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Settlement
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(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $1.00 Per Share
PKOH
The NASDAQ Stock Market LLC
Indicate by
check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files). þ Yes ¨ No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated
filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accountings standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
Number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of October 31, 2019: 12,493,102 shares.
The condensed consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries (collectively, “we,”“our” or the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“U.S. GAAP”)
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2 —
New Accounting Pronouncements
Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” This accounting standard requires that a lessee recognize a right-of-use asset and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. In July 2018, the FASB issued updated guidance, which allows an additional transition method to adopt the new leases standard at the adoption date, rather than as of the beginning of the earliest period presented. The Company elected to transition to the new standard on its effective
date of January 1, 2019 and therefore did not adjust its prior period financial information. On the transition date, we recognized operating right-of-use assets and related lease liabilities of approximately $69.7 million. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also made an accounting policy election not to record a right-of-use asset or lease liability related to leases with an initial term
of 12 months or less, and elected to not separate lease and non-lease components for all leases. See Note 10, "Leases" for additional disclosure.
In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The ASU affects any entity that is required to apply the provisions of Topic 220, “Income Statement—Reporting Comprehensive Income,” and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The Company has evaluated ASU 2018-02 and has decided not to make the election to reclassify the income tax effects of the TCJA from accumulated other comprehensive income
to retained earnings.
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” which replaces the current incurred loss impairment model with a methodology that reflects expected credit losses. Under the new methodology, entities will be required to measure expected credit losses on financial instruments held at amortized cost, including trade receivables, based on historical experience, current conditions and reasonable forecasts. Adoption of this guidance is required for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the expected impact of this standard.
No
other recently issued ASUs are expected to have a material impact on our results of operations, financial condition or liquidity.
NOTE 3 - Revenue
We disaggregate our revenue by product line and geographic region of our customer, as we believe these best depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. See details in the tables below.
Our operating segments are defined as components of the enterprise for which separate financial information is available and evaluated on a regular basis by our chief operating decision maker to allocate resources and assess performance.
For purposes of measuring business segment performance, the Company utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating; unusual in nature; or are corporate costs, which include but are not limited to executive and share-based compensation and
corporate office costs. Segment operating income reconciles to consolidated income before income taxes by deducting corporate costs; certain non-cash and/or non-operating items; Other components of pension income and other postretirement benefits expense, net; and interest expense, net.
One-time
net expense related to former President(a)
—
—
(4.3
)
—
Gain on sale of assets
—
—
—
1.9
Operating
income
23.8
24.8
65.6
74.1
Other components of pension income and other postretirement benefits expense, net
1.4
2.0
4.2
6.4
Interest
expense, net
(8.6
)
(8.9
)
(25.5
)
(26.1
)
Income before income taxes
$
16.6
$
17.9
$
44.3
$
54.4
(a)
On June 17, 2019, Edward F. Crawford, our President, retired and resigned to become the U.S. Ambassador to Ireland. In connection with his resignation, the Company incurred one-time net expense of $4.3 million, consisting of a $6.0 million payment and reversal of $1.7 million of previously-recorded expense related to restricted stock forfeitures.
NOTE 5 — Acquisitions
On May 31, 2019, the
Company acquired EFCO, Inc. d/b/a Erie Press Systems (“EP”) for $9.1 million, including a working capital adjustment and contingent consideration. EP, which has annual revenue of approximately $20 million, is an industry-recognized leader in the manufacturing of advanced forging presses, hydraulic and mechanical presses, and metal stretch-forming and carbon extrusion machines for several end markets, including aerospace and defense, primary metals and high-speed rail. EP is included in the Company's Engineered Products segment.
At closing, the Company paid $7.6 million
in cash (net of $10.4 million of cash and cash equivalents acquired). In July 2019, the Company paid an additional $0.5 million upon finalization of the net working capital adjustment. In addition, the purchase agreement stipulates potential contingent consideration of up to an additional $1.0 million based on two-year cumulative earnings before interest and taxes. The estimated fair value of the contingent consideration, valued using level 3 inputs, was approximately $1.0 million as of September 30, 2019, resulting in total consideration of $9.1 million.
The
allocation of the purchase price for EP is subject to finalization of the Company's determination of the fair values of the assets acquired and liabilities assumed as of the acquisition date, and could be materially different than the estimates presented below. The Company has not yet completed its analysis of the fair value of property, plant and equipment; intangible assets; and deferred income taxes. The final allocation is expected to be completed in 2019 but no later than one year after the acquisition date. Below is the estimated purchase price allocation as of September 30, 2019 related to the acquisition of EP, which reflects decreases in property, plant and equipment and intangible assets and a resulting increase in goodwill compared to the estimated
values at June 30, 2019:
Total purchase price (including working capital adjustment and contingent consideration)
$
9.1
On February 1, 2018, the Company acquired Canton Drop Forge (“CDF”) for $35.6 million in cash for its Engineered Products segment. CDF
manufactures forgings for high-performance applications in the global aerospace, oil and gas, and other markets.
On October 1, 2018, the Company acquired Hydrapower Dynamics Limited (“Hydrapower”) for $7.8 million in cash for its Assembly Components segment. Headquartered in Birmingham, England, Hydrapower is a manufacturer of fluid handling systems incorporating hoses, manipulated tubes and fabricated assemblies for the bus and truck, automotive, agricultural and construction end markets.
During 2018, the Company made two other
acquisitions in its Supply Technologies segment totaling a cash purchase price of $3.5 million. Both acquired companies distribute products into the aerospace and defense end markets.
The purchase price allocations for the 2018 acquisitions have been finalized.
The Company estimates warranty claims that may be incurred based on current and historical data of products sold. Actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents changes in the Company’s product warranty liability for the three and nine
months ended September 30, 2019 and 2018:
The Company’s tax provision for interim periods is determined using an estimate of its annual effective rate, adjusted for discrete items, if any, in each period.
Income tax expense for the three months ended September 30, 2019 was $4.2 million, representing an effective rate of 25.3%, compared to income tax expense of $3.2 million, or 17.9%, for the three months ended September 30, 2018. The rate in the 2018 period includes a $0.9 million
benefit related to an adjustment of the Company's estimated transition tax liability under the TCJA.
Income tax expense for the nine months ended September 30, 2019 was $12.3 million, representing an effective rate of 27.7%, compared to income tax expense of $14.5 million, or 26.7%, for the nine months ended September 30, 2018. The rate in the 2019 period is higher due to the impact of the $6.0 million one-time, non-deductible payment described more fully in Note 4, partially offset by the impact of discrete tax items
including a favorable U.S. return to provision adjustment.
In 2018, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-Ohio Holdings Corp., entered into Amendment No. 1 to Seventh Amended and Restated Credit Agreement (the “Credit Agreement”) with a group of banks to increase the availability under the revolving credit facility from $350.0 million to $375.0 million,
the Canadian revolving subcommitment from $35.0 million to $40.0 million and the European revolving subcommitment from $25.0 million to $30.0 million. Furthermore, Park-Ohio has the option, pursuant to the Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0 million. We had outstanding bank guarantees of approximately $32.3 million at September 30, 2019 and $27.5 million at December 31, 2018 under the Credit Agreement.
In
2017, Park-Ohio completed the issuance, in a private placement, of $350.0 million aggregate principal amount of 6.625% Senior Notes due 2027 (the “Notes”). The Notes are unsecured senior obligations of Park-Ohio and are guaranteed on an unsecured senior basis by the 100% owned material domestic subsidiaries of Park-Ohio.
In 2016, the Company, through its subsidiary, IEGE Industrial Equipment Holding Company Limited, entered into a financing agreement with Banco Bilbao Vizcaya Argentaria, S.A. The financing agreement provides the
Company a loan up to $24.6 million as of September 30, 2019, as well as a revolving credit facility for up to $10.9 million to fund working capital and general corporate needs. The Company had $7.2 million outstanding on the loan as of September 30, 2019. No amounts have been drawn on the revolving credit facility as of September 30, 2019.
In
2015, the Company entered into a Capital Lease Agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for finance leases. Finance lease obligations of $15.7 million were borrowed under the Lease Agreement to acquire machinery and equipment as of September 30, 2019.
In 2015, the Company, through its Southwest Steel Processing LLC subsidiary, entered into a financing agreement with the Arkansas Development Finance Authority. The financing agreement
provides the Company the ability to borrow up to $11.0 million for expansion of its manufacturing facility in Arkansas. The financing agreement matures in September 2025. The Company had $8.8 million of borrowings outstanding under this agreement as of September 30, 2019, which is included in Other above.
The following table represents fair value information of the Notes, classified as Level 1 using estimated quoted market prices.
We lease manufacturing facilities, warehouse space, office space, machinery and equipment, information technology equipment and vehicles under operating leases. We also lease one building and machinery
and equipment under finance leases. For operating leases with terms greater than 12 months, we record the operating right-of-use asset and related lease liability at the present value of lease payments over the lease term. In certain real estate leases, we have options to renew lease terms, generally at our sole discretion. We evaluate renewal options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors.
The discount rate implicit in our operating leases is generally not determinable, and therefore the Company determines the discount rate for each lease based on its incremental borrowing rate. The incremental borrowing rate is calculated based on lease term, currency and collateral adjustments.
During the three and nine months ended September 30, 2019, the Company obtained right-of-use assets in exchange for new operating lease liabilities of $2.8 million and $7.4 million, respectively.
Operating lease expense is recognized on
a straight-line basis over the lease term, with variable payments recognized in the period those payments are incurred.
Less: amount of lease payments representing interest
(12.2
)
(1.2
)
Total present value of future lease payments
$
64.0
$
15.7
NOTE 11 — Stock-Based Compensation
A summary of restricted share activity for the nine months ended September 30, 2019 is as follows:
2019
Time-Based
Performance-Based
Number
of Shares
Weighted Average Grant Date Fair Value
Number of Shares
Weighted Average Grant Date Fair Value
(In whole shares)
(In whole
shares)
Outstanding - beginning of year
529,947
$
35.98
—
$
—
Granted(a)
93,275
32.45
50,000
32.55
Vested
(210,428
)
37.70
—
—
Forfeited
(115,000
)
39.35
—
—
Outstanding
- end of period
297,794
$
32.36
50,000
$
32.55
(a) Included
in the granted amount are 2,825 restricted share units.
Total stock-based compensation expense included in Selling, general and administrative expenses during the three months ended September 30, 2019 and 2018 was $1.1 million and $1.9 million, respectively. The amounts recorded for the nine months ended September 30, 2019 and 2018
were $2.8 million and $6.5 million, respectively. As of September 30, 2019, there was $6.1
million
of unrecognized compensation cost related to non-vested stock-based compensation, which cost is expected to be recognized over a weighted-average period of 2.0 years.
NOTE 12 — Pension and Postretirement Benefits
The components of net periodic benefit (income) costs recognized during interim periods were as follows:
Certain
restricted stock awards are anti-dilutive and therefore excluded from the computation of diluted earnings per share. Anti-dilutive shares were immaterial for the three and nine months ended September 30, 2019 and 2018.
NOTE 15 — Subsequent Events
On October 30, 2019, the
Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend will be paid on November 27, 2019 to shareholders of record as of the close of business on November 13, 2019 and will result in a cash outlay of approximately $1.6 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our condensed consolidated financial statements include the accounts of Park-Ohio Holdings Corp. and its subsidiaries (collectively, “we,”“our,” or the “Company”). All significant intercompany transactions have been eliminated in consolidation.
EXECUTIVE
OVERVIEW
We are a diversified international company providing world-class customers with a supply chain management outsourcing service, capital equipment used on their production lines, and manufactured components used to assemble their products. We operate through three reportable segments: Supply Technologies, Assembly Components and Engineered Products.
Supply Technologies provides our customers with Total Supply Management™, a proactive solutions approach that manages the efficiencies of every aspect of supplying production parts and materials to our customers’ manufacturing floor, from strategic planning to program implementation. Total Supply Management™ includes such services as engineering and design support, part usage and cost analysis, supplier selection, quality assurance,
bar coding, product packaging and tracking, just-in-time and point-of-use delivery, electronic billing services and ongoing technical support. Our Supply Technologies business services customers in the following principal industries: heavy-duty truck; sports and recreational equipment; aerospace and defense; semiconductor equipment; electrical distribution and controls; consumer electronics; bus and coaches; automotive, agricultural and construction equipment; HVAC; lawn and garden; plumbing; and medical.
Assembly Components manufactures products oriented towards fuel efficiency and reduced emission standards. Assembly Components designs, develops and manufactures aluminum products and highly efficient, high pressure direct fuel injection fuel rails and pipes; fuel filler pipes that route fuel from the gas cap to the gas tank; flexible multi-layer plastic and rubber assemblies
used to transport fuel from the vehicle's gas tank and then, at extreme high pressure, to the engine's fuel injector nozzles. Our product offerings include gasoline direct injection systems and fuel filler assemblies, and industrial hose and injected molded rubber and plastic components. Additional products include cast and machined aluminum engine, transmission, brake, suspension and other components, such as pump housings, clutch retainers/pistons, control arms, knuckles, master cylinders, pinion housings, brake calipers, oil pans and flywheel spacers. Our products are primarily used in the following industries: automotive, including automotive and light-vehicle; agricultural equipment; construction equipment; heavy-duty truck; and marine original equipment manufacturers (“OEMs”), on a sole-source basis.
Engineered Products operates a diverse group of niche manufacturing
businesses that design and manufacture a broad range of highly-engineered products, including induction heating and melting systems, pipe threading systems and forged and machined products. Engineered Products also produces and provides services and spare parts for the equipment it manufactures. The principal customers of Engineered Products are OEMs, sub-assemblers and end users in the following industries: ferrous and non-ferrous metals; silicon; coatings; forging; foundry; heavy-duty truck; construction equipment; automotive; oil and gas; locomotive and rail manufacturing; and aerospace and defense.
Sales and segment operating income for these three segments are provided in Note 4 to the condensed consolidated financial statements, included elsewhere herein.
Subsequent
Event
On October 30, 2019, the Company's Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend will be paid on November 27, 2019 to shareholders of record as of the close of business on November 13, 2019 and will result in a cash outlay of approximately $1.6 million.
Selling, general and administrative (“SG&A”) expenses
42.7
41.1
1.6
3.9
%
SG&A
as a percentage of net sales
10.6
%
9.9
%
Operating income
23.8
24.8
(1.0
)
(4.0
)%
Other
components of pension income and other postretirement benefits expense, net
1.4
2.0
(0.6
)
(30.0
)%
Interest expense, net
(8.6
)
(8.9
)
0.3
(3.4
)%
Income
before income taxes
16.6
17.9
(1.3
)
(7.3
)%
Income tax expense
(4.2
)
(3.2
)
(1.0
)
31.3
%
Net
income
12.4
14.7
(2.3
)
(15.6
)%
Net income attributable to noncontrolling interest
(0.2
)
(0.5
)
0.3
(60.0
)%
Net
income attributable to Park-Ohio Holdings Corp. common shareholders
$
12.2
$
14.2
$
(2.0
)
(14.1
)%
Earnings
per common share attributable to Park-Ohio Holdings Corp. common shareholders:
Basic
$
1.00
$
1.15
$
(0.15
)
(13.0
)%
Diluted
$
0.99
$
1.14
$
(0.15
)
(13.2
)%
Net
Sales
Net sales decreased 2.6% to $403.4 million in the third quarter of 2019 compared to $414.3 million in the same period in 2018. This decrease was primarily due to the impact of the United Auto Workers (“UAW”) labor strike at General Motors (“GM”), lower end-market demand for our products in our Supply Technologies segment and negative foreign currency translation from a weaker Euro and British Pound. Overall, these sales decreases were partially offset by increased sales in our Engineered Products segment driven by increasing demand for our
capital equipment and aftermarket sales and services in our industrial equipment group.
The factors explaining the changes in segment net sales for the three months ended September 30, 2019 compared to the corresponding 2018 period are contained within the “Segment Results” section below.
Cost of Sales & Gross Profit
Cost of sales decreased to $336.9 million in the third
quarter of 2019, compared to $348.4 million in the same period in 2018. The decrease in cost of sales was primarily due to the decrease in net sales for the 2019 period compared to the corresponding period in 2018.
Gross margin was 16.5% in the third quarter of 2019 compared to 15.9% in the same period in 2018. The
increase was due primarily to the benefit of cost-reduction actions taken in the first quarter of 2019 to improve margins in our Assembly Components segment, excess operational costs in 2018 that did not repeat in 2019 and higher margin new business in certain product lines.
SG&A expenses increased to $42.7 million, or 10.6% of sales, in the third quarter
of 2019 compared to $41.1 million, or 9.9% of sales, in the same period in 2018. The increase in SG&A expenses was due primarily to the acquisitions of Hydrapower Dynamics Limited (“Hydrapower”) in October 2018 and EFCO, Inc. d/b/a Erie Press Systems (“EP”) in May 2019. The increase in SG&A as of percentage of net sales was due to a fixed portion of SG&A expenses over a lower revenue base.
Other Components of Pension Income and Other Postretirement Benefits Expense (“OPEB”), Net
Other components of pension income and OPEB expense, net was $1.4 million
in the three months ended September 30, 2019 compared to $2.0 million in the corresponding period in 2018. This decrease in the 2019 period relates to the recognition of higher net actuarial losses in 2019 compared to the prior-year period, driven by lower returns on plan assets in 2018 to be amortized over future periods starting in 2019.
Interest Expense, net
Interest expense, net was $8.6 million in the third quarter of 2019 compared to $8.9 million in the 2018 period. The decrease was due to lower average outstanding borrowings during the 2019 period.
Income
Tax Expense
Income tax expense for the three months ended September 30, 2019 was $4.2 million, representing an effective rate of 25.3%, compared to income tax expense of $3.2 million, or 17.9%, for the three months ended September 30, 2018. The rate in the 2018 period includes a $0.9 million benefit related to an adjustment of the Company's estimated transition tax liability under the Tax Cuts and Jobs Act.
Other components of pension income and other postretirement benefits expense, net
4.2
6.4
(2.2
)
(34.4
)%
Interest
expense, net
(25.5
)
(26.1
)
0.6
(2.3
)%
Income before income taxes
44.3
54.4
(10.1
)
(18.6
)%
Income
tax expense
(12.3
)
(14.5
)
2.2
(15.2
)%
Net income
32.0
39.9
(7.9
)
(19.8
)%
Net
income attributable to noncontrolling interests
(1.0
)
(1.1
)
0.1
(9.1
)%
Net income attributable to Park-Ohio Holdings Corp. common shareholders
$
31.0
$
38.8
$
(7.8
)
(20.1
)%
Earnings
per common share attributable to Park-Ohio Holdings Corp. common shareholders:
Basic
$
2.54
$
3.15
$
(0.61
)
(19.4
)%
Diluted
$
2.51
$
3.09
$
(0.58
)
(18.8
)%
*Calculation
not meaningful
Net Sales
Net sales decreased 1.1%, to $1,238.8 million in the first nine months of 2019 compared to $1,252.2 million in the same period in 2018. This decrease was due to lower customer demand for our products in our Supply Technologies and Assembly Components segments, driven by softening demand in certain key end markets, the impact of the UAW labor strike at GM and the pass-through of reduced aluminum prices. Overall, these sales decreases were partially offset by increased sales in our Engineered
Products segment, driven by increasing demand for our capital equipment, aftermarket sales and services and our aerospace and rail forgings.
The factors explaining the changes in segment net sales for the nine months ended September 30, 2019 compared to the corresponding 2018 period are contained in the “Segment Results” section below.
Cost of sales decreased to $1,040.8 million in the first nine months of 2019, compared to $1,048.1 million in the same period in 2018. The decrease in cost of sales was primarily due to the decrease in net sales for the 2019 period compared to the corresponding period in 2018.
Gross margin was 16.0% in the first nine months of 2019 compared to 16.3% in
the corresponding period in 2018. The increase in cost of sales and decrease in gross margin was due primarily to $3.3 million of non-recurring costs related to plant closure and consolidation in our Assembly Components segment.
SG&A Expenses
SG&A expenses increased to $132.4 million, or 10.7% of net sales, in the first nine months of 2019, compared to $131.9 million, or 10.5% of net sales, in the same period in 2018. These increases in SG&A expenses were due primarily to $4.3 million of one-time net expense related to an executive departure in June
2019 as discussed further in Note 4 to the condensed consolidated financial statements, included elsewhere herein, and SG&A expense from our acquisitions of Hydrapower and EP, both partially offset by lower professional fees, acquisition-related expenses and restricted stock compensation expense.
Gain on Sale of Assets
During the first nine months of 2018, the Company sold land to a third party, resulting in cash proceeds of $2.8 million and a pre-tax gain on sale of $1.9 million.
Other Components of Pension Income and OPEB, Net
Other
components of pension income and OPEB expense, net was $4.2 million in the nine months ended September 30, 2019 compared to $6.4 million in the corresponding period in 2018. This decrease in the 2019 period relates to the recognition of higher net actuarial losses in 2019 compared to the prior-year period, driven by lower returns on plan assets in 2018 to be amortized over future periods starting in 2019.
Interest Expense, net
Interest expense, net was $25.5 million in the first nine months of 2019 compared to $26.1 million in 2018. The decrease was due to lower average outstanding borrowings during the 2019 period.
Income
Tax Expense
Income tax expense for the nine months ended September 30, 2019 was $12.3 million, representing an effective rate of 27.8%, compared to income tax expense of $14.5 million, or 26.7%, for the nine months ended September 30, 2018. The rate in the 2019 period is higher due to the impact of the $6.0 million one-time, non-deductible payment described more fully in Note 4 to the condensed consolidated financial statements, included elsewhere herein, partially offset by the impact of discrete tax items including a favorable U.S. return to provision adjustment.
SEGMENT
RESULTS
For purposes of business segment performance measurement, the Company utilizes segment operating income, which is defined as revenues less expenses identifiable to the product lines within each segment. The Company does not allocate items that are non-operating or unusual in nature or are corporate costs, which include but are not limited to executive and share-based compensation and corporate office costs.
Net
sales decreased 4.2% in the three months ended September 30, 2019 compared to the 2018 period due primarily to lower customer demand in certain end markets, including the Company’s semiconductor market, which was down 11% year-over-year, and the Company's construction and agricultural equipment market, which was down 18% year-over-year. These decreases were partially offset by higher customer demand in the Company’s truck and truck-related market, which was up 3% year-over-year; the Company's civil aerospace market, which was up 16% year-over-year; and the
Company's power sports market, which was up 5% year-over-year.
Segment operating income decreased by $1.3 million due primarily to the impact of lower sales in the 2019 period compared to the same period a year ago. Segment operating income margin was down 60 basis points in the 2019 period compared to a year ago, driven by lower profit flow-through from the lower sales levels and unfavorable sales mix.
Nine months ended September 30:
Net sales decreased 1.4% in the nine months ended September 30, 2019 compared to the 2018 period due primarily to lower customer demand in certain end markets,
including the Company’s semiconductor market, which was down 20% year-over-year; the Company's consumer products market, which was down 15% year-over-year; and the Company's construction and agricultural equipment market, which was down 13% year-over-year. These decreases were offset by higher customer demand in the Company’s truck and truck-related market, which was up 19% year-over-year, and the Company's civil aerospace market, which was up 18% year-over-year.
In
the 2019 period compared to the same period a year ago, segment operating income decreased by $2.9 million and segment operating income margin was down 50 basis points, due primarily to unfavorable sales mix and an increase in product costs from both general inflation and tariffs on Chinese imported products.
Net
sales decreased 7.0% in the three months ended September 30, 2019 compared to the 2018 period due primarily to the impact of the UAW labor strike at GM in the 2019 period; lower levels of demand in China; and the pass-through of reduced aluminum prices.
Segment operating income in the 2019 period increased by $1.1 million, and segment operating income margin increased by 130 basis points, compared to the corresponding 2018 period. These increases were due primarily to the favorable impact of cost reduction actions
taken in the first half of 2019 to improve margins; the flow-through impact of new business in our extrusion and molded rubber products business; excess operational costs in 2018 that did not repeat in 2019; plant start-up costs related to new facilities in China and Mexico in the third quarter of 2018 that did not repeat in 2019; and favorable sales mix. These positive factors more than offset the impact of lower sales volumes.
Nine months ended September 30:
Net sales decreased 7.7% in the 2019 period compared to the 2018 period due primarily to the impact of the UAW labor strike at GM in the 2019 period; lower year-over-year sales from our facilities in China; anticipated end-of-life programs; and the pass-through of reduced aluminum
prices.
Segment operating income in the 2019 period decreased by $6.6 million, and segment operating income margin decreased by 100 basis points, compared to the corresponding period of 2018. These decreases were due primarily to the lower sales volumes noted above; $3.3 million of costs related to the closure of two facilities in 2019; and unfavorable sales mix. As a result of the reduced sales volumes in this segment, during the first quarter of 2019, the Company initiated several cost reduction actions to improve profitability, including the closure and consolidation of two manufacturing facilities.
Net
sales were 5.1% higher in the 2019 period compared to the 2018 period. The increase was due to organic growth driven by increased customer demand for our induction and pipe threading equipment, and aftermarket parts and services in our industrial equipment group. In our forged and machined products group, higher aerospace sales and sales from the acquisition of EP were substantially offset by weaker customer demand for our oil and gas forged products.
Segment operating income in the 2019 period decreased by $1.9 million and segment operating income margin decreased by 210 basis points compared to the corresponding 2018 period. These decreases were driven by unfavorable sales mix and an unplanned temporary shutdown of a production line at one of our forging plants.
Nine months ended September
30:
Net sales were 8.5% higher in the 2019 period compared to the 2018 period. The increase was due to organic growth driven by increased customer demand for our induction and pipe threading equipment, our aftermarket parts and services, and our aerospace products, as well as the acquisitions of Canton Drop Forge (“CDF”) in February 2018 and EP in May 2019.
Segment operating income in the 2019 period increased by $2.5 million and segment operating income margin improved by 10 basis points compared to the corresponding 2018 period. These increases were driven by the profit flow-through from the higher sales in the 2019 period compared to the same period a year ago, partially offset by unfavorable sales mix and the unplanned shutdown noted above.
Cash provided by operating activities increased from the comparable period in the prior year, as more efficient working capital usage in 2019 more than offset higher profitability in 2018. The 2019 period includes the $6.0 million one-time payment as discussed further in Note 4 of the condensed consolidated financial statements.
Investing Activities
Capital expenditures were $31.6 million for the nine months ended September 30, 2019, and were primarily to fund growth and maintain operations. In the comparable period of 2018, we had $35.9 million
of capital expenditures. In the first nine months of 2019, we spent cash of $8.1 million for the EP acquisition, and in the 2018 period, we spent cash of $36.8 for acquisitions.
Financing Activities
During the nine months ended September 30, 2019, we had net borrowings of $10.4 million to fund the acquisition of EP. In the comparable period of 2018, we had net borrowings of $44.2 million, primarily to fund the CDF acquisition and higher working capital levels.
We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated
entities or other persons, other than the letters of credits disclosed in Note 9 to the condensed consolidated financial statements, included elsewhere herein.
Liquidity
Our liquidity needs are primarily for working capital, capital expenditures, dividends and acquisitions. Our primary sources of liquidity have been funds provided by operations, funds available from existing bank credit arrangements and the sale of our debt securities. Our existing financial resources (working capital and available bank borrowing arrangements) and anticipated cash flow from operations are expected to be adequate to meet anticipated cash requirements for at least the next twelve months, including but not limited to our ability to maintain current operations and fund capital expenditure requirements, service
our debt, pay dividends, pursue acquisitions, and repurchase shares.
As of September 30, 2019, we had $185.7 million outstanding under our revolving credit facility, approximately $185.8 million of unused borrowing availability, and cash and cash equivalents of $49.8 million.
The Company had cash and cash equivalents held by foreign subsidiaries of $38.6 million
at September 30, 2019 and $46.2 million at December 31, 2018. We do not expect restrictions on repatriation of cash held outside the U.S. to have a material effect on our overall liquidity, financial condition or results of operations for the foreseeable future.
The
Company has two components to its assertion regarding reinvestment of foreign earnings outside of the United States. For all foreign subsidiaries except RB&W Corporation of Canada (“RB&W”), all earnings are permanently reinvested outside of the United States. For RB&W, dividend distributions may be made, but only to the extent of current earnings in excess of cash required to fund its business operations; all accumulated earnings are permanently reinvested.
Senior Notes
In April 2017, Park-Ohio Industries, Inc. (“Park-Ohio”), the operating subsidiary of Park-Ohio Holdings Corp., completed the sale, in a private placement, of $350.0 million aggregate principal amount
of 6.625% Senior Notes due 2027 (the “Notes”). The net proceeds from the issuance of the Notes were used to repay in full our previously outstanding 8.125% Senior Notes due 2021 and our outstanding term loan, and to repay a portion of the borrowings then outstanding under our revolving credit facility.
Credit Agreement
In June 2018, Park-Ohio entered into Amendment No. 1 to its Seventh Amended and Restated Credit Agreement (the “Credit Agreement”). The amendment to the Credit Agreement, among other things, provided increases in the availability under the revolving credit facility from $350.0 million to $375.0 million, the Canadian revolving subcommitment from $35.0 million to $40.0 million and the European revolving subcommitment from $25.0 million to $30.0 million. Furthermore,
the Company has the option, pursuant to the Credit Agreement, to increase the availability under the revolving credit facility by an aggregate incremental amount up to $100.0 million.
Finance Leases
In August 2015, the Company entered into a Capital Lease Agreement (the “Lease Agreement”). The Lease Agreement provides the Company up to $50.0 million for finance leases. Finance lease obligations of $15.7 million were borrowed under the Lease Agreement to acquire machinery and equipment as
of September 30, 2019.
Covenants
The future availability of bank borrowings under the revolving credit facility provided by the Credit Agreement is based on our ability to meet a debt service ratio covenant, which could be materially impacted by negative economic trends. Failure to meet the debt service ratio covenant could materially impact the availability and interest rate of future borrowings.
Our debt service coverage ratio must be greater than 1.0 and not less than 1.15 for any two consecutive fiscal quarters. At September 30,
2019, our debt service coverage ratio was 2.1; therefore, we were in compliance with the debt service coverage ratio covenant in the revolving credit facility provided by the Credit Agreement. The debt service coverage ratio is calculated at the end of each fiscal quarter based on the following ratio: (1) the most recently ended four fiscal quarters of consolidated EBITDA, as defined in the Credit Agreement, minus cash taxes paid, minus unfunded capital expenditures, plus cash tax refunds; to (2) consolidated debt charges, which are consolidated cash interest expense, plus scheduled principal payments on indebtedness, plus scheduled reductions in our term debt as defined in the Credit Agreement.
We were also in compliance with the other covenants contained in the revolving credit facility as of September 30,
2019. While we expect to remain in compliance throughout 2019, declines in sales volumes in the future could adversely impact our ability to remain in compliance with certain of these financial covenants. Additionally, to the extent our customers are adversely affected by declines in the economy in general, they may be unable to pay their accounts payable to us on a timely basis or at all, which could make our accounts receivable ineligible for purposes of the revolving credit facility and could reduce our borrowing base and our ability to borrow under such facility.
The Company paid dividends to shareholders of $4.8 million during the nine months ended September 30, 2019. In October 2019, our Board of Directors declared a quarterly dividend of $0.125 per common share. The dividend will be paid on November 27, 2019 to shareholders of record as of the close of business on November 13, 2019 and will result in a cash outlay of approximately $1.6 million. Although we currently intend to pay a quarterly
dividend on an ongoing basis, all future dividend declarations are at the discretion of our Board of Directors and dependent upon then-existing conditions, including our operating results and financial condition, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors may deem relevant.
Seasonality; Variability of Operating Results
The timing of orders placed by our customers has varied with, among other factors, orders for customers’ finished goods, customer production schedules, competitive conditions and general economic conditions. The variability of the level and timing of orders has, from time to time, resulted in significant periodic and quarterly fluctuations
in the operations of our businesses. Such variability is particularly evident in our capital equipment business, included in the Engineered Products segment, which typically ships large systems at a relatively lower pace than our other businesses.
Critical Accounting Policies
Our critical accounting policies are described in "Item. 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations," and in the notes to our consolidated financial statements for the year ended December 31, 2018, both contained in our Annual Report on Form 10-K for the year ended December 31,
2018. There were no new critical accounting policies or updates to existing critical accounting policies as a result of new accounting pronouncements in this Quarterly Report on Form 10-Q.
The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the condensed consolidated financial statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Forward-Looking Statements
This Quarterly
Report on Form 10-Q contains certain statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believes”, “anticipates”, “plans”, “expects”, “intends”, “estimates” and similar expressions are intended to identify forward-looking statements.
These forward-looking statements include statements regarding future performance of the Company that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors that could
cause actual results to differ materially from expectations include, but are not limited to, the following: our substantial indebtedness; the uncertainty of the global economic environment; general business conditions and competitive factors, including pricing pressures and product innovation; demand for our products and services; the impact of labor disturbances affecting our customers; raw material availability and pricing; fluctuations in energy costs; component part availability and pricing; changes in our relationships with customers and suppliers; the financial condition of our customers, including the impact of any bankruptcies; our ability to successfully integrate recent and future acquisitions into existing operations; the amounts and timing, if any, of purchases of our common stock; changes in general economic conditions such as inflation rates, interest rates, tax rates, unemployment rates, higher labor and healthcare costs, recessions and changing government
policies, laws and regulations, including those related to the current global uncertainties and crises, such as tariffs and surcharges; adverse impacts to us, our suppliers and customers from acts of terrorism or hostilities; our ability to meet various covenants, including financial covenants, contained in the agreements governing our
indebtedness; disruptions, uncertainties or volatility in the credit markets that may limit our access to capital; potential disruption due to a partial or complete reconfiguration of the European Union; increasingly stringent domestic and foreign governmental regulations, including
those affecting the environment or import and export controls and other trade barriers; inherent uncertainties involved in assessing our potential liability for environmental remediation-related activities; the outcome of pending and future litigation and other claims and disputes with customers; our dependence on the automotive and heavy-duty truck industries, which are highly cyclical; the dependence of the automotive industry on consumer spending; our ability to negotiate contracts with labor unions; our dependence on key management; our dependence on information systems; our ability to continue to pay cash dividends, and the other factors we describe under “Item 1A. Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by us that our plans and objectives will be achieved.
Item 3.
Quantitative and Qualitative Disclosure About
Market Risk
We are exposed to market risk, including changes in interest rates. As of September 30, 2019, we are subject to interest rate risk on borrowings under the floating rate revolving credit facility provided by our Credit Agreement. A 100-basis-point increase in the interest rate would have resulted in an increase in interest expense on these borrowings of approximately $1.4 million during the nine-month period ended September 30, 2019.
Our foreign subsidiaries
generally conduct business in local currencies. We face translation risks related to the changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated in U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive loss in the Shareholders' equity section of the accompanying Condensed Consolidated Balance Sheets. Sales and expenses at our foreign operations are translated into U.S. dollars at the applicable monthly average exchange rates. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses from foreign operations as expressed in U.S. dollars.
Our largest exposures to commodity prices relate to metal and natural gas prices, which have fluctuated widely in recent years. We do
not have any commodity swap agreements, forward purchase or hedge contracts.
Item 4.
Controls and Procedures
Evaluation of disclosure controls and procedures.
Under the supervision of and with the participation of our management,
including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
Changes in internal control over financial reporting.
During the quarter ended September 30, 2019, there were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from currently pending or threatened litigation are not expected to have a material adverse effect on our financial condition, liquidity or results of operations.
In addition to the routine lawsuits and asserted claims noted above, we were a party to the lawsuits and legal proceedings described below as of September 30, 2019:
We
were a co-defendant in approximately 113 cases asserting claims on behalf of approximately 217 plaintiffs alleging personal injury as a result of exposure to asbestos. These asbestos cases generally relate to production and sale of asbestos-containing products and allege various theories of liability, including negligence, gross negligence and strict liability, and seek compensatory and, in some cases, punitive damages.
In every asbestos case in which we are named as a party, the complaints are filed against multiple named defendants. In substantially all of the asbestos cases, the plaintiffs either claim damages in excess of a specified amount, typically a minimum amount sufficient to establish jurisdiction of the court in which the case was filed (jurisdictional minimums generally range from $25,000 to $75,000), or do not specify the monetary damages sought. To the extent that
any specific amount of damages is sought, the amount applies to claims against all named defendants.
There are three asbestos cases, involving 19 plaintiffs, that plead specified damages against named defendants. In each of the three cases, the plaintiff is seeking compensatory and punitive damages based on a variety of potentially alternative causes of action. In two cases, the plaintiff has alleged three counts at $3.0 million compensatory and punitive damages each; one count at $3.0 million compensatory and $1.0 million punitive damages; one count at $1.0 million. In the third case, the plaintiff has alleged compensatory and punitive damages, each in the amount of $20.0 million, for three separate causes of action, and $5.0 million compensatory damages for the fifth cause of action.
Historically,
we have been dismissed from asbestos cases on the basis that the plaintiff incorrectly sued one of our subsidiaries or because the plaintiff failed to identify any asbestos-containing product manufactured or sold by us or our subsidiaries. We intend to vigorously defend these asbestos cases, and believe we will continue to be successful in being dismissed from such cases. However, it is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, and although our results of operations and cash flows for a particular period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters
will not have a material adverse effect on our financial condition, liquidity or results of operations. Among the factors management considered in reaching this conclusion were: (a) our historical success in being dismissed from these types of lawsuits on the bases mentioned above; (b) many cases have been improperly filed against one of our subsidiaries; (c) in many cases the plaintiffs have been unable to establish any causal relationship to us or our products or premises; (d) in many cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all or that any injuries that they have incurred did in fact result from alleged exposure to asbestos; and (e) the complaints assert claims against multiple defendants and, in most cases, the damages alleged are not attributed to individual defendants. Additionally, we do not
believe that the amounts claimed in any of the asbestos cases are meaningful indicators of our potential exposure because the amounts claimed typically bear no relation to the extent of the plaintiff's injury, if any.
Our cost of defending these lawsuits has not been material to date and, based upon available information, our management does not expect its future costs for asbestos-related lawsuits to have a material adverse effect on our results of operations, liquidity or financial position.
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The
table below summarizes the information regarding our repurchases of the Company's common stock during the quarter ended September 30, 2019.
Period
Total Number
of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans (1)
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program (1)
On
March 4, 2013, we announced a share repurchase program whereby we may repurchase up to 1.0 million shares of our outstanding common stock.
(2)
Consists of an aggregate total of 674 shares of common stock we acquired from recipients of restricted stock awards at the time of vesting of such awards in order to settle recipient withholding tax liabilities.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
