Park-Ohio Holdings Corp. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; figures are unaudited. Park-Ohio is an industrial supply-chain management and diversified manufacturing company with Supply Technologies, Assembly Components, and Engineered Products segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $352.2 million | $312.7 million | $1,046.9 million | $970.1 million |
| Gross profit / margin | $57.2 million / 16.2% | $54.3 million / 17.4% | $173.0 million / 16.5% | $156.4 million / 16.1% |
| Operating income | $20.7 million | $20.9 million | $67.0 million | $52.5 million |
| Net income | $10.2 million | $13.8 million | $23.5 million | $25.5 million |
| Net income attributable to common shareholders | $10.0 million | $13.5 million | $22.8 million | $25.2 million |
| Diluted EPS | $0.80 | $1.10 | $1.83 | $2.06 |
Q3 sales rose 12.6%, while common-shareholder net income fell 25.9%. Nine-month sales increased 7.9%; common-shareholder net income declined 9.5%. Nine-month operating income included a $3.3 million litigation settlement gain, while 2016 included a $4.0 million impairment charge. 2017 also included an $11.0 million loss on debt extinguishment. Nine-month effective tax rates were 28.6% in 2017 and 18.3% in 2016.
- Q3 segment results: Supply Technologies sales were $140.2 million and operating income $10.9 million; Assembly Components $127.9 million and $11.4 million; Engineered Products $84.1 million and $6.0 million.
- Nine-month segment results: Supply Technologies sales of $415.8 million and operating income of $34.6 million; Assembly Components $393.2 million and $37.0 million; Engineered Products $237.9 million and $13.5 million.
- For Q3, management attributed sales growth mainly to stronger end-market demand in Supply Technologies and Engineered Products and the inclusion of acquired GH. Assembly Components sales and profits weakened. Gross margin fell year over year in Q3 due to China facility start-up costs, lower absorption in rubber and plastics, and Engineered Products mix and order-preparation costs. For the nine-month period, gross margin improved to 16.5% from 16.1%.
Cash flow, balance sheet, and financing
- For the first nine months, operating cash flow was $27.2 million, down from $40.8 million; investing cash outflow was $29.4 million, including $18.9 million of capital expenditures and the $10.5 million AMC acquisition. Financing provided $13.5 million. Cash increased $16.4 million to $80.7 million.
- At September 30, 2017, current assets were $651.6 million and current liabilities $275.6 million. Cash was $80.7 million; accounts receivable $231.4 million; and inventory $268.3 million.
- Gross debt was $519.3 million versus $475.0 million at year-end 2016; reported long-term debt, net of current amounts and issuance costs, was $492.3 million. Cash less gross debt was approximately $438.6 million. The filing reports $100.3 million drawn on the revolving facility and $205.3 million of unused availability.
- In April, the company issued $350 million of 6.625% senior notes due 2027, using proceeds to repay $250 million of 8.125% notes due 2021, its term loan, and part of revolver borrowings. The revolving facility was increased to $350 million and extended to 2022. The refinancing generated the $11.0 million extinguishment loss.
- The company reported a 2.1 debt-service coverage ratio and compliance with its credit-facility covenants at quarter-end. Management said existing resources and expected operating funds should cover anticipated needs for at least 12 months, while noting covenant and borrowing-base exposure if sales weaken or customers pay late.
Outlook, notable items, and risks
- The filing provides no specific earnings or revenue guidance. Management described demand growth in several markets but cautioned that order timing and operating results can fluctuate, particularly in capital equipment.
- Cash held by foreign subsidiaries was $72.5 million. Management intended to permanently reinvest undistributed foreign earnings of approximately $148.1 million; repatriation could have an adverse tax impact.
- In October 2017, the company acquired Heads & All Threads Ltd., a European supply-chain services business with approximately $35 million in annual revenue, for which purchase price details are not provided here. In April 2017, it acquired Aero-Missile Components for $10.5 million.
- The IPSCO dispute was settled for $4.0 million in March 2017; reversal of excess accrual produced a $3.3 million gain. The company also disclosed continuing SEC review and a DOJ investigation concerning a third party and a 2007 payment to a foreign tax official that may implicate the Foreign Corrupt Practices Act. The company said outcomes and potential impact cannot be predicted.
- The company was a co-defendant in approximately 89 asbestos cases involving approximately 143 plaintiffs. Management stated pending litigation was not expected to have a material adverse effect, while acknowledging outcomes are uncertain. Warranty liability was $7.7 million at September 30, 2017, compared with $5.5 million a year earlier.
- Key risks cited include substantial indebtedness, economic and cyclical demand, customer and supplier conditions, raw-material and component costs, covenant compliance, acquisition integration, litigation and regulatory matters, and foreign currency and geopolitical exposure. A 100-basis-point rate increase was estimated to add approximately $0.8 million of interest expense on revolver borrowings for the nine-month period.
- The board declared a $0.125 per-share quarterly dividend payable November 28, 2017. The company reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether weaker Q3 gross margin and Assembly Components performance persist, and whether expected Engineered Products orders convert to revenue and profit.
- Working-capital trends and cash conversion, given reduced operating cash flow and increased receivables and inventory.
- Debt-service covenant headroom, revolver availability, and the effect of interest rates or a downturn on liquidity.
- Any developments or potential financial exposure from the SEC/DOJ matter, asbestos litigation, or other claims.
- Integration, financing terms, and contribution from the October 2017 HAT acquisition, as well as the impact of adopting new revenue-recognition requirements in 2018.