Park-Ohio Holdings Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with the three months ended March 31, 2018. Park-Ohio is a diversified industrial company operating through Supply Technologies, Assembly Components and Engineered Products.
Financial results and liquidity
- Revenue: $420.1 million, up 3.5% from $405.7 million.
- Profit: Operating income was $22.5 million versus $22.1 million. Net income was $11.7 million versus $10.2 million; net income attributable to common shareholders was $11.2 million versus $9.8 million. Diluted EPS rose to $0.90 from $0.78.
- Margins: Gross profit was $65.3 million versus $65.1 million, while gross margin declined to 15.5% from 16.0%. SG&A was $42.8 million, or 10.2% of sales, versus $43.0 million, or 10.6%. Operating income margin was approximately 5.4% versus 5.4%.
- Taxes and interest: Income tax expense was $3.9 million (25.4% effective rate), down from $5.8 million (36.3%). The prior-year rate included $0.9 million of discrete expense, primarily related to the Tax Cuts and Jobs Act. Net interest expense was $8.2 million versus $8.4 million.
- Cash flow: Operating cash flow was $6.6 million versus $8.4 million. Capital expenditures were $10.6 million; investing cash use was $10.6 million, compared with $45.6 million in 2018, which included the CDF acquisition. Financing cash use was $4.3 million versus $42.9 million provided in 2018. Cash declined $8.2 million to $47.5 million.
- Balance sheet and debt: Total assets were $1.310 billion and total equity was $329.3 million at March 31. Gross debt was $571.3 million, including $166.6 million outstanding on the revolving facility; the balance sheet reported $17.9 million of current debt and $546.1 million of long-term debt, net of issuance costs. Cash was $47.5 million. The company reported approximately $205 million of unused revolver availability.
- Working capital and liquidity: Accounts receivable was $287.9 million and inventory was $329.7 million, up from $264.4 million and $317.8 million, respectively, at year-end. Management said existing resources and expected operating cash flow should cover anticipated needs for at least the next 12 months.
Material changes and operating performance
- Supply Technologies: Sales rose 2.7% to $165.3 million and segment operating income increased to $13.1 million from $12.5 million. Truck-related sales rose 37% and aerospace and defense rose 21%; semiconductor sales fell 28%.
- Assembly Components: Sales declined 4.9% to $138.3 million; segment operating income fell to $8.3 million from $12.6 million and margin declined to 6.0% from 8.7%. Lower fuel-products volumes, end-of-life programs, unfavorable mix, start-up costs at facilities in China and Mexico, and $1.4 million of plant closure and consolidation costs weighed on results. The company initiated cost-reduction actions and closed/consolidated two facilities.
- Engineered Products: Sales increased 17.2% to $116.5 million and segment operating income rose to $8.1 million from $5.7 million. Growth reflected demand for induction heating, pipe threading and forged/machined products, plus a full quarter of Canton Drop Forge sales.
- Revenue growth also reflected Hydrapower, acquired in October 2018. Cost of sales increased 4.2%, faster than sales, contributing to the lower consolidated gross margin.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expects liquidity to be adequate for at least the next 12 months, while noting that operating results are subject to order timing, cyclical demand and economic conditions.
- The company was in compliance with its debt covenants at quarter-end; its debt service coverage ratio was 1.9. Management cautioned that lower sales volumes or customer payment problems could impair covenant compliance or reduce borrowing availability.
- Risks identified include substantial indebtedness, economic and market volatility, cyclical automotive and heavy-duty truck demand, raw-material and component costs/availability, customer and supplier relationships, acquisition integration, interest rates, foreign exchange, trade barriers, litigation, and access to credit. A 100-basis-point rate increase would have added approximately $0.4 million to quarterly interest expense on revolving borrowings.
- The company reported approximately 87 asbestos cases involving approximately 190 plaintiffs, alongside other ordinary-course legal and warranty disputes. Management believes these matters will not have a material adverse effect, but outcomes are uncertain.
- Adoption of lease accounting on January 1, 2019 resulted in approximately $69.7 million of operating lease right-of-use assets and related liabilities at transition. At March 31, operating lease liabilities were $68.7 million. The adoption materially affected internal controls through implementation of a new lease accounting system and processes.
- The board declared a quarterly dividend of $0.125 per share, payable May 29, 2019. The filing reports no material changes to previously disclosed risk factors and states disclosure controls were effective.
Important facts for investors to verify
- Whether Assembly Components’ lower volumes, plant consolidation costs and new-facility start-up costs continue to pressure segment margins.
- Whether operating cash flow improves as the receivables and inventory build is converted to cash.
- Revolver availability, covenant headroom and debt-service capacity if demand weakens or customer collections slow.
- Progress and costs associated with the two facility closures, as well as the performance of recent acquisitions.
- Potential financial effects of asbestos and other litigation, warranty claims, and the company’s ability to sustain dividends amid its debt and capital needs.