Park-Ohio Holdings Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Park-Ohio is a diversified industrial company with three reportable segments: Supply Technologies, Assembly Components, and Engineered Products. Unaudited results are compared with the corresponding 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $435.8 million | $358.5 million | $1,282.8 million | $1,068.1 million |
| Gross profit / margin | $50.4 million / 11.6% | $40.1 million / 11.2% | $153.9 million / 12.0% | $132.0 million / 12.4% |
| Operating income (loss) | $7.0 million | $(5.0) million | $22.6 million | $3.9 million |
| Net income (loss) attributable to common shareholders | $2.7 million | $(7.2) million | $9.8 million | $(7.0) million |
| Diluted EPS | $0.22 | $(0.60) | $0.80 | $(0.58) |
Q3 sales rose 21.6%, primarily on stronger customer demand and higher realized pricing across all three segments. Gross margin improved year over year in Q3 as pricing and volume benefits outweighed inflation, labor costs, and supply-chain constraints; nine-month margin declined, largely reflecting higher restructuring-related charges. SG&A was $43.4 million in Q3, down from $45.1 million, and 10.0% of sales versus 12.6%. Nine-month SG&A increased 4.8% to $134.2 million but fell to 10.5% of sales from 12.0%.
- Supply Technologies: Q3 sales increased 20.7% to $185.9 million; segment operating income was flat at $10.7 million and margin fell to 5.8% from 6.9%, mainly due to supply-chain costs, including premium freight.
- Assembly Components: Q3 sales increased 27.3% to $153.0 million; segment operating loss narrowed to $2.0 million from $8.9 million. Higher sales and improvement initiatives helped offset inflation and restructuring costs.
- Engineered Products: Q3 sales increased 14.9% to $96.9 million; segment operating income rose to $5.8 million from $0.6 million, supported by stronger demand and operational improvements.
Q3 income tax benefit was $3.0 million on only $0.1 million of pretax income, including a $2.4 million discrete benefit. The nine-month $5.7 million tax benefit included $6.5 million of discrete benefits, primarily relating to estimates for prior-year tax credits and international tax items. Interest expense increased to $9.6 million in Q3 and $25.7 million for nine months, reflecting higher average borrowings and interest rates.
Cash flow, debt, and liquidity
- Cash used in operating activities was $31.4 million for the first nine months, compared with $25.9 million used in 2021. Working capital rose $67.2 million; cash-flow impacts included $52.7 million of inventory growth and $35.5 million of higher receivables.
- Investing cash outflow was $41.6 million, including $23.7 million of capital expenditures and $21.9 million of acquisition spending, partly offset by $4.0 million of asset-sale proceeds.
- Financing provided $78.5 million, including $90.0 million of net revolving-credit-facility proceeds. Cash declined by $0.4 million to $53.7 million.
- Total debt was $688.3 million at September 30, 2022, versus $606.1 million at year-end 2021. This included $350.0 million of 6.625% senior notes due 2027 and $309.9 million drawn on a revolving facility maturing November 2024. Long-term debt, net of current portion and issuance costs, was $674.4 million.
- Management reported total liquidity of $163.6 million, including $53.7 million cash and $109.9 million unused borrowing availability, of which $23.6 million was suppressed. Separately, availability under the credit agreement was $78.8 million. The company said existing resources and expected operating cash flows should cover anticipated needs for at least the next 12 months.
Changes, outlook, and risks
For the first nine months, sales increased 20.1% and the company returned to net income attributable to common shareholders from a loss in 2021. However, working-capital investment, acquisition spending, and higher debt increased financing needs; interest expense also rose. Foreign-currency translation produced a $35.5 million loss in other comprehensive income for the nine-month period.
The company acquired Charter Automotive in China for $9.3 million and Southern Fasteners in North Carolina for $18.7 million, both net of cash acquired; purchase-price allocations remained subject to finalization. It recorded $7.9 million of Assembly Components restructuring and related costs and $2.8 million in Engineered Products for the first nine months. Management expected additional 2022 costs of approximately $0.5 million and $4.0 million, respectively. Asset sales connected with consolidation initiatives generated a $2.9 million total gain.
No formal earnings or revenue guidance is provided in the supplied filing text. Management cited inflation, higher labor and supply-chain costs, commodity prices, semiconductor and logistics disruptions, cyclical end-market demand, customer credit risk, acquisition integration, foreign exchange, and interest rates as risks. A 100-basis-point increase in rates was estimated to add approximately $2.3 million of interest expense over the nine-month period. The company was in compliance with its credit-facility covenants at quarter-end; availability falling below $50.625 million could trigger a debt-service covenant. Management did not expect pending litigation, including 99 asbestos cases involving 162 plaintiffs, to have a material adverse effect, while acknowledging outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
The board declared a quarterly dividend of $0.125 per share on November 4, 2022, payable December 2, 2022. Future dividends remain at the board’s discretion. Disclosure controls were assessed as effective, with no material quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and demand gains can sustain margins as inflation, labor, freight, and other supply-chain costs persist.
- Whether working-capital requirements and cash conversion improve, given negative operating cash flow and inventory and receivables growth.
- Debt and revolving-facility availability, covenant headroom, and sensitivity to higher interest rates.
- Progress and remaining costs of restructuring, and the integration and performance of the two acquisitions.
- The durability of reported earnings in light of discrete tax benefits and asset-sale gains, and the ultimate exposure from litigation and other contingencies.