other
Intangible Assets". Under this standard, goodwill is no longer amortized but is
subject to an impairment test at least annually. The Company has selected
October 1 as its annual testing date.

The Company, with the assistance of an outside consultant, completed the
transitional impairment review of goodwill during the fourth quarter of 2002 and
recorded a non-cash charge for goodwill impairment which aggregated $48,799. In
accordance with the provisions of FAS 142, the charge has been accounted for as
a cumulative effect of a change in accounting principle, retroactive to January
1, 2002.

NOTE F -- SHAREHOLDERS' EQUITY

At September 30, 2003, capital stock consists of (i) Serial Preferred
Stock, of which 632,470 shares were authorized and none were issued, and (ii)
Common Stock, of which 40,000,000 shares were authorized and 10,501,186 shares
were issued and outstanding.

9

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE G -- NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

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(a) The addition of 445 shares for both the three months and nine months ended
September 30, 2002 would result in anti-dilution.

NOTE H -- ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," ("FAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS
146 requires that a liability for a cost that is associated with an exit or
disposal activity be recognized when a legal liability is incurred. FAS 146 is
effective for exit and disposal activities that are initiated after December 31,
2002.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on required
disclosures by a guarantor in its financial statements about obligations under
certain guarantees that it has issued and requires a guarantor to recognize, at
the inception of certain guarantees, a

10

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has adopted the provisions of FIN 45 relating to initial
recognition and measurements of guarantor liabilities, which are effective for
qualifying guarantees entered into or modified after December 31, 2002. The
adoption did not have a material impact on the consolidated financial
statements.

On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment to FASB Statement No. 123" ("FAS 148"). FAS 148
amends the Accounting for Stock-Based Compensation to provide alternative
methods of transition to FAS 123's fair value method of accounting for
stock-based employee compensation. FAS 148 also amends the disclosure provision
of FAS 123 and Accounting Principles Board ("APB") Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. The Statement is effective for
fiscal years beginning after December 15, 2002. The Company has elected to
continue to apply APB Opinion No. 25 and related interpretations in accounting
for its stock option plan, as permitted under FAS 123 and FAS 148. Accordingly,
no compensation cost has been recognized for its stock option plan. However, the
Company recognizes compensation expense resulting from fixed awards of
restricted shares, which is measured at the date of grant and expensed over the
vesting period. Had compensation cost for stock options granted been determined
on the fair value method of FAS 123, the Company's net income (loss) and
earnings (loss) per share would have been effected as follows:

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements," relating to consolidation of certain entities. First, FIN 46 will
require identification of the Company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate on a
stand alone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as VIEs, FIN 46
sets forth a model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to its expected
losses, or stands to gain from a majority of its expected returns. FIN 46 also
sets forth certain disclosures regarding interests in VIEs that are deemed
significant, even if consolidation is not required. The Company's adoption of
FIN 46 had no effect on its financial position, results of operations and cash
flows.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("FAS 149"). FAS 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under FAS 133, "Accounting for
Derivative Instruments and Hedging

11

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Activities." FAS 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company's adoption of FAS 149 had no effect on its financial
position, results of operations and cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). FAS 150 requires that certain
financial instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. FAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003 and must be applied to the Company's
existing financial instruments effective July 1, 2003, the beginning of the
first fiscal period after June 15, 2003. The Company adopted FAS 150 on June 1,
2003. The adoption of this statement had no effect on the Company's financial
position, results of operations or cash flows.

NOTE I -- SEGMENTS

The Company operates through three segments: Integrated Logistics Solutions
("ILS"), Aluminum Products and Manufactured Products. ILS is a leading supply
chain logistics provider of production components to large, multinational
manufacturing companies, other manufacturers and distributors. In connection
with the supply of such production components, ILS provides a variety of
value-added, cost-effective supply chain management services. Aluminum Products
manufactures cast aluminum components for automotive, agricultural equipment,
heavy duty truck and construction equipment. Aluminum Products also provides
value-added services such as design and engineering, machining and assembly.
Manufactured Products operates a diverse group of niche manufacturing businesses
that design and manufacture a broad range of high quality products engineered
for specific customer applications. Intersegment sales are immaterial.

12

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Results by business segment were as follows:

NOTE J -- COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) was as follows:

13

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

The components of accumulated comprehensive loss at September 30, 2003 and
December 31, 2002 are as follows:

NOTE K -- RESTRUCTURING ACTIVITIES

The Company responded to the economic downturn by reducing costs in a
variety of ways, including restructuring businesses and selling non-core
manufacturing assets. These activities, which included asset write-downs and
other exit costs related to the shutdown of facilities, generated restructuring
and asset impairment charges of $19.2 million and $28.5 million in 2002 and
2001, respectively (of which $5.6 million (490 employees) in 2002 and $6.9
million (525 employees) in 2001 related to severance and exit costs). For
further details on the restructuring plan, see Note N to the audited financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.

During the first quarter of 2003, the Company completed the sale of
substantially all of the assets of Green and St. Louis Screw for cash of
approximately $7.3 million. No gain or loss was recorded on these sales. Both of
these businesses had been identified as businesses the Company was selling as
part of its restructuring activities.

The accrued liability balance for severance and exit costs and related cash
payments consisted of:

2001
Severance and exit charges.................................. $ 6,883
Cash payments............................................... (2,731)
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Balance at December 31, 2001................................ 4,152

2002
Severance and exit charges.................................. 5,599
Cash payments............................................... (5,706)
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Balance at December 31, 2002................................ 4,045

2003
Cash payments............................................... (2,095)
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Balance at September 30, 2003............................... $ 1,950
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As of September 30, 2003, all of the 525 employees identified in 2001 and
all but 18 of the 490 employees identified in 2002 had been terminated. The
workforce reductions under the restructuring plan consisted of hourly and
salaried employees at various operating facilities due to either closure or
consolidation.

Net sales for the businesses that were included in net assets held for sale
were $1,139 and $14,210 for the nine months ended September 30, 2003 and 2002,
respectively. Operating income (loss) for these entities was $(8) and $(102) for
the nine months ended September 30, 2003 and 2002, respectively.

14

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE L -- ACCRUED WARRANTY COSTS

The Company estimates the amount of warranty claims on sold products that
may be incurred based on current and historical data. The actual warranty
expense could differ from the estimates made by the Company based on product
performance. The following table presents the changes in the Company's product
warranty liability:

Balance at January 1, 2003.................................. $ 3,068
Claims paid during the year............................... (2,138)
Additional warranties issued during the year.............. 714
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Balance at September 30, 2003............................... $ 1,644
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NOTE M -- INCOME TAXES

The effective income tax rate for the three-month period ended September
30, 2003 was 62%, compared to 136% for the corresponding period in 2002. The
effective income tax rate for the nine-month period ended September 30, 2003 was
18%. Only foreign and state income taxes were provided for in 2003. The federal
income tax provision was offset by the recognition of the benefit of net
operating loss carryforwards for which valuation allowances had been provided
for prior to 2003. At December 31, 2002, the Company had net operating loss
carryforwards of approximately $25.6 million. Tax benefits related to these
carryforwards were fully reserved in 2002, because the Company was in a
three-year cumulative loss position.

NOTE N -- DEBT RESTRUCTURING

On July 30, 2003, the Company entered into a new, four-year revolving
credit agreement with a group of banks under which it may borrow up to $165.0
million secured by substantially all the assets of the Company. On November 5,
2003, this credit agreement was amended to include the Company's subsidiaries in
Canada and the United Kingdom. Proceeds from this credit agreement, as amended
("Credit Agreement"), which expires on July 30, 2007, were used to repay the
existing borrowings under the old credit agreement. Amounts borrowed under the
Credit Agreement may be borrowed at Park-Ohio's election at either (i) LIBOR
plus 175 -- 250 basis points or (ii) the bank's prime lending rate. The interest
rate is dependent on the Company's Debt Service Coverage Ratio, as defined in
the Credit Agreement. Under the Credit Agreement, a detailed borrowing base
formula provides borrowing capacity to the Company based on percentages of
eligible accounts receivable, inventory and fixed assets. As of September 30,
2003, the Company had $104.5 million outstanding under the Credit Agreement.
After giving effect to the amendment, as of September 30, 2003, the Credit
Agreement provided approximately $40.0 million of unused borrowing capacity.

15

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

Board of Directors and Shareholders
Park-Ohio Holdings Corp.

We have reviewed the accompanying consolidated balance sheet of Park-Ohio
Holdings Corp. and subsidiaries as of September 30, 2003 and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2003 and 2002, the consolidated statement of shareholders'
equity for the nine-month period ended September 30, 2003 and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2003 and
2002. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Park-Ohio
Holdings Corp. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended, not presented herein, and in our report dated February 25,
2003, we expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph for a change in accounting for
goodwill. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

As discussed in Note B to the consolidated financial statements, effective
June 30, 2003, the Company changed its method of accounting for inventories at
certain subsidiaries.

/s/ Ernst & Young LLP

Cleveland, Ohio
November 12, 2003

16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Financial information for the three-month and nine-month periods ended
September 30, 2003 is not directly comparable to the financial information for
the same periods in 2002 primarily due to restructuring and impairment charges,
divestitures and acquisitions. Restructuring charges of $1.0 million and $5.3
million were recorded in the third quarter and the first nine months of 2002,
respectively. The Company divested Castle Rubber in second quarter 2002, and
Green and St. Louis Screw in first quarter 2003. The Company purchased the
assets of Ajax in third quarter 2002.

OVERVIEW

The Company operates through three segments, ILS, Aluminum Products and
Manufactured Products. ILS is a leading supply chain logistics provider of
production components, principally to large OEM manufacturers. In connection
with the supply of such production components, ILS provides a variety of value-
added, cost-effective supply chain management services. The principal customers
of ILS are in the semiconductor equipment, heavy-duty truck, industrial
equipment, aerospace and defense, electrical controls, HVAC, vehicle parts and
accessories, appliances, and lawn and garden equipment industries. Aluminum
Products manufactures cast aluminum components for automotive, agricultural
equipment, heavy-duty truck and construction equipment manufacturers. Aluminum
Products also provides value-added services such as design and engineering,
machining and assembly. Manufactured Products operates a diverse group of niche
manufacturing businesses that design and manufacture a broad range of high
quality products engineered for specific customer applications. The principal
customers of Manufactured Products are OEMs and end-users in the aerospace,
automotive, steel, forging, railroad, truck, oil, food processing and consumer
appliance industries.

The Company's sales volumes and profitability declined during 2001, due to
overall weakness in the manufacturing economy, and particularly to contraction
in the heavy-duty truck and automotive industries. Despite these sales declines,
the Company retained or gained market share in most major markets served. The
Company responded to this downturn by reducing costs, increasing prices on
targeted products, restructuring many of its businesses and selling non-core
manufacturing assets. The Company continued and extended restructuring its
businesses through 2001 and 2002, closing 20 supply chain logistics facilities,
and closing or selling eight manufacturing plants in those two years. With
regard to these actions, the Company recorded restructuring and impairment
charges of $28.5 million in 2001 and $19.2 million in 2002. Management's actions
were aimed to position the Company for increased profitability when the
manufacturing economy stabilizes and returns to growth.

The Company's actions resulted in increased operating income in 2002
compared to 2001, despite flat sales. Operating income rose to $16.2 million in
2002, after restructuring and impairment charges of $19.2 million, compared to
an operating loss of $4.4 million in 2001, after restructuring and impairment
charges of $28.5 million and goodwill amortization of $3.7 million.

The Company's profitability improved again in the first nine months of
2003, on lower sales. Compared to the first nine months of 2002, operating
income increased 28%, or $5.7 million, to $26.3 million, on a 3% sales decline.
Operating income in the first nine months of 2002 was negatively impacted by
$5.3 million in restructuring charges. During the first nine months of 2003, the
Company continued to reduce costs and implement its restructuring plan,
including consolidating two logistics facilities and selling two additional non-
core manufacturing businesses.

The Company sold substantially all the assets of St. Louis Screw on January
29, 2003 and Green on February 21, 2003 for cash totaling approximately $7.3
million.

The Company sold substantially all the assets of Castle Rubber on April 26,
2002 for cash of approximately $2.5 million. The Company purchased substantially
all the assets of Ajax on September 10, 2002 for cash of approximately $5.5
million.

17

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under FAS
142, the Company reviewed its goodwill and other intangible assets and recorded
a non-cash goodwill impairment charge of $48.8 million, which was recorded as
the cumulative effect of a change in accounting principle effective January 1,
2002.

Effective June 30, 2003, the Company changed its method of accounting for
the 15% of its inventories utilizing the LIFO method to the FIFO method. As
required by generally accepted accounting principles, the Company has restated
its balance sheet as of December 31, 2002 to increase inventories by the
recorded LIFO reserve ($4.4 million), increase deferred tax liabilities ($1.7
million), and increase shareholders' equity ($2.7 million). Previously reported
results of operations have not been restated because the impact of utilizing the
LIFO method had an insignificant impact on the Company's reported amounts for
consolidated net income (loss).

RESULTS OF OPERATIONS

Nine Months 2003 versus Nine Months 2002

Net sales decreased by $16.7 million, or 3%, from $478.3 million for the
first nine months of 2002 to $461.6 million in 2003. ILS net sales declined 9%,
or $26.2 million, of which $8.6 million related to the sale of Green and the
early termination of the pharmaceutical sales contract. The remainder related to
continued volume weakness in customer industries. Aluminum Products net sales
were 16%, or $13.2 million lower, primarily due to the ending of $9.7 million of
sales contracts, a significant portion of which related to the 2002 closure of
the Tupelo plant. Manufactured Products net sales increased 25%, or $22.7
million, primarily due to increased sales in the induction business.

Gross profit increased by $2.7 million, or 4%, to $72.0 million for the
first nine months of 2003 from $69.3 million for the same period of 2002, and
the Company's gross margin increased to approximately 15.6% for the first nine
months of 2003 from 14.5% for the same period of 2002. ILS gross margin
decreased, primarily due to reduced absorption of fixed overhead over a smaller
sales base and the positive effect on the first nine months of 2002 of the early
termination of a high margin pharmaceutical sales contract, partially offset by
lower inventory costs, facility costs and other cost reductions. Aluminum
Products gross margin increased significantly, primarily as a result of
restructuring and cost reductions and higher margins on new contracts. Gross
margin in the Manufactured Products segment increased, primarily as a result of
increased sales and overhead efficiencies achieved in the induction business.

Selling, general and administrative ("SG&A") expenses increased by 5%, or
$2.2 million, to $45.7 million for the first nine months of 2003 from $43.5
million for the same period in 2002. Consolidated SG&A expenses as a percentage
of net sales were 9.9% for the first nine months of 2003 as compared to 9.1% for
the same period in 2002. SG&A expenses increased by $5.3 million due to the net
effect of acquisitions and divestitures, partially offset by cost reductions in
the ILS and Aluminum Products segments. SG&A expenses were also impacted by a
$1.3 million reduction of net pension credits reflecting less favorable returns
on pension plan assets.

Interest expense decreased $.7 million from $20.7 million in the first nine
months of 2002 to $20.0 million in the same period of 2003, due to reduced
borrowings in 2003. During the first nine months of 2003, the Company averaged
outstanding borrowings of $323.0 million as compared to $333.7 million for the
corresponding period of the prior year. The $10.7 million decrease related
primarily to lower average working capital levels during the first nine months
and cash from the sale of non-core manufacturing assets. The average interest
rate of 8.24% for the first nine months of 2003 was 2 basis points lower than
the average rate of 8.26% for the same period in 2002.

The effective income tax rate for the nine-month period ended September 30,
2003 was 18%. Only foreign and certain state income taxes were provided for in
2003. The federal income tax provision was offset by the recognition of the
benefit of net operating loss carryforwards for which valuation allowances had
been provided for prior to 2003. At December 31, 2002, the Company had net
operating loss carryforwards of approximately $25.6 million. Tax benefits
related to these carryforwards were fully reserved in 2002 because the Company
was in a three-year cumulative loss position. For the first nine months of 2002,
the Company
18

recorded a $.6 million income tax provision despite a loss before income tax of
$.1 million, due to foreign taxes and a foreign tax rate difference in foreign
subsidiaries, and a reduced tax benefit from the Company's foreign sales
corporations.

Third Quarter 2003 versus Third Quarter 2002

Net sales decreased by $11.0 million, or 7%, from $157.8 million in third
quarter 2002 to $146.8 million in the same quarter 2003. ILS net sales declined
15%, or $15.3 million, of which $4.3 million related to the sale of Green and
the early termination of the pharmaceutical sales contract. The remainder
related to continued volume weakness in customer industries. Aluminum Products
net sales declined 19%, or $4.7 million, due to a $1.4 million decrease relating
to the ending of certain sales contracts, and downturns in volumes on certain
parts. Manufactured Products net sales increased 32%, or $9.0 million, primarily
due to increased sales in the induction business.

Gross profit decreased by $1.4 million, or 6%, to $21.8 million for third
quarter 2003 from $23.2 million for the same quarter 2002. However, the
Company's gross margin increased to approximately 14.8% for third quarter 2003
from 14.7% for the same quarter 2002. ILS gross margin decreased, primarily due
to reduced absorption of fixed overhead over a smaller sales base and the
positive effect on the third quarter of 2002 of the early termination of a high
margin pharmaceutical sales contract, partially offset by lower inventory costs,
facility costs and other cost reductions. Aluminum Products gross margin
increased, primarily as a result of restructuring and cost reductions and higher
margins on new contracts. Gross margin in the Manufactured Products segment
increased, primarily as a result of increased sales and overhead efficiencies
achieved in the induction business.

SG&A expenses increased by 3%, or $.5 million, to $15.0 million for third
quarter 2003 from $14.5 million for the same quarter 2002. Consolidated SG&A
expenses as a percentage of net sales were 10.2% for third quarter 2003 as
compared to 9.2% for the same quarter 2002. SG&A expenses increased by $1.5
million due to the net effect of acquisitions and divestitures, partially offset
by cost reductions in the ILS and Aluminum Products segments. SG&A expenses were
also impacted by a $.5 million reduction of net pension credits reflecting less
favorable returns on pension plan assets.

Interest expense decreased $.5 million from $7.0 million in third quarter
2002 to $6.5 million in the same quarter 2003 primarily due to lower interest
rates under the Company's new revolving credit agreement entered into in July
2003, and reduced borrowings in 2003. During third quarter 2003, the Company
averaged outstanding borrowings of $320.2 million as compared to $331.7 million
for the same quarter of the prior year. The $11.5 million decrease related
primarily to lower average working capital levels during the quarter and cash
from the sale of non-core manufacturing assets. The average interest rate of
8.13% for the current quarter was 34 basis points lower than the average rate of
8.47% for same quarter 2002.

The effective income tax rate for third quarter 2003 was 62%. Only foreign
and certain state income taxes were provided for in 2003. The federal income tax
provision was offset by the recognition of the benefit of net operating loss
carryforwards for which valuation allowances had been provided for prior to
2003. At December 31, 2002, the Company had net operating loss carryforwards of
approximately $25.6 million. Tax benefits related to these carryforwards were
fully reserved in 2002, because the Company was in a three-year cumulative loss
position. The effective income tax rate for third quarter 2002 was over 100%,
because of a $.4 million tax provision adjustment for the first two quarters of
2002 based on revised estimates of foreign taxes and a foreign tax rate
difference in the Company's foreign subsidiaries, and a reduced tax benefit from
the Company's foreign sales corporations.

LIQUIDITY AND SOURCES OF CAPITAL

The Company's liquidity needs are primarily for working capital and capital
expenditures. The Company's primary sources of liquidity have been funds
provided by operations and funds available from bank credit arrangements and the
sale of Senior Subordinated Notes. On July 30, 2003, the Company entered into a
new, four-year revolving credit agreement with a group of banks under which it
may borrow up to $165.0 million secured by substantially all the assets of the
Company. On November 5, 2003, this credit agreement was amended to include the
Company's subsidiaries in Canada and the United Kingdom. Proceeds
19

from this credit agreement, as amended ("Credit Agreement"), which expires on
July 30, 2007, will be used for general corporate purposes. Amounts borrowed
under the Credit Agreement may be borrowed at Park-Ohio's election at either (i)
LIBOR plus 175 -- 250 basis points or (ii) the bank's prime lending rate. The
interest rate is dependent on the Company's Debt Service Coverage ratio, as
defined in the Credit Agreement. Under the Credit Agreement, a detailed
borrowing base formula provides borrowing capacity to the Company based on
percentages of eligible accounts receivable, inventory and fixed assets. As of
September 30, 2003, the Company had $104.5 million outstanding under the Credit
Agreement. After giving effect to the amendment, as of September 30, 2003, the
Credit Agreement provided approximately $40.0 million of unused borrowing
capacity.

Current financial resources (working capital and available bank borrowing
arrangements) and anticipated funds from operations are expected to be adequate
to meet current cash requirements. The future availability of borrowings under
the Credit Agreement is based on the Company's ability to meet a Debt Service
Ratio covenant, which could be materially impacted if negative economic trends
continue. Failure to meet this financial covenant could materially impact the
availability and interest rate of future borrowings. At September 30, 2003, the
Company was in compliance with the Debt Service Ratio covenant under the Credit
Agreement.

The ratio of current assets to current liabilities was 2.25 at September
30, 2003 versus 2.17 at December 31, 2002. Working capital increased by $3.6
million to $151.8 million at September 30, 2003 from $148.2 million at December
31, 2002.

During the first nine months of 2003, the Company provided $3.7 million
from operating activities as compared to providing $17.6 million in the same
period of 2002 due primarily to the change in working capital accounts. During
the first nine months of 2003, the Company invested $8.3 million in capital
expenditures and received $7.3 million from the sale of Green and St. Louis
Screw. These activities, less a net pay-down of borrowings of $9.8 million,
resulted in a decrease in cash of $7.1 million in the first nine months of 2003.

SEASONALITY; VARIABILITY OF OPERATING RESULTS

The Company's results of operations are typically stronger in the first six
months rather than the last six months of each calendar year due to scheduled
plant maintenance in the third quarter to coincide with customer plant shutdowns
and due to holidays in the fourth quarter.

The timing of orders placed by the Company's customers has varied with,
among other factors, orders for customers' finished goods, customer production
schedules, competitive conditions and general economic conditions. The
variability of the level and timing of orders has, from time to time, resulted
in significant periodic and quarterly fluctuations in the operations of the
Company's business units. Such variability is particularly evident at the
capital equipment businesses included in the Manufactured Products segment,
which typically ship a few large systems per year.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain forward-
looking statements, including, without limitation, credit availability, levels
and funding of capital expenditures and trends for the remainder of 2003.
Forward-looking statements are necessarily subject to risks, uncertainties and
other factors, many of which are outside our control, which could cause actual
results to differ materially from such statements. These uncertainties and other
factors include such things as: general business conditions and competitive
factors, including pricing pressures and product innovation; raw material
availability and pricing; changes in our relationships with customers and
suppliers; the ability of the Company to successfully integrate recent and
future acquisitions into its existing operations; changes in general domestic
economic conditions such as inflation rates, interest rates, foreign currency
exchange rates, tax rates and adverse impacts to us, our suppliers and customers
from acts of terrorism or hostilities; our ability to meet various covenants,
including financial covenants, contained in our credit agreement and the
indenture
20

governing the Senior Subordinated Notes; increasingly stringent domestic and
foreign governmental regulations including those affecting the environment;
inherent uncertainties involved in assessing our potential liability for
environmental remediation-related activities; the outcome of pending and future
litigation and other claims; dependence on the automotive and heavy truck
industries; dependence on key management; and dependence on information systems.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. In light of
these and other uncertainties, the inclusion of a forward-looking statement
herein should not be regarded as a representation by us that our plans and
objectives will be achieved.

REVIEW BY INDEPENDENT ACCOUNTANTS

The consolidated financial statements at September 30, 2003, and for the
three-month and nine-month periods ended September 30, 2003 and 2002, have been
reviewed, prior to filing, by Ernst & Young LLP, the Company's independent
accountants, and their report is included herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risk including changes in interest rates.
The Company is subject to interest rate risk on its floating rate revolving
credit facility, which consisted of borrowings of $104.5 million at September
30, 2003. A 100 basis point increase in the interest rate would have resulted in
an increase in interest expense of approximately $.8 million during the nine
months ended September 30, 2003.

The Company's foreign subsidiaries generally conduct business in local
currencies. During the first nine months of 2003, the Company recorded a
favorable foreign currency translation adjustment of $2.1 million related to net
assets located outside the United States. This foreign currency translation
adjustment resulted primarily from the weakening of the United States dollar in
relation to the Canadian dollar and the euro. Our foreign operations are also
subject to other customary risks of operating in a global environment, such as
unstable political situations, the effect of local laws and taxes, tariff
increases and regulations and requirements for export licenses, the potential
imposition of trade or foreign exchange restrictions and transportation delays.

ITEM 4. CONTROLS AND PROCEDURES

The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this quarterly
report, have concluded that, as of the end of such period, the Company's
disclosure controls and procedures were effective and designed to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries would be made known to them by others within those entities.

There were no significant changes in the Company's internal control over
financial reporting or in other factors that occurred during the period covered
by this quarterly report that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.

21

PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
third quarter of 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are included herein:

(4) Amended and Restated Credit Agreement, dated November 5, 2003,
among Park-Ohio Industries, Inc., the other loan parties party
thereto, the lenders party thereto, Bank One, NA and Banc One
Capital Markets, Inc.

(15) Letter re: unaudited financial information

(31.1) Principal Executive Officer's Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

(31.2) Principal Financial Officer's Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

(32) Certification requirement under Section 906 of the Sarbanes-Oxley
Act of 2002

(b) On July 31, 2003, the Company furnished a current Form 8-K Report under
Item 12 announcing its financial results for its second quarter ended June 30,
2003.

22

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

PARK-OHIO HOLDINGS CORP.
------------------------------------
(REGISTRANT)

By /s/ RICHARD P. ELLIOTT
-----------------------------------
Name: Richard P. Elliott
Title: Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)

Dated November 12, 2003
---------------------------------

23

EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
FOR THE QUARTER ENDED SEPTEMBER 30, 2003