Park-Ohio Holdings Corp. — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Park-Ohio operates Supply Technologies, Assembly Components and Engineered Products, serving industrial, automotive, heavy-duty truck and other markets. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $343.3 | $307.3 | $661.1 | $590.3 |
| Gross profit / margin | $61.0 / 17.8% | $57.5 / 18.7% | $117.0 / 17.7% | $109.1 / 18.5% |
| Operating income | $26.3 | $25.0 | $49.2 | $48.2 |
| Net income from continuing operations | $12.9 | $12.1 | $23.2 | $22.8 |
| Net income attributable to Park-Ohio common shareholders | $12.4 | $12.0 | $22.5 | $22.3 |
| Diluted EPS attributable to common shareholders | $1.00 | $0.98 | $1.82 | $1.84 |
Q2 sales rose 11.7%, including $14.8 million of acquisition-related revenue; management reported organic growth of 6.9%. First-half sales rose 12.0%, including $36.3 million from acquisitions, with organic growth of 5.8%. Gross margin declined 90 basis points in Q2 and 80 basis points year to date, primarily due to a greater sales mix from the lower-margin Supply Technologies and Assembly Components segments. SG&A as a share of sales improved 50 basis points to 10.1% in Q2 and was flat at 10.3% for the first half. First-half operating income increased 2.1%, while common-shareholder diluted EPS declined 3.2%.
Segment trends: Q2 Supply Technologies sales and operating income increased 17% and 14%, respectively; its margin eased to 7.4% from 7.7%. Assembly Components sales rose 16% and operating income rose 13%, with a 10.0% margin. Engineered Products sales fell 2%, but operating income rose 3% and margin improved to 13.6%. For the first half, Engineered Products sales declined 3% and operating income declined 6%; extreme first-quarter weather and related operating disruption were estimated to reduce segment operating income by about $1.2 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $14.7 million, down from $33.8 million, mainly because growth required more working capital. Investing used $17.7 million, including $12.3 million of capital expenditures and $5.9 million for acquisitions, net of cash acquired. Financing provided $6.0 million, including $15.8 million of net revolving-credit borrowings. Cash increased $2.2 million to $57.4 million.
- At June 30, total debt was $397.4 million, including $250.0 million of 8.125% Senior Notes due 2021, $126.7 million of revolving borrowings and a $17.0 million term loan. Debt was $383.6 million at December 31, 2013. Cash less total debt was approximately $340.0 million.
- Working capital was $327.8 million, up from $298.3 million; the current ratio was 2.54, versus 2.51 at year-end. The company reported $71.1 million of unused revolving availability in addition to cash. Its debt-service coverage ratio was 2.0, and it reported compliance with credit covenants at quarter-end.
- On July 31, 2014, after the reporting date, the company amended and restated its credit agreement, increasing the revolver commitment to $230 million and extending maturity to July 31, 2019. The agreement also provided a $16.1 million term loan and an option for up to $50 million of additional revolver availability.
Management outlook, risks and unusual items
- Management said available resources and anticipated operating cash flow should meet cash needs for at least the next 12 months, including operations, capital expenditures, debt service, dividends, acquisitions and share repurchases. No specific full-year revenue or earnings guidance is provided.
- Management expected to remain in covenant compliance during 2014, but warned that sales declines could weaken covenant capacity and that customer payment problems could reduce eligible receivables and borrowing availability. Debt covenants, substantial indebtedness, economic conditions, customer and industry cyclicality, acquisition integration, input costs and access to credit are identified risks.
- The company reported a special committee review and SEC inquiry concerning a third party’s 2007 payment on the company’s behalf to a foreign tax official that may implicate the Foreign Corrupt Practices Act. The DOJ was investigating the third party; the company said it would cooperate and could not predict the outcome or impact.
- ATM is appealing a court award of approximately $5.2 million to TMK IPSCO, which the company recorded; the plaintiff is also appealing and has sought $3.8 million in attorney fees. The company reported approximately 269 asbestos cases involving 612 plaintiffs and said outcomes are uncertain, while management did not expect a material adverse effect on its overall financial condition, liquidity or results.
- The company paid $1.6 million in dividends in the first half. A further $0.125-per-share quarterly dividend was declared in July, expected to require approximately $1.6 million in Q3; future dividends remain at the board’s discretion. Apollo, acquired in June, contributed insignificant revenue and net income through quarter-end; its purchase-price allocation was preliminary.
Important facts for investors to verify
- Whether organic growth and acquisition contributions persist, particularly in Supply Technologies and Assembly Components, and whether lower-margin mix continues to pressure consolidated gross margin.
- Whether working-capital demands moderate and operating cash flow improves relative to reported earnings.
- Revolver availability, covenant headroom and borrowing costs under the July 2014 credit agreement, including exposure to floating rates.
- Developments and potential financial consequences of the SEC/DOJ-related matter, the TMK IPSCO appeals and asbestos litigation.
- Final Apollo purchase accounting, future acquisition earn-out costs, and the board’s ability and willingness to sustain dividends.