Park-Ohio Holdings Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company is a diversified manufacturer and supply-chain services provider with three continuing segments: Supply Technologies, Assembly Components, and Engineered Products. Aluminum Products is classified as held for sale and reported as discontinued operations; figures below are for continuing operations unless stated otherwise. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $428.1 | $369.8 | $851.6 | $727.5 |
| Gross margin | 16.4% | 14.5% | 16.1% | 14.1% |
| Operating income | $19.2 | $13.8 | $39.4 | $19.2 |
| Income from continuing operations | $6.6 | $6.9 | $14.2 | $10.8 |
| Continuing income attributable to common shareholders | $7.1 | $6.4 | $14.6 | $10.1 |
| Net income attributable to common shareholders, including discontinued operations | $5.4 | $1.0 | $11.2 | $7.1 |
| Diluted EPS from continuing operations | $0.57 | $0.52 | $1.18 | $0.83 |
Q2 sales grew 15.8%; operating income rose 39.1%. For the first half, sales increased 17.1% and operating income more than doubled. Management attributed growth mainly to stronger demand across all segments and higher pricing; improved gross margin reflected sales flow-through and profit-enhancement initiatives. Q2 SG&A was $46.8 (10.9% of sales), versus $40.5 (11.0%); first-half SG&A was $92.1 (10.8%), versus $80.7 (11.1%).
- Segment results: Q2 sales and operating income were Supply Technologies $197.3 and $15.4; Assembly Components $112.0 and $8.4, versus a prior-year loss of $1.4; Engineered Products $118.8 and $3.2, down from $7.1. Engineered Products’ forged and machined operations faced equipment downtime and labor challenges.
- Interest and tax: Net interest expense increased to $11.1 in Q2 from $7.6, and to $21.8 for the first half from $14.7, reflecting higher rates and borrowings. First-half 2023 tax expense was $4.7; the prior-year period included a $3.2 research and development tax credit benefit.
Cash flow, balance sheet, and liquidity
- For the six months, continuing operating cash flow was $0.9, compared with a $35.0 use in 2022. Investing used $13.0, including $13.4 of capital expenditures; continuing financing provided $12.1. Including discontinued operations and other effects, cash declined $4.8 to $53.4.
- At June 30, cash was $53.4; total debt was $688.3, including $350.0 of 6.625% senior notes due 2027 and $300.0 drawn on the revolving credit facility. Long-term debt on the balance sheet was $673.1; reported current debt was $12.5.
- The company reported total liquidity of $168.6, comprising cash of $53.4 and $115.2 of unused borrowing availability, including $24.3 of suppressed availability. Separately, calculated availability under the credit agreement was $86.8; the debt-service covenant trigger was not in effect at quarter-end.
- Total assets were $1,451.8 and total equity was $285.6. The revolving credit facility matures November 26, 2024. Management said existing resources and anticipated operating cash flow should meet expected needs for at least the next twelve months.
Material developments, outlook, and risks
- The Aluminum Products business remains held for sale. A December 2022 memorandum of understanding contemplated a sale, but a definitive purchase agreement and customary conditions remained outstanding. The related financing arrangement included $20.0 cash and a $25.0 promissory note, with a $45.0 liability recorded. If the sale is not completed, the note is cancelled and the company must repay the $20.0.
- Restructuring and other special charges were $4.1 in Q2 and $6.6 for the first half, primarily for plant closures, consolidation, and related actions. The company expected less than $1.0 of additional plant-closure and consolidation costs in the rest of 2023.
- Management cited ongoing inflation, supply-chain costs, customer demand variability, and cyclicality in automotive and heavy-duty truck markets. It warned that lower sales or customer payment problems could reduce borrowing availability or affect covenant compliance. Other stated risks include substantial indebtedness, interest-rate exposure, labor challenges, commodity prices, and the uncertain Aluminum Products sale.
- The company reported 112 asbestos cases involving 162 plaintiffs and said it intends to defend them; management did not expect their ultimate resolution to materially affect financial condition, liquidity, or results. Routine claims and other disputes are also disclosed.
- A quarterly dividend of $0.125 per share was declared after quarter-end, payable August 18, 2023. Future dividends remain subject to board discretion and applicable conditions.
Key facts for investors to verify
- Status, terms, timing, and any repayment implications of the proposed Aluminum Products sale and related $45.0 financing arrangement.
- Revolver availability and covenant headroom, particularly given $688.3 of reported debt, the facility’s 2024 maturity, and rising interest expense.
- Whether improved margins and operating cash flow persist, including the effect of working-capital needs and capital expenditures.
- Recovery in Engineered Products’ forged and machined operations from downtime and labor constraints, and progress against restructuring costs.
- Actual outcomes and potential costs from asbestos litigation and other contingencies; the filing states amounts and outcomes cannot be predicted with certainty.