Park-Ohio Holdings Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Park-Ohio is a diversified industrial supply-management and manufacturing company with three segments: Supply Technologies, Assembly Components, and Engineered Products. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $312.7 | $364.4 | $970.1 | $1,116.4 |
| Gross profit / margin | $54.3 / 17.4% | $62.3 / 17.1% | $156.4 / 16.1% | $181.1 / 16.2% |
| Operating income | $20.9 | $27.4 | $52.5 | $77.3 |
| Net income | $13.8 | $13.2 | $25.5 | $36.9 |
| Net income attributable to common shareholders | $13.5 | $13.2 | $25.2 | $36.4 |
| Diluted EPS | $1.10 | $1.06 | $2.06 | $2.94 |
Q3 sales fell 14.2% year over year, while operating income declined 23.7%. Nine-month sales fell 13.1%, and common-shareholder net income declined 30.8%. Q3 common-shareholder earnings increased slightly despite lower operating income, aided by a $7.3 million year-over-year swing in income taxes, including reversals of prior uncertain-tax-position accruals. Nine-month effective tax rates were 18.3% in 2016 and 34.8% in 2015; the 2016 rate benefited from approximately $4.0 million of tax accrual reversals.
- Q3 segments: Supply Technologies sales/operating income were $122.0/$9.7; Assembly Components $133.4/$13.9; and Engineered Products $57.3/$4.0. All had lower sales than a year earlier. Segment operating income fell in each segment, except that Engineered Products’ margin improved to 7.0% from 6.0%.
- Nine-month segments: Supply Technologies sales/operating income were $384.8/$30.8; Assembly Components $399.4/$38.3; and Engineered Products $185.9/$8.6. Segment operating income declined across all three.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $40.8, versus $11.7 in 2015, reflecting improved working-capital efficiency. Capital expenditures were $20.3, down from $31.1. Financing used $24.4, compared with $27.0 provided in the prior-year period, primarily reflecting debt repayments and a $2.0 acquisition earn-out payment. Cash declined $4.3 to $57.7.
- At September 30, cash was $57.7; current assets were $554.8 and current liabilities $228.1. Total assets were $941.9 and total equity $235.0.
- Reported current and long-term debt totaled $448.6, compared with $463.6 at December 31, 2015. The debt table lists $250.0 of 8.125% senior notes due 2021, $151.6 drawn on the revolving facility, and a $24.5 term loan, plus other debt and capital leases.
- The amended revolving facility was increased to $300.0. The company reported $176.1 outstanding under the facility and $105.1 of unused availability, including the term loan balance in the facility borrowing figure. Its debt-service coverage ratio was 2.0, above the required threshold, and it reported compliance with covenants.
- Management said cash, borrowing availability, and expected operating funds should cover requirements for at least the next 12 months. It cautioned that falling sales or customer payment problems could affect borrowing-base availability and covenant compliance. Cash held by foreign subsidiaries was $49.5 and was intended to remain invested abroad.
Changes, outlook, and notable matters
- Management attributed weaker sales across segments mainly to lower end-market demand. It cited particularly sharp declines in heavy-duty truck, truck-related, power sports, and bus markets for Supply Technologies; reduced automotive program volumes for Assembly Components; and softer oil and gas, rail, steel, aerospace, and military demand for Engineered Products.
- Cost reductions helped Q3 gross margin rise to 17.4% from 17.1%; nine-month gross margin edged down to 16.1% from 16.2%, partly because of lower fixed-cost absorption. SG&A declined in dollars but rose as a percentage of sales.
- A $4.0 asset impairment charge was recorded in Q1 after volume declines in certain automotive customer programs. No numerical earnings or revenue guidance is provided. The filing notes that results are variable and not necessarily indicative of full-year performance.
- Interest expense rose to $21.3 for nine months, with management citing higher borrowing rates. The filing estimates that a 100-basis-point rate increase would have added about $1.3 of interest expense during the nine-month period.
- Contingencies include the IPSCO dispute, for which $7.4 was accrued at September 30 and appeals were pending; asbestos litigation; and an ongoing SEC review and DOJ investigation involving a third party and a 2007 payment to a foreign tax official that the company said implicated the FCPA. The company could not predict the outcome or impact of the investigations.
- The board declared a quarterly dividend of $0.125 per share, payable November 28, 2016. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether end-market demand and automotive program volumes stabilize, and whether cost reductions can offset lower production and fixed-cost absorption.
- Whether cash generation, borrowing availability, and covenant headroom remain adequate if sales or customer collections weaken.
- The final tax effects of uncertain-tax-position reversals and any further changes in the effective tax rate.
- Developments in the IPSCO appeals, asbestos claims, and SEC/DOJ matters, including any change in the related accruals or potential exposure.
- The durability of the dividend and the effect of floating-rate debt, foreign-currency movements, and foreign cash balances on liquidity and earnings.