Park-Ohio Holdings Corp. — 2018 Third-Quarter Form 10-Q
Business context and reporting period. Park-Ohio is a diversified manufacturer and supply-chain services company operating through Supply Technologies, Assembly Components and Engineered Products. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $414.3 million | $352.2 million | $1,252.2 million | $1,046.9 million |
| Gross profit / margin | $65.9 million / 15.9% | $56.7 million / 16.1% | $204.1 million / 16.3% | $171.5 million / 16.4% |
| Operating income | $24.8 million | $19.0 million | $74.1 million | $62.3 million |
| Net income attributable to common shareholders | $14.2 million | $10.0 million | $38.8 million | $22.8 million |
| Diluted EPS | $1.14 | $0.80 | $3.09 | $1.83 |
- Q3 sales increased 17.6%; management attributed growth to 7% organic growth and $36.8 million of sales from CDF and 2017 acquisitions. Nine-month sales rose 19.6%, including 10% organic growth and $105.3 million of acquisition sales.
- For the first nine months, operating income included a $1.9 million gain on a land sale; 2017 included a $3.3 million litigation settlement gain and an $11.0 million debt-extinguishment loss. These items affect year-over-year comparisons.
- Q3 segment results: Supply Technologies sales were $155.1 million and operating income $11.3 million; Assembly Components, $146.1 million and $9.3 million; Engineered Products, $113.1 million and $12.2 million. Assembly Components’ margin fell to 6.4% from 8.4%, attributed to mix and start-up costs at China and Mexico facilities. Engineered Products’ margin improved to 10.8% from 6.7%, helped by higher sales and CDF.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $21.8 million, down from $27.2 million. Higher profitability was more than offset by increased working-capital needs. Investing cash outflow was $69.9 million, including $35.9 million of capital expenditures and $36.8 million for acquisitions, net of cash acquired. Financing cash inflow was $30.2 million; cash declined $19.9 million to $62.9 million.
- At September 30, gross debt was $587.5 million, including $350.0 million of 6.625% senior notes due 2027 and $173.0 million drawn on the revolving facility. Cash was $62.9 million. Long-term debt, net of current portion and issuance costs, was $563.1 million.
- The revolver was increased to $375.0 million; approximately $199.7 million remained available. The reported debt-service coverage ratio was 1.74, and the company was in compliance with its covenants. Management said available resources and expected operating cash flow should meet anticipated requirements for at least 12 months, while warning that declining sales could threaten covenant compliance.
- Cash and cash equivalents were $62.9 million versus $82.8 million at December 31, 2017; current assets were $743.4 million and current liabilities $305.6 million. Foreign subsidiaries held $54.1 million of cash at quarter-end.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management describes demand as higher across all three segments but notes that order timing and economic conditions can cause quarterly variability, particularly in capital equipment.
- Key stated risks include substantial indebtedness, cyclical automotive and heavy-duty truck markets, economic and customer-payment weakness, raw-material and energy price changes, interest and foreign-exchange movements, tariffs and trade barriers, acquisition integration, and covenant compliance. A 100-basis-point increase in floating rates would have added approximately $1.3 million of nine-month interest expense.
- The company disclosed an ongoing SEC review and DOJ investigation concerning a third party and a 2007 payment to a foreign tax official that may implicate the Foreign Corrupt Practices Act. The company is cooperating and cannot predict the outcome or impact. It also reported approximately 86 asbestos cases involving 188 plaintiffs; management does not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- Revenue-standard adoption in 2018 resulted in $13.6 million of previously unrecognized revenue and a $2.6 million cumulative increase to beginning retained earnings. The company acquired Canton Drop Forge for $35.6 million in February and acquired Hydrapower for $8.0 million on October 1, after quarter-end.
- The board declared a $0.125-per-share quarterly dividend in October. The filing reports effective tax rates of 17.8% for Q3 and 26.6% for the first nine months; Q3 included a $0.9 million Tax Act benefit and foreign tax valuation-allowance reversals.
Important facts for investors to verify
- Whether Assembly Components’ lower margins and new-facility start-up costs improve, and whether Engineered Products’ margin gains persist.
- How acquisition contributions, including CDF and post-quarter Hydrapower, affect organic growth, margins, cash flow and debt.
- Working-capital requirements, cash conversion and revolver utilization, given lower operating cash flow and higher borrowings.
- Headroom under the debt covenants if sales or customer collections weaken, and the effect of floating-rate changes.
- Developments in the SEC/DOJ matter, asbestos litigation and other legal contingencies, as well as final Tax Act accounting estimates.