Park-Ohio Holdings Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Park-Ohio is a diversified manufacturer and supply-chain services company operating through Supply Technologies, Assembly Components and Engineered Products. Results were heavily affected by COVID-19 disruptions and lower demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $228.3m | $415.3m | $594.6m | $835.4m |
| Gross profit / margin | $14.2m / 6.2% | $66.2m / 15.9% | $68.1m / 11.5% | $131.5m / 15.7% |
| Operating income (loss) | $(20.9)m | $19.3m | $(7.9)m | $41.8m |
| Net income (loss) | $(17.0)m | $7.9m | $(15.7)m | $19.6m |
| Net income (loss) attributable to common shareholders | $(16.6)m | $7.6m | $(15.4)m | $18.8m |
| Diluted earnings (loss) per share | $(1.38) | $0.61 | $(1.27) | $1.51 |
Q2 revenue fell 45.0% year over year; first-half revenue fell 28.8%. Lower volume and unfavorable product mix reduced gross margins, partly offset by cost reductions. SG&A declined, but rose as a percentage of sales because revenue fell. Interest expense was $7.5m in Q2 and $15.5m for the first half, down from the comparable 2019 periods. First-half income-tax benefit was $4.1m, including the effect of a CARES Act net operating loss carryback; Q2 tax benefit was $9.6m.
Segments and material changes
- Supply Technologies: Q2 sales were $94.4m, down 41.5%; segment operating income was $0.3m versus $11.3m. First-half sales fell 28.0% and operating income was $9.5m versus $24.4m. Weakness across several end markets was partly offset by stronger semiconductor and medical demand.
- Assembly Components: Q2 sales were $54.9m, down 59.7%, and segment operating loss was $14.6m versus income of $8.3m. First-half sales fell 33.3%; operating loss was $8.3m versus income of $16.6m. Automotive customer shutdowns and reduced vehicle production were primary drivers.
- Engineered Products: Q2 sales were $79.0m, down 32.8%, and segment operating loss was $0.8m versus income of $11.5m. First-half sales fell 24.7%; operating income was $3.0m versus $19.6m. Lower capital-equipment, oil-and-gas, and aerospace-and-defense demand, unfavorable mix and manufacturing underabsorption weighed on results.
Cash flow, debt and liquidity
- First-half operating cash flow was $9.5m versus $2.8m in 2019. Working-capital reductions, including lower receivables and inventory, more than offset weak profitability.
- Investing cash outflow was $8.0m, including $9.4m of capital expenditures, down from $20.7m of capex in the prior-year period. Financing cash outflow was $4.3m; cash decreased $4.1m to $51.9m.
- June 30 total debt was $572.3m, including $350.0m of 6.625% senior notes due 2027 and $181.3m outstanding on the revolving facility due 2024. Long-term debt, net, was $553.8m. Cash was $51.9m.
- Management reported total liquidity of $196.9m: $51.9m cash and $145.0m of unused borrowing availability. Calculated availability under the credit agreement was $125.7m; the debt-service covenant did not apply at that level. The company was compliant with other reported covenants at June 30.
- The quarterly cash dividend was suspended in Q2 to preserve liquidity. The company paid $1.6m in dividends in the first half. It also repurchased 149,376 shares under its public program during Q2.
Outlook, risks and unusual items
- Management said the pandemic’s duration, severity and financial impact could not be reasonably estimated. It expected COVID-19 and related responses to continue adversely affecting results, cash flows and financial position, while citing cost actions, liquidity and a diversified business portfolio as support for managing the downturn. No specific financial guidance was provided.
- Automotive production in North America began a slow restart in late May; by June 30, approximately 75% of furloughed employees had returned. Further workforce and cost actions remained possible.
- First-half 2020 charges included $2.3m for Assembly Components plant closure, consolidation and cost-reduction actions; the company expected about $1.7m of additional costs for these initiatives in the remainder of 2020. MD&A also reports $3.1m of first-half charges related to closures, severance and other cost actions across the period.
- Key risks include prolonged COVID-19 disruption, customer and supplier interruptions, cyclical automotive and truck exposure, substantial indebtedness, covenant and borrowing-base pressure, foreign exchange and commodity-price changes, and litigation. The company was a co-defendant in approximately 118 asbestos cases involving approximately 220 plaintiffs; management did not expect the ultimate resolution to materially affect the company, while acknowledging outcomes are uncertain.
- Other items: the CARES Act affected the tax benefit; the fair value of the $350m senior notes was $288.9m at June 30 versus $358.3m at year-end. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor verification priorities
- Track customer demand and production recovery, especially in automotive, truck, aerospace and capital equipment, and the effect on segment margins.
- Verify that reported liquidity remains accessible as cash use, borrowing availability, customer receivables and credit-agreement thresholds change.
- Monitor covenant compliance and debt levels if sales or collections weaken further.
- Assess whether cost reductions and plant actions deliver savings and whether expected additional restructuring costs are incurred.
- Confirm the pace and terms of dividend reinstatement, if any, and capital allocation including share repurchases.
- Follow the CARES Act tax benefits, asbestos and other litigation, and the uncertainty of the pandemic-related outlook.