Park-Ohio Holdings Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Park-Ohio is a diversified industrial company operating Supply Technologies, Assembly Components and Engineered Products. It acquired GH Electrotermia in December 2016.
Financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $1,276.9 million | $1,463.8 million |
| Gross profit / margin | $203.0 million / 15.9% | $235.2 million / 16.1% |
| Operating income / margin | $69.2 million / 5.4% | $97.9 million / 6.7% |
| Net income | $32.2 million | $48.7 million |
| Net income attributable to Park-Ohio shareholders | $31.7 million | $48.1 million |
| Diluted EPS | $2.58 | $3.88 |
| Cash from operating activities | $72.9 million | $44.7 million |
| Capital expenditures | $28.5 million | $36.5 million |
| Cash and cash equivalents at year-end | $64.3 million | $62.0 million |
| Gross debt | $475.0 million | $468.1 million |
Sales fell 13% and operating income fell 29% year over year, principally because of lower demand across the segments. Gross margin declined 20 basis points; SG&A fell in dollars but rose to 10.2% of sales from 9.2%. Operating cash flow improved with lower working-capital requirements. Approximate operating cash flow less capital expenditures was $44.4 million. Interest expense was $28.2 million, versus $27.9 million.
Segment performance
| Segment | 2016 sales | 2016 operating income | 2015 comparison |
|---|---|---|---|
| Supply Technologies | $502.1 million | $40.0 million; 8.0% margin | Sales down 13%; income $50.3 million |
| Assembly Components | $529.4 million | $50.5 million; 9.5% margin | Sales down 7%; income $57.9 million |
| Engineered Products | $245.4 million | $10.6 million; 4.3% margin | Sales down 22%; income $20.9 million |
Liquidity, debt and capital allocation
- Year-end working capital was $310.8 million. The company reported $132.8 million drawn on its revolving credit facility and approximately $106.2 million of unused availability.
- Net debt as a percentage of capitalization was 58%, compared with 60% in 2015. The debt service coverage ratio was 2.0, and the company reported compliance with its credit covenants at year-end.
- Senior notes total $250 million, carry an 8.125% coupon and mature in 2021. Gross debt also includes revolving and term borrowings, capital leases and other debt.
- The company spent $23.4 million, net of cash acquired, on GH and assumed $13.9 million of debt. GH generated approximately $55 million of 2016 revenue. The purchase-price allocation remained preliminary.
- Cash dividends were $0.50 per share for 2016. Management expected available operating funds and borrowing capacity to meet requirements for at least twelve months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected to remain in covenant compliance during 2017 but cautioned that weaker sales could affect covenant headroom and borrowing availability.
- Management attributed 2016 sales declines to lower end-market demand, especially in aluminum products, heavy-duty truck and power sports markets. Engineered Products also faced weakness in oil and gas, rail, steel, and commercial and military aerospace markets.
- A $4.0 million asset impairment charge was recorded in the first quarter after an automotive customer accelerated the end of certain production programs. The company also cited lower fixed-cost absorption and start-up costs for new products.
- The effective tax rate was 21.5%, including an approximately $4.0 million benefit from reversal of prior uncertain tax-position accruals following statute expirations.
- A subsidiary had accrued $7.4 million for the IPSCO equipment litigation, including damages and legal fees; appeals were pending. The company could not estimate additional losses beyond recorded accruals for certain legal matters.
- The company disclosed a 2007 payment to a foreign tax official by a third party on its behalf that implicates the Foreign Corrupt Practices Act. The SEC and DOJ were investigating the third party, and a company special committee was reviewing the transactions; Park-Ohio said the outcome and impact were uncertain.
- Other material risks include cyclical end markets and customer concentration, raw-material and energy costs, supplier dependence, international and currency exposure, acquisition integration, environmental liabilities, and substantial indebtedness. The company reported 103 asbestos cases involving approximately 199 plaintiffs and said it did not expect these matters to have a material adverse effect.
- The auditor gave an unqualified opinion on the financial statements and internal controls. Management’s and the auditor’s internal-control assessments excluded GH, acquired in December, which represented approximately 7% of year-end assets.
Important facts for investors to verify
- Whether demand and segment margins stabilized after the broad 2016 declines, particularly in Engineered Products and aluminum products.
- GH’s final purchase-price allocation, integration progress, acquired debt and contingent consideration tied to EBITDA targets.
- Revolver availability and covenant compliance if sales, customer collections or eligible receivables weaken.
- Updates on the SEC/DOJ-related FCPA matter and the special committee’s review, as well as the pending IPSCO appeals and accrued liability.
- The sustainability of operating cash flow and dividends given debt service, capital needs and foreign cash balances; $54.4 million of cash was held by foreign subsidiaries, and approximately $131.1 million of undistributed foreign earnings was intended to remain permanently invested.