Park-Ohio Holdings Corp. — Q1 2016 Form 10-Q
Business context and reporting period: Park-Ohio is an industrial supply-management and diversified manufacturing company with three reportable segments: Supply Technologies, Assembly Components, and Engineered Products. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Figures are in millions except per-share amounts.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $328.0 | $374.7 | Down 12.5% |
| Gross profit / margin | $47.8 / 14.6% | $58.4 / 15.6% | Margin down 1.0 percentage point |
| Operating income | $11.3 | $24.3 | Down 53.5% |
| Income before taxes | $4.2 | $17.5 | Down 76.0% |
| Net income | $2.7 | $11.1 | Down 75.7% |
| Net income attributable to Park-Ohio shareholders | $2.7 | $10.8 | Down 75.0% |
| Diluted EPS | $0.22 | $0.87 | Down 74.7% |
| Operating cash flow | $10.1 | $1.0 | Up $9.1 |
| Capital expenditures | $8.9 | $11.5 | Down $2.6 |
Gross margin pressure reflected sales mix and reduced absorption at sites affected by lower customer demand. SG&A fell 4.7% to $32.5, but rose as a share of sales to 9.9% from 9.1%. Interest expense increased 4.4% to $7.1, primarily due to higher average borrowings ($465.8 versus $445.7). The effective tax rate was 35.7%, versus 36.6%.
Segment results
| Segment | Sales, Q1 2016 (vs. 2015) | Operating income, Q1 2016 (vs. 2015) | Margin, Q1 2016 (vs. 2015) |
|---|---|---|---|
| Supply Technologies | $129.9 (down 14%) | $10.2 (down 28%) | 7.9% (9.4%) |
| Assembly Components | $131.7 (down 6%) | $10.2 (down 4%) | 7.7% (7.5%) |
| Engineered Products | $66.4 (down 20%) | $1.4 (down 77%) | 2.1% (7.5%) |
Supply Technologies was affected by weaker heavy-duty truck, power sports, semiconductor, and agriculture/construction demand. Assembly Components sales were reduced by lower demand for certain aluminum parts on two automotive programs and lower fuel-filler business. Engineered Products faced weak oil and gas, military/commercial aerospace, rail, and steel markets, as well as unfavorable induction-business mix.
Balance sheet, debt, and liquidity
- At March 31, 2016, cash was $60.4 (down from $62.0 at year-end); total assets were $960.3 and total equity was $218.3.
- Current assets were $568.4 and current liabilities $244.6; reported working capital was $323.8. The current ratio was 2.32, compared with 2.44 at December 31, 2015.
- Long-term debt, net of current maturities and debt issuance costs, was $439.6, versus $445.8 at year-end. The filing reports $191.3 outstanding on the revolving credit facility and approximately $105.4 of unused availability as of March 31. Capital lease obligations were $17.8.
- The debt service coverage ratio was 2.2, and the company reported compliance with its debt covenants. The filing states the ratio must exceed 1.0 and may not be below 1.1 for two consecutive quarters.
- Cash from operations was $10.1; investing cash use was $8.9, primarily capital expenditures; financing cash use was $3.6. Cash declined by $1.6 during the quarter. Operating cash flow improved mainly because less working capital was used than in Q1 2015.
- Foreign subsidiaries held $48.6 of cash. Management intends to permanently reinvest undistributed foreign earnings; repatriating approximately $96.4 of undistributed earnings could result in adverse tax consequences.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects current financial resources and anticipated operating cash flows to cover requirements for at least the next 12 months, including operations, capital expenditures, debt service, dividends, acquisitions, and share repurchases. It expects covenant compliance during 2016, but warns that lower sales volumes could threaten compliance and borrowing availability.
- Credit facility: An April 22, 2016 amendment increased the facility to $300.0, raised the inventory advance rate to 65% (scheduled to decline gradually to 50% beginning July 1, 2016), and adjusted sublimits and pricing. This occurred after quarter-end.
- Impairment: The company recorded a $4.0 impairment charge in Assembly Components after declines in certain automotive-customer programs made related long-lived assets unrecoverable. It anticipates lease exit costs for related leased assets but said they are not expected to be material.
- Dividend: The company paid $1.5 in Q1 and declared a further $0.125-per-share quarterly dividend in April, expected to require approximately $1.5 in cash. Future dividends remain at the board’s discretion.
- Legal and regulatory matters: ATM’s IPSCO dispute includes a $5.2 damages award and a further $2.2 award of fees and costs, both accrued; appeals are pending. The company is cooperating with SEC and DOJ inquiries concerning a third party and a disclosed 2007 payment to a foreign tax official that may implicate the FCPA; outcomes and impacts are uncertain. The company also reported 108 asbestos cases involving approximately 284 plaintiffs and said it does not expect them to materially affect its financial position, liquidity, or results.
- Other risks: Cyclical end-market demand, customer concentration and payment risk, raw-material and component availability/costs, substantial indebtedness, covenant compliance, litigation, and economic and foreign-currency exposure remain relevant. A 100-basis-point increase in rates would have increased Q1 interest expense by approximately $0.5. No currency hedge contracts or derivative instruments were outstanding at quarter-end.
Most important facts for investors to verify
- Whether demand and margins stabilize, particularly in Engineered Products and the affected automotive programs in Assembly Components.
- Whether the $4.0 impairment, further program volume declines, or related lease exit costs lead to additional charges.
- Whether operating cash flow remains sufficient as working capital changes and capital spending fluctuate.
- Whether covenant headroom and revolver availability hold up if sales weaken, and the effect of the amended facility’s pricing and borrowing-base terms.
- Developments in the IPSCO appeals and the SEC/DOJ-related review, including any potential financial or operational consequences.