Park-Ohio Holdings Corp. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial amounts are in millions except per-share data. Park-Ohio operates Supply Technologies, Assembly Components and Engineered Products.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $350.9 | $329.4 | $694.7 | $657.4 |
| Gross profit / margin | $60.3 / 17.2% | $54.3 / 16.5% | $115.8 / 16.7% | $102.1 / 15.5% |
| Operating income | $24.1 | $20.3 | $46.3 | $31.6 |
| Net income | $3.2 | $9.0 | $13.3 | $11.7 |
| Net income attributable to common shareholders | $3.0 | $9.0 | $12.8 | $11.7 |
| Diluted EPS | $0.24 | $0.73 | $1.03 | $0.96 |
| Interest expense | $7.9 | $7.0 | $15.3 | $14.1 |
Q2 sales rose 6.5%; gross margin improved 0.7 percentage points, while common-shareholder earnings fell 66.7%, principally because of an $11.0 debt-extinguishment loss from refinancing. First-half sales increased 5.7%, and operating income rose 46.5%. First-half net income includes a $3.3 litigation settlement gain; the prior-year period included a $4.0 asset impairment charge. First-half SG&A was $72.8, or 10.5% of sales, versus $66.5, or 10.1%, a year earlier.
Segments and drivers
- Supply Technologies: First-half sales of $275.6 versus $262.8; segment operating income of $23.7 versus $21.1. Growth reflected stronger demand in power sports, semiconductor and aerospace markets, partly offset by weaker truck-related demand.
- Assembly Components: First-half sales of $265.3 versus $266.0; operating income of $25.6 versus $24.4. Lower aluminum-program volumes offset growth in fuel filler and fuel rail products.
- Engineered Products: First-half sales of $153.8 versus $128.6; operating income of $7.5 versus $4.6. Growth reflected the acquired GH business and higher demand for induction heating and pipe threading products.
Cash flow, liquidity and debt
- First-half operating cash flow was $9.0, down from $27.5, reflecting increased working-capital requirements and the $4.0 litigation payment. Investing cash use was $22.9, including $12.4 of capital expenditures and the $10.5 AMC acquisition. Financing provided $19.3; cash increased $8.4 to $72.7.
- At June 30, 2017, gross debt was $521.5 and reported long-term debt, net of current amounts and issuance costs, was $496.1. Gross debt was $475.0 at year-end 2016. Cash was $72.7; current assets were $616.7 and current liabilities $250.7.
- In April, the company issued $350.0 of 6.625% senior notes due 2027 and used proceeds to repay $250.0 of 8.125% notes due 2021, repay its term loan and reduce revolver borrowings. It also extended and increased its revolving facility to $350.0, maturing in 2022, with an option for up to $100.0 of additional capacity.
- Revolver borrowings were $104.0, with reported unused availability of $176.8. The company reported a 2.2 debt service coverage ratio and compliance with covenants at quarter-end. Management expected available resources and operating cash flow to meet needs for at least twelve months.
Outlook, risks and notable items
- No specific revenue, earnings or margin guidance is provided. Management cited demand growth in certain end markets but noted variability in customer orders, particularly for capital equipment, and dependence on cyclical automotive and heavy-duty truck markets.
- Risks include substantial indebtedness, covenant compliance, economic and customer demand conditions, raw-material and component availability and costs, acquisition integration, foreign currency exposure, and litigation. A 100-basis-point rate increase was estimated to add approximately $0.5 of interest expense on revolver borrowings during the first half.
- The company settled the IPSCO dispute for $4.0 in March and recognized a $3.3 gain from reversing excess accruals. It also disclosed an ongoing SEC review and DOJ investigation concerning a third party and a 2007 payment to a foreign tax official that may implicate the FCPA; the outcome and potential impact were undetermined.
- The filing reported approximately 93 asbestos cases involving 187 plaintiffs; management did not expect their ultimate resolution to materially affect the company, while acknowledging uncertainty. AMC was acquired for $10.5 in April; purchase accounting remained subject to finalization. GH acquisition consideration includes contingent payments of up to $2.1; the 2016 EBITDA target was not met.
- Cash held by foreign subsidiaries was $63.6. Management intended to permanently reinvest foreign earnings and noted potential adverse tax consequences if approximately $141.5 of undistributed earnings were repatriated. The board declared a $0.125 quarterly dividend payable in August.
Most important facts for investors to verify
- Whether operating cash flow and working capital improve after the first-half cash-flow decline.
- Debt levels, revolver availability and covenant headroom as sales and earnings fluctuate.
- Whether segment growth and margin gains persist, especially in Engineered Products and Supply Technologies.
- The eventual financial or regulatory consequences, if any, of the FCPA-related review and pending legal matters.
- The finalized purchase-price allocations for AMC and GH and the impact of adopting the new revenue-recognition standard in 2018.