Park-Ohio Holdings Corp. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited, compared with the corresponding 2018 periods. Park-Ohio is a diversified industrial company operating in Supply Technologies, Assembly Components and Engineered Products.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $403.4 million | $414.3 million | $1,238.8 million | $1,252.2 million |
| Gross profit / margin | $66.5 million / 16.5% | $65.9 million / 15.9% | $198.0 million / 16.0% | $204.1 million / 16.3% |
| Operating income | $23.8 million | $24.8 million | $65.6 million | $74.1 million |
| Net income attributable to common shareholders | $12.2 million | $14.2 million | $31.0 million | $38.8 million |
| Diluted EPS | $0.99 | $1.14 | $2.51 | $3.09 |
- Cash flow, nine months: Operating cash flow was $33.5 million, versus $21.8 million; investing cash outflow was $39.7 million, versus $69.9 million; financing cash inflow was $1.2 million, versus $30.2 million. Cash decreased $5.9 million to $49.8 million.
- Liquidity: Current assets were $746.2 million and current liabilities $319.5 million at September 30, 2019. The company reported $185.8 million of unused revolving-credit availability, alongside $185.7 million drawn.
- Debt: Gross debt was $582.1 million, compared with $573.1 million at December 31, 2018. Long-term debt, net, was $559.4 million. Senior notes of $350.0 million carry a 6.625% rate and mature in 2027.
- Dividends: $0.125 per common share per quarter; $5.5 million paid during the first nine months. A further $0.125 dividend was declared in October 2019.
Material changes and segment results
- Q3 sales declined 2.6%; nine-month sales declined 1.1%. Management cited the GM UAW strike, weaker demand in certain end markets, currency translation and lower aluminum prices. Higher Engineered Products sales partly offset declines elsewhere.
- Q3 gross margin improved to 16.5%, attributed to Assembly Components cost reductions, nonrecurring 2018 operating costs not repeating, and higher-margin new business. Nine-month gross margin fell to 16.0%, including $3.3 million in Assembly Components plant closure and consolidation costs.
- Q3 common-shareholder income fell 14.1% and diluted EPS fell 13.2% year over year. For the first nine months, common-shareholder income fell 20.1% and diluted EPS fell 18.8%.
- Supply Technologies: Q3 sales were $148.6 million and segment operating income $10.0 million; nine-month sales were $475.4 million and income $34.4 million. Lower demand and unfavorable mix weighed on results; management also cited inflation and tariffs on Chinese imports for the nine-month period.
- Assembly Components: Q3 sales were $135.9 million and segment operating income $10.4 million. Nine-month sales were $410.5 million and income $27.0 million. Q3 income improved on cost actions and favorable mix, but nine-month income declined amid lower volumes, unfavorable mix and facility closure costs.
- Engineered Products: Q3 sales were $118.9 million and segment operating income $10.3 million; nine-month sales were $352.9 million and income $29.9 million. Sales grew, supported by equipment, aftermarket, aerospace and acquisition activity; Q3 income was affected by unfavorable mix and a temporary forging-line shutdown.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said existing resources and anticipated operating cash flow are expected to meet needs for at least the next 12 months, including operations, capital spending, debt service, dividends and acquisitions.
- The revolving-credit debt-service coverage ratio was 2.1 at September 30, against a minimum covenant level of 1.0 (and 1.15 for any two consecutive fiscal quarters); the company reported compliance with its covenants. Management cautioned that lower sales or customer payment problems could impair future covenant compliance or borrowing availability.
- A $4.3 million one-time net expense related to the President’s June 2019 departure included a $6.0 million payment and reversal of $1.7 million of previously recorded restricted-stock expense. The payment was nondeductible and affected the nine-month tax rate.
- In May 2019, the company acquired Erie Press Systems for total consideration of $9.1 million, including estimated contingent consideration. Purchase-price allocation remained subject to finalization.
- Operating leases were recognized on the balance sheet following adoption of the lease standard on January 1, 2019; the company initially recognized $69.7 million of operating lease assets and liabilities.
- Principal disclosed risks include substantial indebtedness, economic and end-market weakness, customer labor disruptions, tariffs and input costs, acquisition integration, covenant compliance, foreign exchange and cyclical automotive and truck demand. The filing reports 113 asbestos cases involving approximately 217 plaintiffs; management expects no material adverse effect but notes outcomes are uncertain. The filing states that risk factors were not materially changed from the 2018 Form 10-K.
Investor verification points
- Assess whether demand weakness, the GM strike and currency effects persist, and how segment sales and margins respond.
- Review cash conversion, working-capital needs, capital expenditures and the trajectory of revolving-credit borrowings and total debt.
- Monitor Assembly Components cost savings and closure effects, and the Engineered Products production-line shutdown and acquisition integration.
- Verify covenant headroom and liquidity if sales decline or receivables become ineligible under the borrowing base.
- Track the final Erie Press purchase-price allocation, potential contingent payment and developments in asbestos litigation.