Park-Ohio Holdings Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Park-Ohio is a diversified industrial company operating through Supply Technologies, Assembly Components and Engineered Products. Management attributed weaker demand across markets, including an Assembly Components shutdown in spring, primarily to COVID-19.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $340.2m | $403.4m | $934.8m | $1,238.8m |
| Gross profit / margin | $49.7m / 14.6% | $66.5m / 16.5% | $117.8m / 12.6% | $198.0m / 16.0% |
| Operating income | $11.0m | $23.8m | $3.1m | $65.6m |
| Net income (loss) attributable to common shareholders | $5.3m | $12.2m | $(10.1)m | $31.0m |
| Diluted EPS | $0.44 | $0.99 | $(0.83) | $2.51 |
- Q3 sales declined 15.7%; nine-month sales declined 24.5%. Lower volume and unfavorable mix reduced gross margins; cost reductions partly offset the pressure.
- Q3 SG&A was $38.7m, or 11.4% of sales, versus $42.7m, or 10.6%. Nine-month SG&A was $114.7m, or 12.3%, versus $132.4m, or 10.7%. Lower expense reflected cost actions, while the sales decline increased SG&A as a share of revenue.
- Operating cash flow was $32.8m for the nine months, versus $33.5m. Investing cash outflow was $13.5m, including $14.9m capital expenditure; financing cash outflow was $24.1m. Cash declined $5.1m to $50.9m.
- September 30 total debt was $555.0m, including $350.0m of 6.625% senior notes due 2027 and $165.2m drawn on the revolving facility due 2024. Long-term debt, net, was $537.2m; debt at December 31, 2019 was $568.5m.
- Management reported total liquidity of $242.5m, comprising $50.9m cash and $191.6m unused borrowing availability. Separately, calculated availability under the credit agreement was $172.2m.
Segments and material changes
- Supply Technologies: Q3 sales were $132.0m, down 11.2%; segment operating income rose to $10.6m from $10.0m, and margin improved to 8.0% from 6.7%. Nine-month sales were $367.2m, down 22.8%, and operating income was $20.1m versus $34.4m.
- Assembly Components: Q3 sales were $126.9m, down 6.6%; operating income declined to $6.7m from $10.4m. Nine-month sales were $310.0m, down 24.5%, and the segment recorded a $1.6m operating loss versus $27.0m income. Spring customer and facility shutdowns and lower production were key factors.
- Engineered Products: Q3 sales were $81.3m, down 31.6%, and operating income was $1.3m versus $10.3m. Nine-month sales were $257.6m, down 27.0%, and operating income was $4.3m versus $29.9m. Lower capital-equipment demand, weaker end markets, mix and manufacturing underabsorption weighed on results.
Outlook, risks and unusual items
- Management said the duration and financial impact of COVID-19 remained uncertain, but expected available resources and cost actions to support anticipated cash needs for at least 12 months. No quantified earnings or revenue guidance was provided.
- Cost responses included plant consolidation, workforce and salary reductions, discretionary-spending cuts, and reduced capital spending. The filing reports restructuring-related charges in several places; the stated consolidated nine-month charge of $4.1m in MD&A does not clearly reconcile to amounts disclosed by segment.
- The quarterly dividend was suspended in Q2 to preserve liquidity and reinstated by the board on November 3, 2020 at $0.125 per share, with an expected $1.5m cash outlay. Future declarations remain discretionary. The company repurchased $7.2m of treasury shares during the first nine months.
- Credit-facility availability below $46.875m would trigger a debt-service coverage test; management said the test did not apply at quarter-end and other covenants were met. Further sales deterioration could pressure covenant compliance and borrowing capacity.
- Other risks include substantial indebtedness, cyclical automotive and truck exposure, customer and supplier disruptions, interest-rate and foreign-exchange movements, and litigation. The company was co-defendant in approximately 119 asbestos cases involving 221 plaintiffs; management did not expect these matters to have a material ultimate effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- Whether demand and margins continued to recover after September 30, especially in Assembly Components and Engineered Products.
- The reconciliation and nature of plant-closure and cost-reduction charges, given differing totals in MD&A and segment disclosures.
- Revolver availability, borrowing-base eligibility, covenant headroom and debt-service capacity under weaker operating scenarios.
- The sustainability of operating cash flow and liquidity after the dividend reinstatement and share repurchases.
- Developments in COVID-19 impacts, asbestos and other legal matters, and the potential contingent consideration for the 2019 Erie Press acquisition.