Park-Ohio Holdings Corp. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in millions of dollars unless otherwise stated. Park-Ohio operates Supply Technologies, Assembly Components and Engineered Products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $286.5 | $243.5 | $858.3 | $732.0 |
| Gross profit / margin | $53.9 / 18.8% | $41.8 / 17.2% | $158.8 / 18.5% | $129.0 / 17.6% |
| Operating income | $22.7 | $10.3 | $56.2 | $42.9 |
| Net income | $10.7 | $2.9 | $24.1 | $10.5 |
| Diluted EPS | $0.88 | $0.24 | $1.99 | $0.87 |
Q3 sales grew 18%; nine-month sales grew 17%. Q3 gross margin improved 1.6 percentage points, attributed primarily to product mix and operating efficiencies. Nine-month SG&A was $89.6 million, or 10.4% of sales versus 11.0% a year earlier. Interest expense was $6.5 million in Q3 and $19.8 million year to date; the nine-month comparison benefited from $7.3 million of debt extinguishment costs in 2011.
Cash, debt and liquidity
- Nine-month operating cash flow was $43.1 million, versus $26.1 million. Capital expenditures were $19.1 million; acquisition spending, net of acquired cash, was $96.6 million.
- Cash declined $36.7 million to $41.3 million. The company reported $35.5 million of net cash from financing activities for the period.
- At September 30, debt was approximately $383.0 million: $250.0 million of 8.125% senior notes due 2021, $106.3 million revolving credit borrowings, $23.2 million term loan and $3.5 million other debt. Cash was $41.3 million.
- Revolver commitment was increased to $220 million; reported unused availability was approximately $80.9 million. The term loan matures in April 2016. Floating-rate borrowings totaled $129.5 million; management estimated a 100-basis-point rate increase would add about $1.0 million of interest expense over the first nine months.
- Working capital was $268.2 million, down from $291.5 million at year-end 2011; the current ratio declined to 2.21 from 2.65. Management said liquidity and expected operating cash flow should cover requirements for at least 12 months.
Material changes and notable items
- The March 23 acquisition of Fluid Routing Solutions (FRS) was valued at $98.8 million and funded with $40.0 million cash, a $25.0 million term loan and $33.8 million of revolver borrowings. FRS contributed $107.5 million of sales and $7.4 million net income from acquisition through September 30. Assembly Components’ nine-month sales increased 75%, primarily reflecting FRS.
- Q3 Supply Technologies sales decreased 5%; Assembly Components sales increased 122%, including FRS; Engineered Products sales increased 3%. For the first nine months, all three segments reported sales growth.
- A $13.0 million pre-tax charge in the first half reflects the cash settlement of the Evraz arbitration dispute. The company also wrote off a previously reserved $2.7 million receivable.
- FRS purchase-price allocation included $38.5 million of goodwill and $40.9 million of customer relationship and trade-name intangibles. Allocation remained preliminary.
Outlook, risks and contingencies
- Management estimated a 33.7% effective tax rate for full-year 2012. The filing provides no specific revenue or earnings guidance.
- At quarter-end, the debt-service coverage ratio was 2.1, above the required threshold; the company reported compliance with its covenants. Management warned that sales declines could weaken covenant compliance and borrowing availability.
- Risks include substantial debt and interest-rate exposure, economic and cyclical demand (particularly automotive and heavy-duty truck), customer credit and borrowing-base eligibility, raw-material and component availability and costs, and FRS integration and retention of customer and supplier relationships.
- The company faced approximately 280 asbestos cases involving about 700 plaintiffs, alongside other ordinary-course disputes. Management said it could not estimate additional losses beyond accruals, but did not expect the asbestos matters to have a material adverse effect. Actual outcomes remain uncertain.
- Foreign subsidiaries held $31.0 million of cash; management intended to keep undistributed foreign earnings permanently invested abroad. Repatriation could result in adverse tax consequences.
Investor verification priorities
- Assess how much reported growth and earnings depend on FRS, and review the acquisition’s final purchase-price allocation and integration performance.
- Verify cash conversion, working-capital needs and the sustainability of operating cash flow given the acquisition-related borrowing and cash decline.
- Monitor revolver availability, debt-service covenant headroom and the effects of weaker sales, customer collections or higher interest rates.
- Review the resolution and accrual adequacy of the Evraz settlement and other litigation, including asbestos claims.