Park-Ohio Holdings Corp. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited; Ernst & Young performed a review, not an audit. Park-Ohio operates Supply Technologies, Aluminum Products, and Manufactured Products.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $243.5 million | $203.0 million | $732.0 million | $593.0 million |
| Gross profit / margin | $41.8 million / 17.2% | $35.0 million / 17.2% | $129.0 million / 17.6% | $97.6 million / 16.5% |
| Operating income | $10.3 million | $9.3 million | $42.9 million | $28.6 million |
| Net income | $2.9 million | $6.2 million | $10.5 million | $11.7 million |
| Diluted EPS | $0.24 | $0.52 | $0.87 | $0.99 |
For the nine months, Supply Technologies sales rose 27% to $373.6 million and Manufactured Products sales rose 36% to $255.6 million; Aluminum Products sales fell 6% to $102.8 million. Segment growth reflected higher volumes and contributions from acquisitions, while Aluminum Products was affected by completed automotive contracts. Management attributed about $10.4 million of nine-month sales growth to price increases.
Nine-month SG&A was $80.7 million, up 23%, but remained 11.0% of sales. Q3 SG&A increased 18% to $26.2 million and was 10.8% of sales. Nine-month interest expense rose to $26.3 million from $18.1 million, including $7.3 million in debt-extinguishment costs. Q3 interest expense was $6.2 million versus $6.5 million. The 2011 nine-month tax rate was 36.6%; management estimated a full-year reported rate of approximately 34%. The higher reported nine-month rate included a $2.1 million foreign tax provision related to retiring affiliate-held notes.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $26.1 million, down from $49.7 million. Capital expenditures were $9.5 million, compared with $2.2 million in 2010.
- Cash increased $35.3 million to $70.6 million at September 30, 2011; $63.0 million was held by foreign subsidiaries. Working capital was $270.4 million, up from $219.2 million, and the current ratio was 2.38.
- Total debt was $346.0 million, versus $302.5 million at year-end 2010. It included $250.0 million of 8.125% senior notes due 2021 and $91.2 million drawn on the revolving facility. Unused revolver availability was approximately $74.0 million under a facility of up to $200 million, with a possible additional $50 million.
- The April 2011 refinancing issued the senior notes, redeemed the 8.375% subordinated notes, and repaid term loans. The company reported compliance with its debt covenants and a 1.9 debt-service coverage ratio at quarter-end. Management expected available resources and operating cash to meet requirements for at least 12 months.
Material changes, outlook, and risks
- Q3 sales rose 20%, but net income fell to $2.9 million. The quarter included a $5.4 million impairment charge for abandoned long-lived assets in the underperforming rubber products business. The nine-month comparison also includes the $7.3 million refinancing-related extinguishment charge; 2010 results included a $2.2 million acquisition gain.
- Management said higher commodity prices were expected to persist through year-end and that higher production improved fixed-cost absorption in Manufactured Products. No specific sales or earnings forecast was provided. Management expected to remain covenant-compliant, while warning that lower sales or economic deterioration could threaten covenant compliance and borrowing availability.
- Key exposures include substantial indebtedness and interest-rate changes, cyclical automotive and heavy-duty truck demand, commodity and component availability/pricing, customer credit risk, acquisition integration, and variable capital-equipment order timing. A 100-basis-point rate increase was estimated to add about $0.7 million of interest expense for the nine-month period.
- The company disclosed approximately 300 asbestos cases involving about 1,230 plaintiffs and an arbitration in South Africa in which Evraz seeks $20.8 million; Park-Ohio subsidiary ATM asserts a $2.7 million counterclaim. Management intends to defend the claims and does not expect the matters to have a material adverse effect, but stated that litigation outcomes are uncertain. For other contingencies, the filing says an excess-loss range cannot be estimated clearly.
Important facts for investors to verify
- Whether operating cash flow, working capital, and revolver availability remain adequate as sales and customer collections change.
- Debt covenant headroom, refinancing costs, and the effect of floating-rate borrowings and the 8.125% notes on future interest expense.
- Whether the rubber-products impairment signals further losses or restructuring needs, and whether Aluminum Products can offset contract-related sales declines.
- How much reported growth is attributable to acquisitions, pricing, and underlying volume, and whether margins are sustainable.
- Developments in the asbestos litigation and Evraz arbitration, along with potential tax consequences if foreign earnings or cash are repatriated.