Park-Ohio Holdings Corp. — Q3 2021 Form 10-Q
Business context and period: The unaudited report covers the three and nine months ended September 30, 2021. Park-Ohio is a diversified industrial company with Supply Technologies, Assembly Components, and Engineered Products segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $358.5 million | $340.2 million | $1,068.1 million | $934.8 million |
| Gross profit / margin | $40.1 million / 11.2% | $49.7 million / 14.6% | $132.0 million / 12.4% | $117.8 million / 12.6% |
| Operating income (loss) | $(5.0) million | $11.0 million | $3.9 million | $3.1 million |
| Net income (loss) attributable to common shareholders | $(7.2) million | $5.3 million | $(7.0) million | $(10.1) million |
| Diluted EPS | $(0.60) | $0.44 | $(0.58) | $(0.83) |
| Net cash from (used in) operating activities | Not presented quarterly | $(25.9) million | $32.8 million |
At September 30, 2021, cash was $59.6 million, total debt was $605.2 million, and total liquidity was $218.0 million, comprising cash and $158.4 million of unused borrowing availability. Long-term debt, net, was $592.1 million. The revolving credit facility balance was $221.8 million; the $350 million senior notes bear 6.625% interest and mature in 2027.
Material changes and drivers
- Q3 sales rose 5.4%, but gross margin fell to 11.2% from 14.6%, and the company moved from operating income to an operating loss. Management cited semiconductor shortages, raw-material inflation, higher labor and freight costs, supplier delays, and fixed-cost under-absorption.
- Nine-month sales increased 14.3%; gross profit increased 12.1%, while gross margin edged down to 12.4%. The nine-month net loss narrowed from $10.5 million to $7.5 million.
- Supply Technologies Q3 sales rose to $154.0 million, with segment operating income of $10.7 million. Assembly Components recorded a $8.9 million Q3 segment operating loss, versus $6.7 million income a year earlier; the chip shortage reduced Q3 sales by an estimated $13.1 million. Engineered Products Q3 sales rose to $84.3 million, but segment operating income declined to $0.6 million.
- Operating cash use of $25.9 million reflected $45.1 million of working-capital usage, primarily inventory. Inventory increased to $386.4 million from $310.9 million at year-end. Investing cash use was $30.3 million, including $24.9 million of capital expenditures and $5.4 million for an acquisition, net of cash acquired.
- Financing provided $62.0 million, including $78.4 million of net revolving-facility proceeds. Cash increased by $4.6 million during the nine months.
Outlook, risks and unusual items
- Management said existing resources and anticipated operating cash flow should cover expected needs for at least the next 12 months, and expected to remain in covenant compliance through 2021. Availability under the credit agreement was $136.6 million for covenant purposes; the debt-service coverage test did not apply at quarter-end.
- The company expected approximately $1.9 million of additional Q4 costs for Assembly Components closure and consolidation actions and approximately $1.6 million for Engineered Products actions. It classified real estate with a carrying value of about $4.9 million as held for sale.
- Management cited continuing uncertainty from COVID-19, semiconductor and other supply constraints, inflation, logistics and freight costs, labor costs and disturbances, cyclical end markets, and substantial indebtedness. A 100-basis-point rate increase would have added an estimated $1.7 million of interest expense for the nine-month period.
- The filing reports approximately 124 asbestos cases involving 228 plaintiffs. Management intends to defend the cases and does not expect their ultimate resolution to materially affect financial condition, liquidity, or results, while acknowledging uncertainty and possible period-specific effects. The filing says there were no material changes to previously disclosed risk factors.
- Tax benefits included effects related to CARES Act net operating loss carrybacks and other tax items. The filing also reports $3.1 million of nine-month Assembly Components closure and consolidation costs and $1.9 million in Engineered Products; related segment and SG&A disclosures include other charges, so amounts should not be summed without checking their classifications.
Investor verification priorities
- Assess whether sales recovery can translate into improved margins amid shortages, inflation, freight pressures, and fixed-cost under-absorption.
- Track inventory, working-capital needs, operating cash flow, and additional borrowing against reported liquidity and covenant thresholds.
- Verify the timing and completion costs of plant closures, expected Q4 costs, and the sale of the held-for-sale properties.
- Review acquisition purchase-price allocation and contingent consideration for NYK, which remained subject to finalization.
- Monitor asbestos and other legal contingencies, debt obligations, and the company’s ability to sustain dividends and meet credit-agreement requirements.