Park-Ohio Holdings Corp. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Park-Ohio is an industrial supply-management and manufacturing company with three reportable segments: Supply Technologies, Assembly Components, and Engineered Products. Results are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $377.3 million | $343.3 million | $752.0 million | $661.1 million |
| Gross profit / margin | $60.4 million / 16.0% | $61.0 million / 17.8% | $118.8 million / 15.8% | $117.0 million / 17.7% |
| Operating income | $25.6 million | $26.1 million | $49.9 million | $48.3 million |
| Net income | $12.6 million | $12.9 million | $23.7 million | $23.2 million |
| Net income attributable to common shareholders | $12.4 million | $12.4 million | $23.2 million | $22.5 million |
| Diluted EPS | $1.00 | $1.00 | $1.87 | $1.81 |
| Interest expense | $6.9 million | $6.6 million | $13.7 million | $12.9 million |
- Growth drivers: Q2 sales rose 9.9%, including $28.9 million of incremental revenue from 2014 acquisitions and $5.2 million of organic growth. First-half sales rose 13.7%, including $56.0 million from acquisitions and $34.9 million of organic growth.
- Cash flow: First-half operating cash flow was negative $5.0 million, versus positive $15.5 million a year earlier, mainly reflecting working-capital investment supporting sales growth. Capital expenditures were $19.9 million (versus $12.3 million); investing cash outflow was $19.9 million. Financing provided $19.3 million, largely from net borrowings. Cash declined $7.1 million to $50.9 million.
- Liquidity and debt: At June 30, cash was $50.9 million and total debt was $470.6 million, including $250.0 million of 8.125% senior notes and $217.0 million outstanding on the revolver. Long-term debt, net of current maturities, was $457.2 million. Unused revolver availability was approximately $60.4 million. Current ratio was 2.44 and working capital was $354.8 million. The company reported compliance with debt covenants and a debt-service coverage ratio of 3.1.
- Dividends: First-half dividends were $3.1 million. The board declared a $0.125-per-share quarterly dividend payable August 28, 2015.
Material changes and segment results
- Q2 gross margin fell to 16.0% from 17.8%; first-half margin declined to 15.8% from 17.7%. Management attributed the decline principally to lower higher-margin equipment and aftermarket sales and unfavorable mix in Engineered Products.
- Supply Technologies: Q2 sales increased 5% to $150.2 million and segment operating income rose 25% to $13.0 million; margin improved to 8.7% from 7.3%. Management cited demand in heavy-duty truck, recreational equipment and semiconductor markets, operating leverage, and acquisition integration.
- Assembly Components: Q2 sales increased 15% to $139.8 million and segment operating income rose 11% to $13.6 million; margin was 9.7% versus 10.0%. Autoform contributed approximately $15.9 million of Q2 sales. First-half sales rose 22% to $280.3 million.
- Engineered Products: Q2 sales increased 11% to $87.3 million, but segment operating income fell 51% to $5.2 million and margin dropped to 6.0% from 13.6%. First-half operating income fell 46% to $11.4 million. Weak oil and gas, steel, rail, and military/commercial aerospace demand, lower aftermarket sales, and unfavorable mix were cited.
- Acquisition purchase-price adjustments reduced goodwill by approximately $15.0 million, primarily reflecting preliminary valuation increases to Saet tradenames and technology intangibles. Acquisition-related revenue and earnings were described as accretive in the first half.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said current financial resources and anticipated operating funds were expected to cover requirements for at least the next 12 months, including operations, capital spending, debt service, dividends, acquisitions, and share repurchases. This expectation is subject to borrowing-base and covenant availability and business conditions.
- Management warned that lower sales volumes could affect covenant compliance; delayed or missed customer payments could also reduce eligible receivables and revolver availability. The company was compliant at quarter-end and expected to remain compliant through 2015.
- Floating-rate revolver and term-loan borrowings totaled $217.0 million. A 100-basis-point rate increase was estimated to add approximately $1.1 million to first-half interest expense. Foreign-currency translation reduced first-half comprehensive income by $2.6 million; no currency hedge contracts were outstanding at quarter-end.
- Legal matters include approximately 230 asbestos cases involving about 500 plaintiffs. Management did not expect their ultimate resolution to materially harm financial condition, liquidity, or results, though period results could be affected. In the IPSCO dispute, the company had accrued a $5.2 million judgment; an appeals court affirmed liability but reversed nearly all damages and remanded the damages issue. Attorney-fee proceedings remain stayed.
- The company disclosed a 2007 payment involving a third party to a foreign tax official that implicates the Foreign Corrupt Practices Act. The SEC and DOJ are investigating the third party; a board special committee is reviewing the company’s transactions. The company said the outcome and potential impact could not be predicted.
- The company reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether Engineered Products demand and margins recover, particularly in oil and gas, steel, rail, and aerospace markets.
- Whether working-capital needs, capital spending, and customer payment timing affect operating cash generation and revolver availability.
- Debt levels, borrowing-base availability, and covenant headroom as sales and segment profitability change.
- Further acquisition valuation adjustments and integration performance, including the impact of goodwill and intangible-asset valuations.
- Developments and potential financial exposure from the FCPA-related review, IPSCO remand, and asbestos litigation.