Park-Ohio Holdings Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Figures are unaudited and in U.S. dollars; financial amounts are in millions unless stated otherwise. Park-Ohio operates Supply Technologies, Assembly Components and Engineered Products.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $415.3 | $432.2 | $835.4 | $837.9 |
| Gross profit / margin | $66.2 / 15.9% | $73.1 / 16.9% | $131.5 / 15.7% | $138.2 / 16.5% |
| Operating income | $19.3 | $27.2 | $41.8 | $49.3 |
| Net income attributable to common shareholders | $7.6 | $14.8 | $18.8 | $24.6 |
| Diluted EPS | $0.61 | $1.18 | $1.51 | $1.96 |
| Operating cash flow | Not provided by quarter | $2.8 | $(1.3) |
- Q2 sales declined 3.9% and common-shareholder net income fell 48.6% year over year. First-half sales were nearly flat, while common-shareholder net income decreased 23.6%.
- Q2 segment results: Supply Technologies sales were $161.5 and operating income $11.3; Assembly Components sales were $136.3 and operating income $8.3; Engineered Products sales were $117.5 and operating income $11.5. Engineered Products improved, while the other two segments declined.
- Cash and cash equivalents were $45.3 at June 30, down from $55.7 at year-end 2018. Current assets were $743.5 and current liabilities $313.7.
- Gross debt was $595.3, including $350.0 of 6.625% senior notes due 2027 and $192.7 drawn on the revolving facility. Long-term debt, net of current portion and issuance costs, was $570.5. The filing reports $178.5 of unused revolver availability.
- First-half investing cash outflow was $28.3, including $20.7 of capital expenditures and $7.6 of cash paid for the Erie Press acquisition. Financing cash inflow was $14.8; cash decreased $10.4.
Changes, drivers and unusual items
- Management attributed lower Q2 sales mainly to softer demand in Supply Technologies and Assembly Components, including lower sales from Asia and Europe. Gross margin was pressured by unfavorable mix, lower volume flow-through, inflation and tariffs on Chinese imports.
- Assembly Components first-half sales fell 8.0%; the segment cited end-of-life fuel programs, weaker demand and lower volumes. It closed and consolidated two facilities, with related costs of $3.0 in the first half ($1.7 in Q2).
- Engineered Products first-half sales rose 10.3% and segment operating income increased to $19.6 from $15.2, reflecting demand for capital equipment, aftermarket services and forgings, and the CDF and Erie Press acquisitions.
- The June 2019 retirement of President Edward F. Crawford resulted in a one-time net expense of $4.3, comprising a $6.0 payment partly offset by reversal of $1.7 of previously recorded restricted-stock expense. The payment was non-deductible and affected the Q2 tax rate.
- Erie Press was acquired May 31 for an estimated total purchase price of $9.1, including contingent consideration. The purchase-price allocation remained preliminary; potential additional consideration is up to $1.0 based on two-year cumulative earnings.
- Operating lease accounting adoption added $69.7 of right-of-use assets and lease liabilities on January 1, 2019; prior-period figures were not restated. At June 30, operating lease liabilities were $66.0 in present value.
Outlook, liquidity and risks
- No specific full-year earnings or revenue guidance is provided. Management said existing resources and anticipated operating cash flow should cover expected needs for at least the next 12 months, including operations, capital spending, debt service, dividends and acquisitions.
- The company reported a 1.9 debt service coverage ratio and compliance with its credit-facility covenants at June 30. Management cautioned that lower sales or customer financial distress could affect future covenant compliance, eligible receivables and borrowing capacity.
- Key stated exposures include substantial indebtedness, economic and cyclical demand (including automotive and heavy-duty truck), tariffs and other trade barriers, input costs, customer and supplier conditions, acquisition integration, interest rates, foreign currency and commodity prices. A 100-basis-point rate increase would have increased first-half interest expense by approximately $1.0.
- The company reported approximately 111 asbestos cases involving 214 plaintiffs and said it intends to defend them; management did not expect the matters to materially affect financial condition, liquidity or results, while acknowledging outcomes are uncertain. It reported no material changes to previously disclosed risk factors.
- The Board declared a $0.125-per-share quarterly dividend payable August 27, 2019. Future dividends remain at Board discretion.
Important facts for investors to verify
- Whether the margin decline and weaker Assembly Components and Supply Technologies demand persist, and the results of facility consolidation and cost-reduction actions.
- How acquisition integration and the final Erie Press purchase-price allocation, including contingent consideration, affect results and cash needs.
- Debt, revolver availability and covenant headroom under weaker sales or working-capital conditions.
- The income-tax-rate discrepancy in the filing: the tax note gives a first-half effective rate of 29.2%, while MD&A states 29.3%.
- Progress and potential exposure in asbestos litigation, and the sustainability of cash generation and dividends.