Park-Ohio Holdings Corp. — Q2 2021 Form 10-Q
Business context and period: Diversified industrial supplier operating through Supply Technologies, Assembly Components and Engineered Products. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with 2020, when COVID-19 sharply reduced demand and disrupted North American automotive production.
Financial performance
Quarter ended June 30, 2021 (dollars in millions except per-share data): Sales were $350.0, up 53.3% year over year. Gross profit was $39.9 and gross margin was 11.4%, compared with $14.2 and 6.2%. SG&A was $43.3, or 12.4% of sales versus 15.4%. Operating loss improved to $3.4 from $20.9; net loss attributable to common shareholders was $5.3, or $0.44 per diluted share, versus a $16.6 million loss, or $1.38 per share.
Six months ended June 30, 2021: Sales were $709.6, up 19.3%; gross profit was $91.9 and gross margin 13.0%, versus $68.1 and 11.5%. SG&A was $83.0, or 11.7% of sales versus 12.8%. Operating income was $8.9, compared with an operating loss of $7.9. The company reported a $0.1 million net loss, but $0.2 million net income attributable to common shareholders, or $0.02 per diluted share; the comparable 2020 common-shareholder loss was $15.4 million, or $1.27 per share.
- Segments, Q2: Supply Technologies sales rose to $155.0 from $94.4, with operating income of $10.2 versus $0.3. Assembly Components sales increased to $109.5 from $54.9, but the segment still recorded a $6.1 million operating loss, improved from $14.6 million. Engineered Products sales were $85.5 versus $79.0; its operating loss was $0.7 versus $0.8.
- Segments, first half: Supply Technologies sales were $312.7 and operating income $22.5, both higher year over year. Assembly Components sales were $235.5 and operating income $0.3, versus a prior-year loss of $8.3. Engineered Products sales declined to $161.4 from $176.3 and it recorded a $1.9 million operating loss, versus $3.0 million income.
- Cash flow: First-half operating cash flow was negative $23.3, versus positive $9.5 in 2020, principally reflecting $40.2 million of working-capital use, led by inventory. Investing cash outflow was $19.8, including $14.4 of capital expenditures and $5.4 for an acquisition, net of cash acquired. Financing provided $43.7, including $55.0 net proceeds from the revolving facility. Cash increased $0.3 to $55.3.
- Debt and liquidity: Total debt was $583.0 at June 30, 2021, versus $534.7 at year-end 2020; long-term debt, net, was $570.2. Cash was $55.3, implying approximately $527.7 million of debt net of cash. Reported total liquidity was $221.4, including $166.1 of unused borrowing availability. Revolver borrowings were $198.6; the $350.0 million senior notes bear 6.625% interest and mature in 2027.
- Other: Interest expense for the first half was $14.8, down from $15.5. The six-month income tax benefit was $0.9, including a benefit related to CARES Act net operating loss carryback claims. The company paid $3.1 million in dividends in the first half.
Changes, outlook and risks
Management attributed the broad sales and earnings recovery mainly to higher demand versus the pandemic-depressed 2020 comparison. Supply Technologies also benefited from cost actions and favorable product mix. Results faced pressure from global supply-chain constraints and higher freight costs, semiconductor shortages, raw-material inflation, labor shortages and temporary labor costs, and under-absorption of fixed costs in some facilities. Management noted a labor strike at a major truck assembly plant.
The company acquired NYK Component Solutions Limited on April 1 for $5.4 million in cash, net of cash acquired, plus estimated contingent consideration of up to $2.1 million. Purchase-price allocation remained preliminary. Plant closure and consolidation charges were recorded in both Assembly Components and Engineered Products; management expected approximately $1.7 million of additional related costs in the remainder of 2021. The filing provides no specific earnings or sales guidance. Management stated that available resources and anticipated operating cash flow were expected to meet requirements for at least the next 12 months, while acknowledging continuing COVID-19 uncertainty.
Risks highlighted include the pandemic and supply-chain disruption, substantial indebtedness and covenant compliance, cyclical automotive and heavy-duty truck demand, customer credit and collections, raw-material and labor costs, interest-rate and currency exposure, and acquisition integration. A 100-basis-point increase in rates would have increased first-half interest expense by approximately $1.0 million. The company was in covenant compliance at June 30; its calculated revolver availability was $143.6 million, above the $46.875 million threshold at which a debt-service covenant applies. It was a co-defendant in approximately 125 asbestos cases involving 229 plaintiffs; management expected no material adverse effect, but outcomes are uncertain. A $0.125-per-share quarterly dividend was declared after quarter-end, payable August 20, 2021.
Important facts for investors to verify
- Whether the recovery in sales and margins persists beyond the unusually weak Q2 2020 comparison, particularly in Assembly Components and Engineered Products.
- Whether inventory and working-capital needs ease, and whether operating cash flow turns positive without further borrowing.
- Debt levels, revolver availability, covenant headroom and sensitivity to interest rates and any deterioration in customer receivables.
- The continuing effects of semiconductor, freight, raw-material and labor constraints, plus the cost and execution of plant consolidations.
- Final NYK acquisition accounting and contingent consideration, and the ultimate outcomes of asbestos, warranty and other legal claims.