Park-Ohio Holdings Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Unless noted, operating results below are from continuing operations. The Aluminum Products business is classified as held-for-sale and discontinued operations.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $423.5 million | $357.7 million |
| Gross profit (sales less cost of sales) | $67.2 million; 15.9% margin | $48.9 million; 13.7% margin |
| Operating income | $20.2 million; 4.8% margin | $5.4 million; 1.5% margin |
| Income from continuing operations | $7.6 million | $3.9 million |
| Continuing-operations diluted EPS | $0.61 | $0.30 |
| Net income attributable to common shareholders, including discontinued operations | $5.8 million; $0.47 diluted EPS | $6.1 million; $0.50 diluted EPS |
| Cash from continuing operating activities | $0.2 million | Use of $2.1 million |
| Capital expenditures | $6.0 million | $5.5 million |
Sales rose 18.4%, primarily reflecting higher customer demand across all three continuing segments. SG&A was $45.3 million, or 10.7% of sales, versus $40.2 million, or 11.2%. Interest expense increased to $10.7 million from $7.1 million, primarily due to higher rates and average debt. The 2023 tax expense was $2.6 million (25% effective rate); the prior-year $2.8 million tax benefit included a $3.2 million discrete R&D tax credit.
Segments and material changes
- Supply Technologies: Sales of $195.8 million, up 16%; segment operating income of $14.0 million versus $12.0 million, with margin of 7.2% versus 7.1%.
- Assembly Components: Sales of $110.4 million, up 13%; operating income of $7.3 million versus a $0.4 million loss. Management cited higher volume, pricing and plant-consolidation benefits, partly offset by inflation and operating costs.
- Engineered Products: Sales of $117.3 million, up 29%; operating income of $5.0 million versus $1.8 million. Management cited stronger equipment and forged/machined-product demand and operational improvements.
Total segment operating income increased to $26.3 million from $13.4 million. Restructuring and other special charges were $2.5 million versus $3.3 million; the 2023 figure included $2.3 million of plant-closure and consolidation costs. A $0.8 million gain on asset sales also benefited operating income. Discontinued Aluminum Products reported a $1.7 million net loss, compared with $2.4 million net income in Q1 2022, contributing to the decline in total net income despite higher continuing-operations earnings.
Cash, debt and liquidity
- Cash and equivalents were $49.6 million at March 31, down from $58.2 million at year-end. The overall quarterly cash decrease was $8.6 million, including $8.6 million of cash used by discontinued operations.
- Total reported debt was $676.8 million, versus $669.1 million at December 31, 2022. Components included $350.0 million of 6.625% senior notes due 2027 and $288.5 million drawn on the revolving facility, which matures November 26, 2024.
- Management reported total liquidity of $171.1 million: $49.6 million cash and $121.5 million unused borrowing availability, including $18.3 million of suppressed availability. Credit Agreement availability was $98.4 million; the debt-service covenant was not applicable at that level, and the company reported compliance with its other covenants.
- Continuing investing activities used $5.1 million; continuing financing activities provided $4.5 million, including $7.4 million of net debt borrowings. The quarterly dividend paid was $1.6 million.
Outlook, risks and unusual items
- Management expects existing resources and anticipated operating cash flow to cover anticipated needs for at least the next 12 months. It expects approximately $1.0 million of additional plant-closure and consolidation expenses in the rest of 2023.
- The company expects to finalize the Aluminum Products sale in 2023, but completion remains subject to a definitive purchase agreement and customary conditions. Under the related financing arrangement, it received $20.0 million cash and a $25.0 million promissory note, recording a $45.0 million liability. If the sale is not completed, the note is cancelled and the company must repay $20.0 million, less a $0.8 million break-up fee.
- Key risks include substantial indebtedness, interest-rate and economic conditions, customer demand and cyclicality, inflation and supply-chain constraints, covenant availability, and the uncertain outcome of the Aluminum Products sale. A 100-basis-point rate increase would have added approximately $0.7 million to quarterly interest expense on revolving borrowings.
- The company was a co-defendant in 112 asbestos cases involving 162 plaintiffs. Management said it intends to defend the cases and does not expect their ultimate resolution to materially affect financial condition, liquidity or results, while acknowledging that outcomes are uncertain. It also disclosed ordinary-course litigation and warranty-related disputes.
- The board declared a $0.125-per-share quarterly dividend on April 21, payable May 19, 2023. Future dividends remain at board discretion. Management noted that customer order timing can cause quarterly variability, particularly in capital equipment.
Important facts for investors to verify
- Whether the Aluminum Products sale closes on the expected timetable and on terms consistent with the MOU, including implications of the $45.0 million financing liability and repayment obligation if the transaction fails.
- How working-capital needs, discontinued-operation cash use and interest costs affect cash generation, debt levels and borrowing availability.
- Whether the company maintains covenant headroom and access to revolving credit as the facility approaches its November 2024 maturity.
- Whether segment margin improvements persist amid inflation, supply-chain pressures, cyclical demand and quarterly order variability.
- The eventual financial and legal outcomes of asbestos and other claims, and the board’s future dividend decisions.