Park-Ohio Holdings Corp. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Park-Ohio operates in Supply Technologies, Assembly Components and Engineered Products. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $303.5 | $285.2 | $893.8 | $854.2 |
| Gross profit / margin | $54.6 / 18.0% | $54.2 / 19.0% | $163.7 / 18.3% | $159.1 / 18.6% |
| Operating income | $18.4 | $23.8 | $66.6 | $59.3 |
| Continuing operations net income | $8.7 | $11.4 | $31.5 | $26.0 |
| Net income attributable to Park-Ohio common shareholders | $12.2 | $10.7 | $34.5 | $24.1 |
| Diluted EPS, total | $0.99 | $0.88 | $2.83 | $1.99 |
Quarterly sales rose 6%, but operating income declined, reflecting a $5.2 million litigation judgment and lower gross margin. Net income and EPS benefited from discontinued operations, including a $4.0 million after-tax gain on the sale of a business. For the nine-month period, sales increased 5%; operating income increased despite litigation costs, and common-shareholder net income rose to $34.5 million.
- Cash flow, nine months: Operating cash flow was $36.9 million, versus $43.1 million in 2012. Capital expenditures were $24.4 million; investing cash use was $24.7 million, including $21.6 million for acquisitions. Financing provided $7.7 million. Cash increased $19.9 million to $64.3 million.
- Liquidity: Working capital was $307.3 million; current ratio was 2.53. The company reported about $80.0 million of unused revolver availability and $64.3 million cash at September 30.
- Debt: Total debt was $388.1 million, including $250.0 million of 8.125% Senior Notes due 2021 and $114.4 million outstanding on the revolver. Debt was $378.6 million at year-end 2012. The debt-service coverage ratio was 2.0, and the company reported compliance with covenants.
Changes and segment trends
- Supply Technologies: Q3 sales were essentially flat at $115.9 million; nine-month sales fell 7% to $349.2 million. Management cited continued weakness in heavy-duty truck and defense markets.
- Assembly Components: Q3 sales grew 26% to $106.1 million; nine-month sales grew 38% to $303.9 million. Growth reflected aluminum-business expansion and acquisitions, including Bates and Fluid Routing Solutions.
- Engineered Products: Q3 sales declined 4% to $81.5 million; nine-month sales declined 6% to $240.7 million. Rail-related forging demand was strong, while industrial equipment OEM demand, especially internationally, remained weak; aftermarket demand was steady.
- Gross margin fell 100 basis points in Q3 and 30 basis points for the nine-month period, which management attributed primarily to a higher mix of lower-margin Assembly Components sales.
- Q3 operating income included $5.2 million of litigation costs; nine-month 2012 included $13.0 million of Evraz settlement costs, compared with none in 2013. A $0.6 million bargain-purchase gain from a small Engineered Products acquisition was recorded in 2013.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided. Management expected available resources and anticipated operating cash flow to meet cash requirements for at least the next 12 months, while warning that sales declines could affect covenant compliance and borrowing availability.
- In October and November 2013, the company acquired Henry Halstead and QEF, supply-chain businesses in the UK and Ireland, for an aggregate $22.9 million. Their reported prior-year sales were approximately $24 million and $14 million, respectively.
- In September 2013, the company sold a non-core Supply Technologies business for $8.5 million cash, recording a $4.0 million after-tax gain. It also sold a 25% interest in Southwest Steel Processing for $5.0 million cash.
- ATM received a court award of approximately $5.2 million in the TMK IPSCO case; both sides appealed, and the plaintiff also sought $3.8 million in attorney fees. The award was recorded as litigation expense.
- The company disclosed that a third party made a 2007 payment on its behalf to a foreign tax official that may implicate the FCPA. The SEC subpoenaed the company in connection with its investigation of the third party; the DOJ was also investigating that party. A board special committee was reviewing the company’s transactions. The company said it could not predict the outcome or impact.
- The company was named in approximately 268 asbestos cases involving about 612 plaintiffs. Management stated it did not expect the matters to have a material adverse effect, but litigation outcomes remain uncertain.
- Other stated risks include substantial indebtedness, cyclical automotive and heavy-truck demand, customer credit and receivable eligibility, interest-rate exposure, acquisition integration, and variable order timing. $55.7 million of cash was held by foreign subsidiaries; the company intended to permanently reinvest foreign earnings and noted potential tax effects if repatriated.
Important facts for investors to verify
- Whether the $5.2 million TMK IPSCO award or requested attorney fees change following appeals.
- Developments and potential financial consequences of the SEC/DOJ-related FCPA matter and the board committee’s review.
- Whether demand weakness in heavy-duty truck, defense and industrial equipment affects sales, margins, cash flow or covenant headroom.
- Integration, purchase accounting and financing effects of Bates and the post-quarter Henry Halstead and QEF acquisitions.
- Cash availability, foreign cash accessibility, and continued compliance with credit-facility covenants.