Park-Ohio Holdings Corp. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Park-Ohio is an industrial supply-management and diversified manufacturing company operating through Supply Technologies, Assembly Components and Engineered Products. Financial amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $344.6 | $303.5 | $1,005.7 | $893.8 |
| Gross profit / margin | $60.6 / 17.6% | $54.6 / 18.0% | $177.6 / 17.7% | $163.7 / 18.3% |
| Operating income | $26.4 | $18.3 | $74.7 | $66.3 |
| Continuing-operations net income | $12.5 | $8.7 | $35.7 | $31.5 |
| Net income attributable to Park-Ohio shareholders | $12.4 | $12.2 | $34.9 | $34.5 |
| Diluted EPS, continuing operations | $1.00 | $0.69 | $2.82 | $2.57 |
| Diluted EPS, total | $1.00 | $0.99 | $2.82 | $2.83 |
Q3 sales rose 13.5%; management attributed $13.1 of the increase to acquisitions and reported 9.2% organic growth. Nine-month sales grew 12.5%, including $49.5 of acquisition-related revenue and 7.0% organic growth. Operating income rose 44.3% in Q3 and 12.7% year to date. Gross margin declined 40 basis points in Q3 and 60 basis points year to date, primarily because Supply Technologies and Assembly Components—lower-margin businesses than Engineered Products—made up a larger share of sales. SG&A increased 10.0% in Q3 and 11.6% year to date; as a percentage of sales it fell 30 basis points in Q3 and was roughly flat year to date.
Segments and material comparisons
- Supply Technologies: Q3 sales were $143.4, up 24%, and segment operating income was $12.2, up 28%; margin rose to 8.5% from 8.2%. Nine-month sales were $420.2, up 20%, while operating income increased 17% to $32.7 and margin eased to 7.8% from 8.0%. Growth reflected acquisitions and demand in several markets, including heavy-duty truck, power sports, semiconductor and HVAC.
- Assembly Components: Q3 sales were $121.6, up 15%, and operating income rose 45% to $11.0; margin improved to 9.0% from 7.2%. Nine-month sales grew 16% to $351.7 and operating income rose 24% to $31.3. Automotive aluminum program launches were a key driver; Bates added about $15.5 of nine-month revenue.
- Engineered Products: Q3 sales declined 2% to $79.6 and operating income fell 9% to $11.5; margin declined to 14.4% from 15.6%. Nine-month sales fell 3% to $233.8 and operating income fell 7% to $32.8. Forging demand and lower volume weighed on results; first-quarter severe-weather effects on segment operating income were estimated at about $1.2.
Prior-year net income included discontinued operations from a business sold in September 2013, including a $4.0 after-tax sale gain. This contributed $3.7 to Q3 2013 and $3.2 to nine-month 2013 income. Consequently, 2014 continuing-operations EPS improved while total nine-month EPS was slightly lower year over year.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $33.5, versus $36.9 in 2013. Management cited working-capital investment supporting growth; accounts receivable used $33.9 of cash.
- Investing cash outflow was $17.3, versus $24.7. Cash purchases of property and equipment were $13.9, and acquisition spending net of cash acquired was $5.4.
- Financing cash outflow was $12.0, compared with $7.7 of inflow in 2013, including dividends of $3.1 and treasury-stock purchases of $3.7. Cash increased $7.3 to $62.5.
- At September 30, current assets were $545.7 and current liabilities $223.0; working capital was $322.7 and the current ratio was 2.45. Long-term debt, net of current maturities, was $376.7; total debt including current maturities was $380.1. Cash was $62.5.
- The July 2014 credit agreement provided a $230.0 revolving facility and a $16.1 term loan, with borrowings maturing July 31, 2019. The company reported about $84.0 of unused revolver availability at quarter-end. An October 24 amendment subsequently increased the revolver to $250.0 and permitted a term loan up to $35.0; $25.0 was drawn and outstanding as of that date.
- The company reported compliance with its debt covenants at quarter-end, including a 1.7 debt-service coverage ratio. Management said available resources and anticipated operating cash flow were expected to cover requirements for at least the next 12 months, while warning that weaker sales or customer payment problems could pressure covenant compliance and borrowing availability.
Outlook, significant events and risks
- No formal full-year earnings or revenue guidance is provided. Management reported expected adequacy of liquidity for at least 12 months and said it expected to remain covenant-compliant during 2014, while noting risks from sales declines and economic weakness.
- On October 10, 2014, the company acquired Indiana-based Autoform Tool & Manufacturing for $48.9. Management expected its 2015 annual revenue to exceed $70.
- The board declared a $0.125-per-share quarterly dividend in October, payable December 1, 2014; the expected cash outlay was about $1.6.
- Foreign-currency translation reduced nine-month other comprehensive income by $3.9. The company also recorded $1.7 of Q3 foreign-exchange losses on non-permanent intercompany loans. At September 30, no currency hedges were outstanding. A 100-basis-point rate increase was estimated to add about $0.9 to interest expense for the nine-month period.
- Material contingencies include an appeal of a roughly $5.2 judgment in the TMK IPSCO matter, with the plaintiff also seeking $3.8 in attorney fees; asbestos-related claims involving approximately 268 cases and 611 plaintiffs; and an SEC review connected to a third-party investigation and a disclosed 2007 payment to a foreign tax official that may implicate the Foreign Corrupt Practices Act. A board special committee was reviewing the company’s transactions with that third party. The company could not predict the outcome or impact of the investigations.
- Other disclosed risks include acquisition integration, cyclical automotive and heavy-duty-truck demand, customer credit and supplier risks, substantial debt and covenant compliance, litigation, and volatility in Engineered Products project timing. Management reported no material change to the risk factors in its 2013 Form 10-K.
Investor verification points
- Track whether organic growth and segment margins persist, particularly in Engineered Products and the higher-growth Supply Technologies and Assembly Components businesses.
- Review working-capital conversion, especially receivables, and whether operating cash flow improves alongside revenue growth.
- Confirm post-amendment debt balances, borrowing-base availability, covenant headroom and the financing impact of the Autoform acquisition.
- Monitor the SEC/DOJ-related review, special committee findings, TMK IPSCO appeal and asbestos claims for changes in exposure or disclosure.
- Assess the sustainability of dividends and the company’s ability to fund investment and acquisitions while servicing debt.