Park-Ohio Holdings Corp. — 2018 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2018; this annual filing also reports fourth-quarter results. Park-Ohio is a diversified industrial company operating Supply Technologies, Assembly Components and Engineered Products. It reported approximately 7,300 employees.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,658.1 million | $1,412.9 million |
| Gross profit / margin | $271.5 million / 16.4% | $232.8 million / 16.5% |
| Operating income / margin | $97.3 million / 5.9% | $83.8 million / 5.9% |
| Net income attributable to common shareholders | $53.6 million | $28.6 million |
| Diluted EPS | $4.28 | $2.30 |
| Operating cash flow | $54.8 million | $46.7 million |
| Capital expenditures, net of asset-sale proceeds | $42.3 million | $27.9 million |
Revenue grew 17%, reflecting 8% organic growth and contributions from acquisitions. Common-shareholder net income rose 87%; the effective tax rate fell to 23.2% from 38.0%, partly due to the lower U.S. statutory rate and a roughly $3.0 million benefit from reversing foreign valuation allowances.
Fourth quarter: Sales were $405.9 million versus $366.0 million; net income attributable to common shareholders was $14.8 million versus $5.8 million; diluted EPS was $1.19 versus $0.46.
Segment results: Supply Technologies sales were $636.8 million, up 13%, with a 7.7% operating margin. Assembly Components sales rose 10% to $578.3 million, but margin declined to 7.4% from 9.1% amid launch and excess-facility costs and mix. Engineered Products sales rose 36% to $443.0 million, with margin improving to 8.7% from 6.0%, helped by acquisitions and organic growth.
Liquidity, debt and capital allocation
- Year-end cash was $55.7 million, down from $82.8 million. Working capital excluding cash was $366.0 million.
- Gross debt was $573.1 million, including $350.0 million of 6.625% senior notes due 2027 and $165.1 million drawn on the revolving facility. The company reported approximately $203.3 million of unused revolver availability.
- Net debt was 59% of capitalization, versus 55% in 2017. The debt-service coverage ratio was 1.9 at year-end; the company reported compliance with covenants.
- Operating cash flow increased, but higher working-capital requirements and investment contributed to the cash decline. The company spent $46.9 million on acquisitions, paid $6.4 million in dividends and repurchased $9.0 million of shares.
- Management said existing resources and expected operating cash flow should meet anticipated needs for at least the next 12 months.
Material changes, outlook and risks
- 2018 acquisitions included Canton Drop Forge, Hydrapower and two Supply Technologies businesses; collectively, they contributed $72.3 million of sales. The Engineered Products firm-order backlog was $226.1 million at year-end, versus $173.2 million a year earlier; nearly all was scheduled to ship in 2019.
- Management expected to remain within credit covenants during 2019, but cautioned that lower sales, particularly in automotive, or slower customer payments could weaken covenant compliance and borrowing availability. No numerical earnings guidance was provided.
- Automotive and heavy-duty truck accounted for 37% and 8% of 2018 sales, respectively. Customer concentration is significant: the ten largest customers represented about 32% of sales; individual segments also rely heavily on major customers.
- Other disclosed risks include cyclical end markets, raw-material and energy costs, supplier dependence, acquisition integration, foreign exchange and trade uncertainty, cybersecurity, environmental obligations and substantial indebtedness.
- The company disclosed approximately 86 asbestos cases involving 188 plaintiffs and said it did not expect them to have a material effect. It also described an SEC/DOJ matter concerning a third party and a 2007 payment to a foreign tax official that implicates the FCPA; the company said the outcome and impact could not be predicted.
- Unusual items: 2018 included a $1.9 million gain on sale of land. 2017 included a $3.3 million litigation-reserve reversal, an $11.0 million debt-extinguishment loss and $4.2 million of net TCJA-related tax expense. Revenue-standard adoption increased opening retained earnings by $2.6 million.
Important facts for investors to verify
- Whether Assembly Components can recover margins after 2018 launch costs, facility inefficiencies and adverse mix.
- Whether acquisition contributions, Engineered Products backlog and organic growth translate into sustained cash generation and debt reduction.
- Revolver availability, covenant headroom and sensitivity to weaker sales or customer collections.
- Progress and any material developments in the FCPA-related inquiry, asbestos claims and environmental contingencies.
- Effects of the 2019 lease-accounting adoption; the filing said its quantitative impact had not yet been determined.
Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded the 2018 acquisitions, which represented approximately 6% of assets and 4% of revenue.