Park-Ohio Holdings Corp. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Park-Ohio is an industrial supply-chain logistics and diversified manufacturer operating through Supply Technologies, Assembly Components and Engineered Products.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,203.2 million | $1,128.2 million |
| Gross profit / gross margin | $211.0 million / 17.5% | $207.3 million / 18.4% |
| Operating income | $86.5 million | $80.9 million |
| Income from continuing operations | $40.9 million | $34.2 million |
| Net income attributable to Park-Ohio common shareholders | $43.4 million | $31.8 million |
| Diluted earnings per share | $3.56 | $2.62 |
| Operating cash flow | $60.3 million | $55.9 million |
| Cash and cash equivalents at year-end | $55.2 million | $44.4 million |
| Total debt at year-end | $383.6 million | $378.6 million |
| Working capital / current ratio | $298.3 million / 2.51 | $273.5 million / 2.43 |
Capital expenditures, net of sale-and-leaseback proceeds, were $22.7 million. Cash flow from investing activities was a use of $54.3 million, including $45.8 million for acquisitions, net of cash acquired. The company reported $67.8 million of unused revolving-credit availability. Its debt service coverage ratio was 1.5 at year-end, and it was in compliance with credit-facility covenants.
Fourth-quarter 2013 net sales were $309.4 million, gross profit was $47.3 million, continuing-operations income was $9.4 million, and diluted EPS was $0.72. In fourth-quarter 2012, these were $274.0 million, $48.2 million, $8.2 million and $0.63, respectively.
Material changes versus 2012
- Annual sales grew 7%, but the company said organic growth was slightly down or flat; acquisitions contributed $82.1 million of the sales increase.
- Gross margin fell 90 basis points to 17.5%, mainly because Assembly Components, a lower-margin business, represented a larger share of sales.
- Assembly Components sales rose 36% to $412.8 million and segment operating income rose to $31.8 million, primarily reflecting FRS and Bates acquisitions and stronger aluminum program revenue.
- Supply Technologies sales declined 2% to $471.9 million. Heavy-duty truck and defense volumes weakened, partly offset by acquisitions and growth in other markets.
- Engineered Products sales declined 6% to $318.5 million and segment operating income declined 14% to $47.1 million, mainly due to an 18% decline in industrial-equipment capital-equipment sales.
- Net income included $3.0 million from discontinued operations, predominantly the after-tax gain on the sale of a non-core business. 2013 also included $5.2 million of litigation expense; 2012 included $13.0 million for settlement of the Evraz arbitration.
Outlook, risks and unusual items
- Management said current working capital, available borrowing arrangements and anticipated operating cash flow should meet cash requirements for at least the next 12 months. It expected covenant compliance through 2014 but cautioned that weaker sales or customer payment problems could reduce borrowing availability or threaten compliance.
- Engineered Products’ firm backlog was $145.3 million at year-end, down from $180.0 million a year earlier; predominantly all was scheduled to ship in 2014. The filing does not provide formal earnings or revenue guidance.
- Debt includes $250.0 million of 8.125% senior notes due 2021 and revolving-credit and term-loan borrowings. The company reported average borrowing costs of 6.95% for 2013 and said a 100-basis-point rate increase would have increased annual interest expense by approximately $1.3 million.
- ATM was ordered to pay approximately $5.2 million in the TMK IPSCO dispute. ATM and the plaintiff are appealing; the plaintiff also requested $3.8 million in attorney fees.
- The company disclosed a 2007 payment to a foreign tax official involving a third party that implicates the Foreign Corrupt Practices Act. The SEC had issued a subpoena, the DOJ was investigating the third party, and a board special committee was reviewing the company’s transactions. The company said it could not predict the outcome or impact.
- Park-Ohio was named in approximately 269 asbestos cases involving approximately 609 plaintiffs. Management did not expect these matters to have a material adverse effect, while acknowledging uncertainty in their ultimate outcomes. It also identified environmental remediation, raw-material and energy costs, customer concentration, cyclicality, acquisition integration, and labor disruptions as risks.
- Acquisitions during 2013 included Bates and UK/Ireland supply-chain businesses Henry Halstead and QEF. The company sold a non-core business for $8.5 million and sold a 25% interest in SSP for $5.0 million.
Important facts for investors to verify
- Whether organic sales and margins improve, particularly in Supply Technologies and Engineered Products, and whether Assembly Components’ acquisition-driven growth is sustainable.
- Progress on the TMK IPSCO appeals and any attorney-fee award, and developments in the SEC/DOJ-related FCPA review and special-committee investigation.
- Debt maturities, borrowing availability and covenant headroom, especially if customer demand or collections weaken.
- Acquisition integration and returns, including the effects of purchase-accounting costs and preliminary purchase-price allocations.
- Customer concentration: the ten largest customers represented approximately 28% of 2013 sales; automotive and heavy-duty truck together represented 46%.
- Cash availability and tax implications: $40.0 million of cash was held by foreign subsidiaries, and approximately $82.6 million of undistributed foreign earnings were intended to remain permanently reinvested.