PARK OHIO HOLDINGS CORP quarterly report, Q3 FY2020

Park-Ohio Holdings Corp. — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Park-Ohio is a diversified industrial company operating through Supply Technologies, Assembly Components and Engineered Products. Management attributed weaker demand across markets, including an Assembly Components shutdown in spring, primarily to COVID-19.

Financial performance

MetricQ3 2020Q3 2019Nine months 2020Nine months 2019
Net sales$340.2m$403.4m$934.8m$1,238.8m
Gross profit / margin$49.7m / 14.6%$66.5m / 16.5%$117.8m / 12.6%$198.0m / 16.0%
Operating income$11.0m$23.8m$3.1m$65.6m
Net income (loss) attributable to common shareholders$5.3m$12.2m$(10.1)m$31.0m
Diluted EPS$0.44$0.99$(0.83)$2.51
  • Q3 sales declined 15.7%; nine-month sales declined 24.5%. Lower volume and unfavorable mix reduced gross margins; cost reductions partly offset the pressure.
  • Q3 SG&A was $38.7m, or 11.4% of sales, versus $42.7m, or 10.6%. Nine-month SG&A was $114.7m, or 12.3%, versus $132.4m, or 10.7%. Lower expense reflected cost actions, while the sales decline increased SG&A as a share of revenue.
  • Operating cash flow was $32.8m for the nine months, versus $33.5m. Investing cash outflow was $13.5m, including $14.9m capital expenditure; financing cash outflow was $24.1m. Cash declined $5.1m to $50.9m.
  • September 30 total debt was $555.0m, including $350.0m of 6.625% senior notes due 2027 and $165.2m drawn on the revolving facility due 2024. Long-term debt, net, was $537.2m; debt at December 31, 2019 was $568.5m.
  • Management reported total liquidity of $242.5m, comprising $50.9m cash and $191.6m unused borrowing availability. Separately, calculated availability under the credit agreement was $172.2m.

Segments and material changes

  • Supply Technologies: Q3 sales were $132.0m, down 11.2%; segment operating income rose to $10.6m from $10.0m, and margin improved to 8.0% from 6.7%. Nine-month sales were $367.2m, down 22.8%, and operating income was $20.1m versus $34.4m.
  • Assembly Components: Q3 sales were $126.9m, down 6.6%; operating income declined to $6.7m from $10.4m. Nine-month sales were $310.0m, down 24.5%, and the segment recorded a $1.6m operating loss versus $27.0m income. Spring customer and facility shutdowns and lower production were key factors.
  • Engineered Products: Q3 sales were $81.3m, down 31.6%, and operating income was $1.3m versus $10.3m. Nine-month sales were $257.6m, down 27.0%, and operating income was $4.3m versus $29.9m. Lower capital-equipment demand, weaker end markets, mix and manufacturing underabsorption weighed on results.

Outlook, risks and unusual items

  • Management said the duration and financial impact of COVID-19 remained uncertain, but expected available resources and cost actions to support anticipated cash needs for at least 12 months. No quantified earnings or revenue guidance was provided.
  • Cost responses included plant consolidation, workforce and salary reductions, discretionary-spending cuts, and reduced capital spending. The filing reports restructuring-related charges in several places; the stated consolidated nine-month charge of $4.1m in MD&A does not clearly reconcile to amounts disclosed by segment.
  • The quarterly dividend was suspended in Q2 to preserve liquidity and reinstated by the board on November 3, 2020 at $0.125 per share, with an expected $1.5m cash outlay. Future declarations remain discretionary. The company repurchased $7.2m of treasury shares during the first nine months.
  • Credit-facility availability below $46.875m would trigger a debt-service coverage test; management said the test did not apply at quarter-end and other covenants were met. Further sales deterioration could pressure covenant compliance and borrowing capacity.
  • Other risks include substantial indebtedness, cyclical automotive and truck exposure, customer and supplier disruptions, interest-rate and foreign-exchange movements, and litigation. The company was co-defendant in approximately 119 asbestos cases involving 221 plaintiffs; management did not expect these matters to have a material ultimate effect, while acknowledging outcomes are uncertain.

Important facts for investors to verify

  • Whether demand and margins continued to recover after September 30, especially in Assembly Components and Engineered Products.
  • The reconciliation and nature of plant-closure and cost-reduction charges, given differing totals in MD&A and segment disclosures.
  • Revolver availability, borrowing-base eligibility, covenant headroom and debt-service capacity under weaker operating scenarios.
  • The sustainability of operating cash flow and liquidity after the dividend reinstatement and share repurchases.
  • Developments in COVID-19 impacts, asbestos and other legal matters, and the potential contingent consideration for the 2019 Erie Press acquisition.