10-Q: PARK OHIO HOLDINGS CORP
(EDGAR Online via COMTEX) –
Item 2. Managements 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. All significant intercompany transactions have been eliminated in consolidation.
Executive Overview
We are an industrial Total Supply ManagementTM and diversified manufacturing business, operating in three segments: Supply Technologies, Aluminum Products and Manufactured Products. Our Supply Technologies business provides our customers with Total Supply ManagementTM, 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 ManagementTM 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. The principal customers of Supply Technologies are in the heavy-duty truck, automotive and vehicle parts, electrical distribution and controls, consumer electronics, power sports/fitness equipment, HVAC, agricultural and construction equipment, semiconductor equipment, plumbing, aerospace and defense, and appliance industries. Aluminum Products casts and machines 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 for automotive, agricultural equipment, construction equipment, heavy-duty truck and marine equipment original equipment manufacturers (OEMs), primarily on a sole-source basis. Aluminum Products also provides value-added services such as design and engineering and assembly. Manufactured 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, industrial oven systems, injection molded rubber components, and forged and machined products. Manufactured Products also produces and provides services and spare parts for the equipment it manufactures. The principal customers of Manufactured Products are OEMs, sub-assemblers and end users in the ferrous and non-ferrous metals, silicon, coatings, forging, foundry, heavy-duty truck, construction equipment, automotive, oil and gas, rail and locomotive manufacturing and aerospace and defense industries. Sales, earnings and other relevant financial data for these three segments are provided in Note B to the consolidated financial statements, included elsewhere herein.
During the third quarter of 2010, Supply Technologies completed the acquisition of certain assets and assumed specific liabilities relating to the ACS business (ACS) of Lawson Products, Inc. for $16.0 million in cash and a $2.2 million subordinated promissory note payable in equal quarterly installments over three years ($1.2 million outstanding at September 30, 2011). ACS is a provider of supply chain management solutions for a broad range of production components through its service centers throughout North America.
On September 30, 2010, the Company entered a Bill of Sale with Rome Die Casting LLC (Rome), a producer of aluminum high pressure die castings, pursuant to which Rome agreed to transfer to the Company substantially all of its assets in exchange for approximately $7.5 million of notes receivable due from Rome.
On December 31, 2010, the Company, through its subsidiary Ajax Tocco Magnathermic, acquired the assets and the related induction heating intellectual property of ABP Inductions United States heating business operating as Pillar Induction (Pillar) for $10.3 million in cash. Pillar provides complete turnkey automated induction power systems and aftermarket parts and service to a worldwide market.
On April 7, 2011, the Company completed the sale of $250 million in aggregate principal amount of 8.125% Senior Notes due 2021 (the Notes). The Notes bear an interest rate of 8.125% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2011. The Notes mature on April 1, 2021. In connection with the sale of the Notes, the Company entered into a fourth amended and restated credit agreement (the Amended Credit Agreement). The Amended Credit Agreement, among other things, provides an increased credit facility up to $200 million, extends the maturity date of the borrowings under the facility to April 7, 2016 and amends fee and pricing terms. Furthermore, the Company has the option, pursuant to the Amended Credit Agreement, to increase the availability under the revolving credit facility by $50 million. The Company also purchased all of its outstanding $183.8 million aggregate principal amount of 8.375% Senior Subordinated Notes due 2014 (the Senior Subordinated Notes) that were not held by its affiliates pursuant to a tender offer and subsequent redemption, repaid all of the term loan A and term loan B outstanding
under its then existing credit facility and retired the Senior Subordinated Notes in the aggregate principal amount of $26.2 million that were held by an affiliate. The Company incurred debt extinguishment costs related to premiums and other transaction costs associated with the tender offer and subsequent redemption of the Senior Subordinated Notes and wrote off deferred financing costs totaling $7.3 million and recorded a provision for foreign income taxes of $2.1 million resulting from the retirement of the Senior Subordinated Notes that were held by an affiliate.
During the third quarter of 2011, the Company recorded an asset impairment charge of $5.4 million associated with the underperformance of the assets of its rubber products business unit.
Critical Accounting Policies
Our critical accounting policies are described in Item 7. Managements 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, 2010, contained in our 2010 Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Condensed Consolidated Financial Statements 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.
Results of Operations
Nine Months 2011 versus Nine Months 2010
Net Sales by Segment:
Nine Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Supply Technologies$373.6$295.3$78.327 %
Aluminum Products102.8109.7(6.9)(6)%
Manufactured Products255.6188.067.636 %
Consolidated Net Sales$732.0$593.0$ 139.023 %
Net sales increased $139.0 million to $732.0 million in the first nine months of 2011 compared to $593.0 million in the same period in 2010 as the Company experienced volume increases in the Supply Technologies and Manufactured Products segments. Supply Technologies sales increased 27% primarily due to volume increases in the heavy-duty truck, electrical, industrial equipment, auto, power sports, HVAC, furniture, agricultural and construction equipment industries, offset primarily by declines in the instruments, medical and semi-conductor industries. In addition, there were $31.6 million of incremental sales resulting from the acquisition of ACS. Aluminum Products sales decreased 6%, resulting primarily from the completion of certain automotive supply contracts offset by sales of $9.5 million resulting from the acquisition of Rome. Manufactured Products sales increased 36% primarily due to increased business in the capital equipment, forged and machined products and rubber products business units. In addition, there were $11.4 million of incremental sales resulting from the acquisition of Pillar. Approximately $10.4 million of the increases in consolidated net sales was due to price increases of which $5.3 million relates to the Supply Technologies segment and $5.1 million relates to the Aluminum Products segment.
Cost of Products Sold amp; Gross Profit:
Nine Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Consolidated cost of products sold$603.0$495.4$ 107.622 %
Consolidated gross profit$129.0$97.6$31.432 %
Gross Margin17.6 %16.5 %
Cost of products sold increased $107.6 million in the first nine months of 2011 to $603.0 million compared to $495.4 million in the same period in 2010, while gross margin increased to 17.6% in the first nine months of 2011 from 16.5% in the same period in 2010. The increase in cost of products sold was due primarily to higher sales levels and higher commodity prices (which we expect to remain at this level through the end of the year) offset by higher production levels which contributed to improved absorption of fixed costs in the Manufactured Products segment.
Supply Technologies and Manufactured Products gross margin increased primarily due to sales volume increases and product mix. Gross margin in the Aluminum Products segment remained level primarily because of reduced sales volume and mix of products sold.
Selling, General amp; Administrative (SGamp;A) Expenses:
Nine Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Consolidated SGamp;A expenses$80.7$65.5$15.223 %
SGamp;A percent11.0 %11.0 %
Consolidated SGamp;A expenses increased 23% in the first nine months of 2011 compared to the same period in 2010. SGamp;A expenses increased in the first nine months of 2011 compared to the same period in 2010 primarily due to increases in payroll and payroll related expenses of $8.8 million and to $5.1 million of incremental expenses resulting from the acquisitions of ACS, Rome and Pillar.
Interest Expense:
Nine Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Interest expense$26.3$18.1$8.245 %
Debt extinguishment costs included
in interest expense$7.3-7.3NM
Amortization of deferred financing
costs and bank service charges$1.8$1.9(.1)(5)%
Average outstanding borrowings$332.6$324.2$8.43 %
Average borrowing rate6.90 %6.67 %23 basis points
Interest expense increased $8.2 million in the first nine months of 2011 compared to the same period of 2010, primarily due to debt extinguishment costs of $7.3 million related to premiums and other transaction costs associated with the tender offer and subsequent redemption and write off of deferred financing costs associated with the Senior Subordinated Notes. Excluding these costs, interest increased due primarily to a higher average borrowing rate during the first nine months of 2011 and by higher average outstanding borrowings. The higher average borrowing rate in the first nine months of 2011 was due primarily to the interest rate mix of our revolving credit facility and the Notes when compared to the mix in the same period in 2010.
Income Tax:
The provision for income taxes was $6.1 million in the first nine months of 2011 and the reported effective tax rate for that period was 37% and the underlying effective tax rate on operations was 24%, compared
to a provision for income taxes of $1.1 million and reported effective tax rate and underlying effective tax rate on operations of 9% in the corresponding period of 2010. The variance between the reported rate and the underlying rate in the first nine months of 2011 was primarily due to the tax impact resulting from the retirement of the Senior Subordinated Notes that were held by a foreign affiliate. We estimate that our reported effective tax rate for full-year 2011 will be approximately 34%.
Third Quarter 2011 versus Third Quarter 2010
Net Sales by Segment:
Three Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Supply Technologies$124.8$103.9$20.920 %
Aluminum Products30.235.6(5.4)(15)%
Manufactured Products88.563.525.039 %
Consolidated Net Sales$243.5$203.0$40.520 %
Consolidated net sales increased $40.5 million in the third quarter of 2011 to $243.5 million compared to $203.0 million in the same quarter of 2010 substantially the result of volume increases in the Supply Technologies and Manufactured Products segments. Supply Technologies sales increased 20% primarily due to volume increases in the heavy-duty truck, electrical, industrial equipment, power sports, HVAC, agricultural and construction equipment industries offset by declines in the semi-conductor, instruments, medical and appliance industries. In addition, there were $5.9 million of incremental sales resulting from the acquisition of ACS. Aluminum Products sales decreased 15%, resulting primarily from the completion of certain automotive contracts. Manufactured Products sales increased 39% primarily due to increased business in the capital equipment and forged and machined products business units. In addition, there were $3.9 million of incremental sales resulting from the acquisition of Pillar.
Cost of Products Sold amp; Gross Profit:
Three Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Consolidated cost of products sold$201.7$168.0$33.720 %
Consolidated gross profit$41.8$35.0$6.819 %
Gross Margin17.2 %17.2 %
Cost of products sold increased $33.7 million to $201.7 million in the third quarter of 2011 compared to $168.0 million for the same quarter of 2010, while gross margin remained unchanged from 17.2% in the same quarter of 2010. The increase in cost of products sold was due primarily to higher sales levels and higher commodity prices offset by higher production levels which contributed to improved absorption of fixed costs in the Manufactured Products segment.
Supply Technologies and Manufactured Products gross margin increased primarily due to volume increases and product mix. Gross margin in the Aluminum Products segment decreased primarily from a lower sales volume and mix of products sold.
SGamp;A Expenses:
Three Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Consolidated SGamp;A expenses$26.2$22.2$4.018 %
SGamp;A percent10.8 %10.9 %
Consolidated SGamp;A expenses increased 18% in the third quarter of 2011 compared to the same quarter in 2010, representing a decrease in SGamp;A expenses as a percent of sales of 10 basis points from 10.9% to 10.8%. SGamp;A expenses increased in the third quarter of 2011 compared to the same quarter in 2010 primarily due to increases in payroll and payroll related expenses of $2.4 million and to $1.2 million of incremental expenses resulting from the acquisitions of ACS, Rome and Pillar.
Interest Expense:
Three Months
Ended
September 30,Percent
20112010ChangeChange
(Dollars in millions)
Interest expense$6.2$6.5$(.3)(5)%
Amortization of deferred
financing costs and bank service
charges$.3$.8
Average outstanding borrowings$347.8$315.9$31.910 %
Average borrowing rate6.79 %7.20 %(41) basis points
Interest expense decreased $.3 million in the third quarter of 2011 compared to the same period of 2010, primarily due to lower interest rates on the Companys revolving credit facility in 2011 offset by higher average outstanding borrowings in the third quarter of 2011 compared to the same period in 2010 and to lower amortization of deferred financing costs and bank service charges in the third quarter of 2011 compared to the same period in 2010.
Income Tax:
The provision for income taxes was $1.2 million in the third quarter of 2011 and the reported effective tax rate and the underlying effective tax rate on operations was 29%, compared to a provision for income taxes of $(1.2) million and a reported effective tax rate and underlying effective tax rate on operations of (23)% in the corresponding period of 2010. We estimate that our reported effective tax rate for full-year 2011 will be approximately 34%.
Liquidity and Sources of Capital
As of September 30, 2011, the Company had $91.2 million outstanding under the revolving credit facility, and approximately $74.0 million of unused borrowing availability.
Our liquidity needs are primarily for working capital and capital expenditures. Our primary sources of liquidity have been funds provided by operations and funds available from existing bank credit arrangements and the sale of debt securities. On April 7, 2011, the Company completed the sale of $250,000 aggregate principal amount of Notes. The Notes bear an interest rate of 8.125% per annum and will be payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2011. The Notes mature on April 1, 2021. In connection with the sale of the Notes, the Company also entered into the Amended Credit Agreement. The Amended Credit Agreement, among other things, provides an increased credit facility up to $200,000, extends the maturity date of the facility to April 7, 2016 and amends fee and pricing terms. Furthermore, the Company has the option, pursuant to the Amended Credit Agreement, to increase the availability under the revolving credit facility by $50,000. The Company also purchased all of its outstanding $183,835 aggregate principal amount of the Senior Subordinated Notes that were not held by its affiliates, repaid all of the term loan A and term loan B outstanding under its then existing credit facility and retired the Senior Subordinated Notes that were held by its affiliates.
Current financial resources (cash, working capital and available bank borrowing arrangements) and anticipated funds from operations are expected to be adequate to meet current cash requirements for at least the next twelve months. The future availability of bank borrowings under the revolving credit facility is based on the Companys ability to meet a debt service ratio covenant, which could be materially impacted by negative economic trends. Failure to meet the debt service ratio could materially impact the availability and interest rate of future borrowings.
The Company had cash and cash equivalents held by foreign subsidiaries of $63.0 million at September 30, 2011 and $33.7 million at December 31, 2010. For each of its foreign subsidiaries, the Company makes a determination regarding the amount of earnings intended for permanent reinvestment, with the balance, if any, available to be repatriated to the United States. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the foreign subsidiaries operational activities and/or future foreign investments. At September 30, 2011, management believed that sufficient liquidity was available in the United States, and it is our current intention to permanently reinvest undistributed earnings of our foreign subsidiaries outside of the United States. Although we have no intention to repatriate the approximately $65.4 million of undistributed earnings of our foreign subsidiaries as of December 31, 2010, if we were to repatriate these earnings, there would potentially be an adverse tax impact.
At September 30, 2011, the Companys debt service coverage ratio was 1.9, and, therefore, it was in compliance with the debt service coverage ratio covenant contained in the revolving credit facility. The Company was also in compliance with the other covenants contained in the revolving credit facility as of September 30, 2011. The debt service coverage ratio is calculated at the end of each fiscal quarter and is based on the most recently ended four fiscal quarters of consolidated EBITDA minus cash taxes paid, minus unfunded capital expenditures, plus cash tax refunds to consolidated debt charges that are consolidated cash interest expense plus scheduled principal payments on indebtedness plus scheduled reductions in our term debt as defined in the revolving credit facility. If the Companys aggregate availability under its revolving credit facility is less than $25,000, the debt service coverage ratio must be greater than 1.0 and not less than 1.1 for any two consecutive fiscal quarters. While we expect to remain in compliance throughout 2011, declines in sales volumes in 2011 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 not be able to pay their accounts payable to us on a timely basis or at all, which would make the 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 ratio of current assets to current liabilities was 2.38 at September 30, 2011 versus 2.28 at December 31, 2010. Working capital increased by $51.2 million to $270.4 million at September 30, 2011 from $219.2 million at December 31, 2010. Accounts receivable increased $18.5 million to $144.9 million at September 30, 2011 from $126.4 million at December 31, 2010 primarily resulting from sales volume increases. Inventory increased by $16.1 million at September 30, 2011 to $208.6 million from $192.5 million at December 31, 2010, primarily resulting from planned increases due to sales volume increases. Accrued expenses increased by $18.0 million to $77.5 million at September 30, 2011 from $59.5 million at December 31, 2010, primarily resulting from the terms of the payments of interest due on the Notes. Accounts payable increased $19.8 million to $115.5 million at September 30, 2011 from $95.7 million at December 31, 2010, resulting from an increase in inventory and vendor payment term extensions.
During the first nine months of 2011, the Company provided $26.1 million from operating activities compared to $49.7 million in the same period of 2010. The decrease in the operating cash provision of $23.6 million in 2011 compared to 2010 was primarily the result of an increase in operating assets and liabilities and a decrease in net income. In the first nine months of 2011, the Company used cash of $9.5 million for capital expenditures. These activities, plus cash interest and tax payments of $12.9 million, a net increase in borrowings of $35.1 million and purchase of treasury stock of $.6 million, resulted in an increase in cash of $35.3 million in the first nine months of 2011.
We do not have off-balance sheet arrangements, financing or other relationships with unconsolidated entities or other persons. There are occasions whereupon we enter into forward contracts on foreign currencies, purely for the purpose of hedging exposure to changes in the value of accounts receivable in those currencies against the US dollar. At September 30, 2011, none were outstanding. We currently have no other derivative instruments.
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 business units. Such variability is particularly evident at the capital equipment businesses, included in the Manufactured Products segment, which typically ship a few large systems per year.
Forward-Looking Statements
This Form 10-Q contains certain statements that are forward-looking statements . . .
Nov 09, 2011
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