PARK OHIO HOLDINGS CORP quarterly report, Q1 FY2020

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Park-Ohio Holdings Corp. — Q1 2020 Form 10-Q

Business context and reporting period. The filing covers the unaudited three months ended March 31, 2020, compared with Q1 2019. Park-Ohio operates through Supply Technologies, Assembly Components and Engineered Products, serving manufacturing and industrial customers. Results were affected by COVID-19-related customer plant closures and reduced demand, particularly in automotive markets.

Key financial results

  • Revenue: $366.3 million, down 12.8% from $420.1 million.
  • Profitability: Gross profit was $53.9 million, down 17.5%; gross margin fell to 14.7% from 15.5%. Operating income declined 42.2% to $13.0 million. Net income was $1.3 million versus $11.7 million; income attributable to common shareholders was $1.2 million versus $11.2 million. Diluted EPS was $0.10 versus $0.90.
  • Segment performance: Supply Technologies sales fell 14.8% to $140.8 million and operating margin declined to 6.5% from 7.9%. Assembly Components sales fell 7.3% to $128.2 million and margin declined to 4.9% from 6.0%. Engineered Products sales fell 16.5% to $97.3 million and margin declined to 3.9% from 7.0%.
  • Cash flow: Operating activities used $3.9 million, compared with $6.6 million provided in Q1 2019. Investing activities used $3.5 million, including $4.9 million of capital expenditures and $1.4 million of asset-sale proceeds. Financing activities provided $10.2 million. Cash increased $0.8 million to $56.8 million.
  • Liquidity and debt: Management reported total liquidity of $236.8 million at quarter-end, including $56.8 million cash and $180.0 million of unused borrowing availability. Total debt was $581.7 million, up from $568.5 million at year-end 2019; long-term debt, net, was $560.2 million. The revolving facility matures November 2024; $350 million of 6.625% senior notes mature in 2027.
  • Other metrics: Interest expense was $8.0 million, versus $8.2 million. Income tax expense was $5.5 million, an 80.9% effective rate versus 25.0% in Q1 2019. The quarterly dividend was $0.125 per share for Q1; the company subsequently temporarily suspended the dividend in response to COVID-19.

Material changes versus Q1 2019

  • Lower demand and customer production disruptions reduced sales across all three segments. Management cited COVID-19 impacts, weaker end markets, unfavorable product mix and reduced profit flow-through on lower volumes.
  • Cost-reduction actions partly offset the volume and mix pressures. SG&A declined to $40.9 million from $42.8 million, but rose to 11.2% of sales from 10.2% as revenue fell.
  • Q1 2019 included $1.4 million of plant closure and consolidation costs. Erie Press, acquired in May 2019, contributed to Engineered Products sales and SG&A in Q1 2020.
  • Operating cash flow shifted from positive to negative, and the company used net borrowings to fund cash needs, capital expenditures and share repurchases.
  • Currency translation generated a $16.6 million other comprehensive loss, contributing to comprehensive loss attributable to common shareholders of $14.9 million, versus comprehensive income of $17.2 million in Q1 2019.

Outlook, risks and unusual items

  • Management expected COVID-19 to negatively affect results, cash flows and financial position, but said the duration, severity and financial impact could not be reasonably estimated. Some facilities had reduced or suspended operations; workforce furloughs and some permanent reductions were made or contemplated.
  • Management stated that liquidity and cost actions positioned the company to manage the crisis, and that existing resources and anticipated operating cash flows were expected to cover anticipated needs for at least 12 months. This outlook is subject to uncertainty.
  • The company was in compliance with its credit-facility covenants at March 31, 2020. Management warned that further sales declines or slower customer payments could weaken covenant compliance, reduce eligible receivables and limit borrowing availability. The debt-service coverage covenant applies if calculated availability falls below $46.875 million; reported availability was $169.0 million for this test.
  • The elevated tax rate reflected earnings mix, higher GILTI inclusion and reduced benefits from foreign tax credits and the FDII deduction. The company was assessing the CARES Act’s potential tax effects.
  • Management reported approximately 119 asbestos-related cases involving 222 plaintiffs and various other ordinary-course legal matters. It believes recorded liabilities are appropriate and does not expect resolution to materially affect the company, while acknowledging outcomes are uncertain.
  • The company repurchased 180,827 shares under a program announced March 11, 2020. It also temporarily suspended the quarterly dividend to preserve liquidity.
  • A 100-basis-point increase in floating interest rates would have increased Q1 interest expense by approximately $0.5 million. The company disclosed no commodity hedges.

Important facts for investors to verify

  • Subsequent-quarter sales, operating margins and cash flows as customer shutdowns and production levels changed.
  • Actual cash availability, borrowing-base eligibility and covenant headroom under continued COVID-19-related stress.
  • Whether cost reductions, furloughs and the dividend suspension adequately support liquidity without impairing recovery capacity.
  • Debt levels, interest costs and refinancing or repayment needs, including use of the revolving facility.
  • Tax effects of the CARES Act and whether the unusually high Q1 effective tax rate persists.
  • Developments in asbestos and other legal claims, and any material changes to recorded contingencies.