Park-Ohio Holdings Corp. — Q3 2015 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Park-Ohio operates Supply Technologies, Assembly Components and Engineered Products, serving industrial, automotive, transportation and other markets.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $364.4 million | $344.6 million | $1,116.4 million | $1,005.7 million |
| Gross profit / margin | $62.3 million / 17.1% | $60.6 million / 17.6% | $181.1 million / 16.2% | $177.6 million / 17.7% |
| Operating income | $27.4 million | $26.4 million | $77.3 million | $74.7 million |
| Net income | $13.2 million | $12.5 million | $36.9 million | $35.7 million |
| Net income attributable to common shareholders | $13.2 million | $12.4 million | $36.4 million | $34.9 million |
| Diluted EPS | $1.06 | $1.00 | $2.94 | $2.82 |
Cash flow: Nine-month operating cash flow was $11.7 million, down from $34.2 million, principally due to working capital used to support growth. Investing activities used $31.1 million, including $31.1 million of property, plant and equipment purchases. Operating cash flow less those purchases was approximately negative $19.4 million. Financing activities provided $27.0 million, and cash increased $4.7 million to $62.7 million.
Liquidity and debt: At September 30, cash was $62.7 million; current assets were $615.0 million and current liabilities $242.2 million, giving a 2.54 current ratio and $372.8 million of working capital. Total debt was $480.6 million, including $250.0 million of 8.125% senior notes due 2021; long-term debt, net of current maturities, was $463.9 million. The company reported $215.4 million drawn on its revolving facility and approximately $67.1 million of unused availability. It was compliant with debt covenants, with a 3.1 debt service coverage ratio. Management said available resources and expected operating cash flows should cover requirements for at least the next 12 months.
Other metrics: Nine-month effective tax rate was 34.8%. The company paid $4.7 million in dividends during the period and declared a further $0.125 per-share quarterly dividend after quarter-end.
Material changes and segment performance
- Q3 sales rose 5.7%; management attributed the increase mainly to $24.7 million of incremental revenue from 2014 acquisitions. Nine-month sales rose 11.0%, including $80.8 million from acquisitions and $29.9 million, or 3.0%, of organic growth.
- Gross margin declined year over year in both periods, primarily because Engineered Products had lower higher-margin equipment and aftermarket sales, unfavorable sales mix and weaker demand in oil and gas, steel, and aerospace markets.
- Supply Technologies: Q3 sales were essentially flat at $143.1 million, while segment operating income rose 7% to $13.0 million. Nine-month sales increased 6% to $444.7 million and operating income rose 23% to $40.2 million.
- Assembly Components: Q3 sales rose 23% to $149.3 million and operating income rose 61% to $17.7 million, benefiting from Autoform and aluminum business improvements. Nine-month sales increased 22% to $429.6 million and operating income rose 34% to $41.9 million.
- Engineered Products: Q3 sales fell 10% to $72.0 million and operating income fell 63% to $4.3 million. Nine-month sales rose 4% to $242.1 million, partly from Saet, but operating income fell 52% to $15.7 million amid end-market weakness and mix/volume pressures.
- Debt increased from $443.8 million at year-end 2014 to $480.6 million, and interest expense increased 6.7% year to date. Average borrowings were higher, though average borrowing rates were lower.
Outlook, risks and unusual items
- No quantified earnings or sales guidance is provided. Management expects liquidity to meet needs for at least the next 12 months, but warns that lower sales or customer payment problems could affect borrowing availability and covenant compliance.
- Key disclosed risks include substantial indebtedness, cyclical automotive and heavy-duty truck exposure, economic and market weakness, acquisition integration, customer and supplier risks, and ability to meet debt covenants. Management reported no material changes to previously disclosed risk factors.
- The company disclosed an SEC review and DOJ investigation concerning a third party and a 2007 payment to a foreign tax official on the company’s behalf that may implicate the Foreign Corrupt Practices Act. A board special committee is reviewing related transactions; outcome and financial impact are uncertain.
- In the IPSCO equipment dispute, the appellate court affirmed liability but reversed nearly all damages and remanded for further findings. The previously accrued $5.2 million award may decrease but cannot increase; a separate attorney-fee request remains stayed.
- The company was co-defendant in approximately 90 asbestos cases involving approximately 230 plaintiffs. It stated that it cannot predict outcomes but does not expect ultimate resolution to materially harm its financial position, liquidity or results.
- Saet purchase-price allocation adjustments reduced goodwill by approximately $16.4 million, primarily reclassified to acquired intangible assets. The company also reported $42.9 million of cash held by foreign subsidiaries and approximately $100.5 million of undistributed foreign earnings intended to remain reinvested; repatriation could have adverse tax consequences.
Important facts for investors to verify
- Whether Engineered Products demand and margins recover, particularly in oil and gas, steel, and aerospace markets.
- Whether acquisition-related sales and earnings remain accretive and whether purchase-price allocations are finalized without material further adjustments.
- Working-capital conversion, capital spending and debt trends, including the company’s ability to sustain positive operating cash flow and covenant headroom.
- Developments and potential financial consequences of the SEC/DOJ matter, IPSCO remand and asbestos litigation.
- Availability of foreign cash for domestic needs, potential tax effects of repatriation, and the company’s capacity to maintain dividends.