Park-Ohio Holdings Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Park-Ohio is a diversified manufacturer and supply-chain services provider operating through Supply Technologies, Assembly Components and Engineered Products. Financial amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $428.6 | $350.0 | $847.0 | $709.6 |
| Gross profit / margin | $49.8 / 11.6% | $39.9 / 11.4% | $103.5 / 12.2% | $91.9 / 13.0% |
| Operating income (loss) | $7.7 | $(3.4) | $15.6 | $8.9 |
| Net income (loss) | $1.5 | $(5.5) | $7.8 | $(0.1) |
| Net income attributable to common shareholders | $1.0 | $(5.3) | $7.1 | $0.2 |
| Diluted EPS | $0.08 | $(0.44) | $0.58 | $0.02 |
Sales grew 22.5% in Q2 and 19.4% year to date, primarily from higher customer demand and improved net price realization across all segments. Q2 gross margin edged higher as pricing and volume benefits more than offset inflation, labor and supply-chain costs. Year-to-date margin declined, reflecting those cost pressures and restructuring charges. SG&A as a share of sales improved to 10.5% in Q2 from 12.4%, and to 10.7% year to date from 11.7%. Q2 included a $2.9 gain on asset sales. The six-month tax benefit of $2.7 included a $4.1 discrete federal R&D credit.
Cash flow, balance sheet and debt
- Cash and liquidity: Cash was $61.1 at June 30, versus $54.1 at year-end. Management reported total liquidity of $200.5, comprising cash and $139.4 of unused borrowing availability, including $29.3 of suppressed availability. Separately, the filing reports $101.5 of calculated availability under the revolving credit agreement; the filing text does not clearly reconcile these availability figures.
- Cash flow, first six months: Operating cash use was $38.2, compared with $23.3 in 2021, primarily due to a $64.4 increase in working capital, including a $45.3 increase in receivables. Investing cash use was $11.5, including $15.5 of capital expenditures and $4.0 of asset-sale proceeds. Financing provided $60.6, including $67.9 of net revolving-credit borrowings. Cash increased $7.0.
- Debt: Total debt was $669.4, up from $606.1 at December 31, 2021; long-term debt, net, was $655.6. Revolver borrowings rose to $288.4 from $221.1. The $350.0 senior notes bear 6.625% interest and mature in 2027; the revolving facility matures in November 2024. Interest expense rose to $8.3 in Q2 and $16.1 year to date, mainly due to higher average borrowings.
- Other balance-sheet items: Total assets were $1,418.3, versus $1,360.0 at year-end. Receivables increased to $294.8 from $255.3 and inventory to $413.1 from $382.9. Current liabilities were $359.5; shareholders’ equity and noncontrolling interests totaled $313.8.
Segments and material changes
- Supply Technologies: Q2 sales were $175.8, up 13.4%, and segment operating income was $12.7 versus $10.2. Six-month sales were $344.6 and operating income $24.7. Demand and pricing gains lifted Q2 margin to 7.2% from 6.6%.
- Assembly Components: Q2 sales increased 40.8% to $154.2, but the segment recorded a $7.5 operating loss versus a $6.1 loss. Six-month sales were $312.8; the operating loss was $5.5 versus income of $0.3. Restructuring expenses were $4.2 in Q2 and $6.2 year to date; product and operating costs continued to pressure results.
- Engineered Products: Q2 sales rose 15.3% to $98.6, and segment operating income improved to $7.1 from a $0.7 loss. Six-month sales were $189.6 and operating income $8.9 versus a $1.9 loss, helped by stronger demand, operational improvements and cost actions.
Outlook, risks and unusual items
No formal revenue or earnings guidance is provided. Management said existing resources and expected cash flows should cover anticipated needs for at least the next 12 months. It expects additional 2022 restructuring costs of approximately $1.0 in Assembly Components and $5.0 in Engineered Products. The company cited continuing uncertainty from COVID-19, semiconductor shortages, inflation, supply-chain constraints, higher labor and freight costs, and cyclical end markets. It expects to remain covenant-compliant in 2022, but warned that weaker sales or customer payment delays could reduce borrowing capacity. A 100-basis-point rise in floating rates would have increased six-month interest expense by approximately $1.4.
After quarter-end, the company acquired Southern Fasteners for approximately $17 in cash and $2 in seller notes; it reported annual revenue of approximately $25. It also finalized the Charter Automotive acquisition for approximately $11 in seller notes; Charter has annual revenue of approximately $15. The board declared a $0.125-per-share quarterly dividend payable August 19, 2022. Management reported 99 asbestos cases involving 161 plaintiffs and believes their resolution will not materially affect the company, while noting outcomes are uncertain. Disclosure controls were deemed effective and no material change in internal controls was reported.
Important facts for investors to verify
- Whether price increases and volume gains can continue to offset inflation, labor, freight and supply-chain costs, particularly in Assembly Components.
- The drivers of working-capital growth and whether operating cash flow improves as receivables and inventory normalize.
- Debt reduction plans, borrowing costs, covenant headroom and the differing reported measures of unused credit availability.
- Actual restructuring spending and benefits, and performance and integration of the two post-quarter acquisitions.
- Progress and exposure related to asbestos and other litigation, and the sustainability of dividends amid cash-flow and debt requirements.