Park-Ohio Holdings Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Park-Ohio is a diversified industrial company operating in Supply Technologies, Assembly Components and Engineered Products.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $405.7 million | $343.8 million | Up 18.0%; organic growth was 9% |
| Gross profit / margin | $65.1 million / 16.0% | $55.0 million / 16.0% | Gross profit up 18.4%; margin unchanged |
| Operating income | $22.1 million | $20.5 million | Up 7.8% |
| Net income | $10.2 million | $10.1 million | Up 1.0% |
| Net income attributable to common shareholders | $9.8 million | $9.8 million | Unchanged |
| Diluted EPS | $0.78 | $0.79 | Down $0.01 |
| Operating cash flow | $8.4 million | $(0.2) million | Improved $8.6 million |
| Capital expenditures | $8.9 million | $6.1 million | Up $2.8 million |
SG&A was $43.0 million, or 10.6% of sales, versus $37.8 million, or 11.0%. Interest expense rose to $8.4 million from $7.4 million. The effective tax rate increased to 36.3% from 31.8%, including a $1.2 million Tax Act adjustment that added 760 basis points to the 2018 rate.
Cash, debt and liquidity
- Cash and cash equivalents were $89.2 million at March 31, 2018, versus $82.8 million at year-end 2017; $83.0 million was held by foreign subsidiaries.
- Gross debt was $591.6 million, up from $541.9 million at December 31, 2017. Long-term debt, net of current maturities and issuance costs, was $568.7 million; current debt was $14.5 million.
- Revolver borrowings were $172.0 million, with approximately $163.9 million of unused availability. The $350 million revolving facility matures in 2022. The company reported compliance with its debt covenants and a debt service coverage ratio of 2.4.
- Investing cash outflow was $45.6 million, primarily reflecting the $36.7 million provisional cash payment for Canton Drop Forge (CDF). Financing cash inflow was $42.9 million, mainly from net revolver borrowings. Cash increased $6.4 million during the quarter.
- Management said existing resources and anticipated operating cash flows were expected to meet requirements for at least the next 12 months. The company paid $1.6 million in dividends and declared another $0.125-per-share quarterly dividend.
Material changes and operating trends
- Sales growth reflected 9% organic growth and $31.0 million of first-quarter sales from CDF and acquisitions completed in 2017.
- Supply Technologies sales rose 21% to $160.9 million; segment operating income increased to $12.5 million, while margin eased to 7.8% from 8.0%.
- Assembly Components sales rose 4% to $145.4 million; segment operating income was $12.6 million and margin improved to 8.7% from 8.5%.
- Engineered Products sales rose 39% to $99.4 million, including $10.6 million from CDF; segment operating income increased to $5.7 million from $1.3 million, and margin improved to 5.7% from 1.8%.
- CDF was acquired February 1 for a final purchase price of $35.6 million, subject to final purchase-price allocation. It contributed approximately $10.6 million in quarterly sales and has annual revenue of approximately $60 million.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management noted customer-order variability and seasonality, particularly in capital equipment, where shipment timing can cause quarterly fluctuations.
- Management identified substantial indebtedness, economic and cyclical demand, customer and supplier conditions, raw-material and energy costs, acquisition integration, and covenant compliance among factors that could affect results. Declines in sales could impair covenant compliance or borrowing capacity; covenant compliance was reported at quarter-end.
- A 100-basis-point increase in rates on the $172.0 million floating-rate revolver would have increased quarterly interest expense by approximately $0.4 million. The company also faces foreign-currency translation exposure and steel and natural-gas price risk; it reported no commodity hedging contracts.
- The company is cooperating with SEC and DOJ inquiries concerning a third party and a 2007 payment to a foreign tax official that may implicate the Foreign Corrupt Practices Act. It stated that the inquiries’ outcome and impact could not be predicted.
- Park-Ohio was a co-defendant in approximately 89 asbestos cases involving approximately 195 plaintiffs. Management did not expect these matters or other pending litigation to have a material adverse effect, while acknowledging uncertainty.
- The 2017 comparison included a $3.3 million litigation-settlement gain; no comparable gain was recorded in Q1 2018. Revenue-standard adoption in 2018 resulted in a $2.6 million increase to opening retained earnings and $13.6 million of previously unrecognized revenue on open contracts. The filing states that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether organic growth and segment margins are sustained after the contribution from recent acquisitions.
- CDF’s final purchase-price allocation, integration progress and realized performance.
- Debt levels, interest costs, revolver availability and ongoing covenant headroom.
- Working-capital trends, including the increase in receivables and inventory, and cash conversion.
- Potential financial or operational consequences of the SEC/DOJ review and asbestos litigation.
- The future tax-rate impact of Tax Act adjustments and provisions still under evaluation.