10-Q 1 pkoh20190930-10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-03134
Park-Ohio Holdings Corp.
(Exact name of registrant as specified in its charter)
Ohio
 
34-1867219
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
6065 Parkland Boulevard, Cleveland, Ohio
 
44124
(Address of principal executive offices)
 
(Zip Code)
(440) 947-2000
(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






1


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.

2


Park-Ohio Holdings Corp. and Subsidiaries

Index

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. Financial Information 
Item 1.
Financial Statements
Park-Ohio Holdings Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
 
(Unaudited)
 
 
 
September 30,
2019
 
December 31,
2018
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
49.8

 
$
55.7

Accounts receivable, net
285.3

 
264.4

Inventories, net
324.0

 
317.8

Prepaid and other current assets
87.1

 
82.7

Total current assets
746.2

 
720.6

Property, plant and equipment, net
233.3

 
219.4

Operating lease right-of-use assets
62.6

 

Goodwill
107.1

 
103.4

Intangible assets, net
90.4

 
95.3

Other long-term assets
79.4

 
69.8

Total assets
$
1,319.0

 
$
1,208.5

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 
 
 
Trade accounts payable
$
184.0

 
$
177.8

Current portion of long-term debt and short-term debt
16.0

 
17.9

Current portion of operating lease liabilities
11.7

 

Accrued expenses and other
107.8

 
103.2

Total current liabilities
319.5

 
298.9

Long-term liabilities, less current portion:
 
 
 
Debt
559.4

 
547.5

Long-term operating lease liabilities
52.3

 

Other long-term liabilities
54.3

 
49.5

Total long-term liabilities
666.0

 
597.0

Park-Ohio Holdings Corp. and Subsidiaries shareholders' equity
319.6

 
299.0

Noncontrolling interests
13.9

 
13.6

Total equity
333.5

 
312.6

Total liabilities and shareholders' equity
$
1,319.0

 
$
1,208.5


Refer to the accompanying notes to these unaudited condensed consolidated financial statements.

3


Park-Ohio Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except per share data)
Net sales
$
403.4

 
$
414.3

 
$
1,238.8

 
$
1,252.2

Cost of sales
336.9

 
348.4

 
1,040.8

 
1,048.1

Gross profit
66.5

 
65.9

 
198.0

 
204.1

Selling, general and administrative expenses
42.7

 
41.1

 
132.4

 
131.9

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

Income tax expense
(4.2
)
 
(3.2
)
 
(12.3
)
 
(14.5
)
Net income
12.4

 
14.7

 
32.0

 
39.9

Net income attributable to noncontrolling interests
(0.2
)
 
(0.5
)
 
(1.0
)
 
(1.1
)
Net income attributable to Park-Ohio Holdings Corp. common shareholders
$
12.2

 
$
14.2

 
$
31.0

 
$
38.8

 
 
 
 
 
 
 
 
Earnings per common share attributable to Park-Ohio Holdings Corp. common shareholders:
 
 
 
 
 
 
 
Basic
$
1.00

 
$
1.15

 
$
2.54

 
$
3.15

Diluted
$
0.99

 
$
1.14

 
$
2.51

 
$
3.09

Weighted-average shares used to compute earnings per share:
 
 
 
 
 
 
 
Basic
12.2

 
12.3

 
12.2

 
12.3

Diluted
12.3

 
12.5

 
12.4

 
12.5


Refer to the accompanying notes to these unaudited condensed consolidated financial statements.


4


Park-Ohio Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Net income
$
12.4

 
$
14.7

 
$
32.0

 
$
39.9

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Currency translation
(9.1
)
 
(2.7
)
 
(10.9
)
 
(8.9
)
Pension and other postretirement benefits
0.5

 
0.1

 
6.2

 
1.5

Total other comprehensive loss
(8.6
)
 
(2.6
)
 
(4.7
)
 
(7.4
)
Total comprehensive income, net of tax
3.8

 
12.1

 
27.3

 
32.5

Comprehensive income attributable to noncontrolling interests
(0.2
)
 
(0.5
)
 
(1.0
)
 
(1.1
)
Comprehensive income attributable to Park-Ohio Holdings Corp. common shareholders
$
3.6

 
$
11.6

 
$
26.3

 
$
31.4


Refer to the accompanying notes to these unaudited condensed consolidated financial statements.


5


Park-Ohio Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total
 
(In whole shares)
 
(In millions)
Balance at January 1, 2019
15,555,275

 
$
15.6

 
$
125.7

 
$
265.9

 
$
(67.3
)
 
$
(40.9
)
 
$
13.6

 
$
312.6

Other comprehensive income

 

 

 
11.2

 

 
6.0

 
0.5

 
17.7

Stock-based compensation expense

 

 
1.9

 

 

 

 

 
1.9

Stock-based compensation activity
38,000

 

 

 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 
(0.3
)
 
(1.9
)
Payments of withholding taxes on share awards

 

 

 

 
(1.0
)
 

 

 
(1.0
)
Balance at March 31, 2019
15,593,275

 
15.6

 
127.6

 
275.5

 
(68.3
)
 
(34.9
)
 
13.8

 
329.3

Other comprehensive income

 

 

 
7.6

 

 
(2.1
)
 
0.3

 
5.8

Stock-based compensation expense

 

 
(0.2
)
 

 

 

 

 
(0.2
)
Stock-based compensation activity
(75,550
)
 
(0.1
)
 
0.1

 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 
(0.4
)
 
(2.0
)
Purchases of treasury stock (27,069)

 

 

 

 
(0.9
)
 

 

 
(0.9
)
Payments of withholding taxes on share awards

 

 

 

 
(1.8
)
 

 

 
(1.8
)
Balance at June 30, 2019
15,517,725

 
15.5

 
127.5

 
281.5

 
(71.0
)
 
(37.0
)
 
13.7

 
330.2

Other comprehensive income

 

 

 
12.2

 

 
(8.6
)
 
0.2

 
3.8

Stock-based compensation expense

 

 
1.1

 

 

 

 

 
1.1

Stock-based compensation activity
13,000

 

 

 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 

 
(1.6
)
Balance at September 30, 2019
15,530,725

 
$
15.5

 
$
128.6

 
$
292.1

 
$
(71.0
)
 
$
(45.6
)
 
$
13.9

 
$
333.5


6


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive (Loss) Income
 
Noncontrolling Interest
 
Total
 
(In whole shares)
 
(In millions)
Balance at January 1, 2018
15,153,009

 
$
15.2

 
$
117.8

 
$
216.1

 
$
(55.2
)
 
$
(17.9
)
 
$
12.0

 
$
288.0

Other comprehensive income

 

 

 
9.8

 

 
5.5

 
0.4

 
15.7

Stock-based compensation expense

 

 
2.2

 

 

 

 

 
2.2

Stock-based compensation activity
12,000

 

 

 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 

 
(1.6
)
Purchases of treasury stock (26,917 shares)

 

 

 

 
(1.1
)
 

 

 
(1.1
)
Payments of withholding taxes on share awards

 

 

 

 
(1.0
)
 

 

 
(1.0
)
Adoption of ASU 2014-09

 

 

 
2.6

 

 

 

 
2.6

Balance at March 31, 2018
15,165,009

 
15.2

 
120.0

 
226.9

 
(57.3
)
 
(12.4
)
 
12.4

 
304.8

Other comprehensive income

 

 

 
14.8

 

 
(10.3
)
 
0.2

 
4.7

Stock-based compensation expense

 

 
2.4

 

 

 

 

 
2.4

Stock-based compensation activity
386,450

 
0.4

 
(0.4
)
 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 

 
(1.6
)
Payments of withholding taxes on share awards

 

 

 

 
(2.0
)
 

 

 
(2.0
)
Balance at June 30, 2018
15,551,459

 
15.6

 
122.0

 
240.1

 
(59.3
)
 
(22.7
)
 
12.6

 
308.3

Other comprehensive income

 

 

 
14.2

 

 
(2.6
)
 
0.5

 
12.1

Stock-based compensation expense

 

 
1.9

 

 

 

 

 
1.9

Stock-based compensation activity
5,650

 

 

 

 

 

 

 

Dividends

 

 

 
(1.6
)
 

 

 

 
(1.6
)
Purchases of treasury stock (123,504 shares)

 

 

 

 
(5.0
)
 

 

 
(5.0
)
Payments of withholding taxes on share awards

 

 

 

 
(0.1
)
 

 

 
(0.1
)
Balance at September 30, 2018
15,557,109

 
$
15.6

 
$
123.9

 
$
252.7

 
$
(64.4
)
 
$
(25.3
)
 
$
13.1

 
$
315.6


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Dividends per common share
$
0.125

 
$
0.125

 
$
0.375

 
$
0.375

Refer to the accompanying notes to these unaudited condensed consolidated financial statements.

7


Park-Ohio Holdings Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
 
(In millions)
OPERATING ACTIVITIES
 
 
 
Net income
$
32.0

 
$
39.9

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
25.5

 
27.3

Stock-based compensation expense
2.8

 
6.5

Net impact of Tax Cuts and Jobs Act ("TCJA")

 
0.3

Gain on sale of assets

 
(1.9
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(20.6
)
 
(37.2
)
Inventories
(6.8
)
 
(23.2
)
Prepaid and other current assets
(3.0
)
 
(9.8
)
Accounts payable and accrued expenses
5.4

 
26.0

Other
(1.8
)
 
(6.1
)
Net cash provided by operating activities
33.5

 
21.8

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(31.6
)
 
(35.9
)
Proceeds from sale of assets

 
2.8

Business acquisitions, net of cash acquired
(8.1
)
 
(36.8
)
Net cash used by investing activities
(39.7
)
 
(69.9
)
FINANCING ACTIVITIES
 
 
 
Proceeds from revolving credit facility, net
20.9

 
48.3

Payments on term loans and other debt
(7.3
)
 
(2.8
)
Proceeds from term loans and other debt
1.8

 
2.2

Payments on finance lease facilities, net
(5.0
)
 
(3.5
)
Dividends
(5.5
)
 
(4.8
)
Purchase of treasury shares
(0.9
)
 
(6.1
)
Payments of withholding taxes on share awards
(2.8
)
 
(3.1
)
Net cash provided by financing activities
1.2

 
30.2

Effect of exchange rate changes on cash
(0.9
)
 
(2.0
)
Decrease in cash and cash equivalents
(5.9
)
 
(19.9
)
Cash and cash equivalents at beginning of period
55.7

 
82.8

Cash and cash equivalents at end of period
$
49.8

 
$
62.9

Interest paid
$
18.5

 
$
19.0

Income taxes paid
$
11.0

 
$
14.8


Refer to the accompanying notes to these unaudited condensed consolidated financial statements.

8


Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

NOTE 1 — Basis of Presentation

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. 

Recent Accounting Pronouncements Not Yet Adopted


9

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019


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.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
PRODUCT LINE
 
 
 
 
 
 
 
Supply Technologies
$
128.2

 
$
135.0

 
$
413.9

 
$
419.9

Engineered specialty fasteners and other products
20.4

 
20.1

 
61.5

 
62.3

Supply Technologies Segment
148.6

 
155.1

 
475.4

 
482.2

 
 
 
 
 
 
 
 
Fuel, rubber and plastic products
91.1

 
95.2

 
271.8

 
294.3

Aluminum products
44.8

 
50.9

 
138.7

 
150.4

Assembly Components Segment
135.9

 
146.1

 
410.5

 
444.7

 
 
 
 
 
 
 
 
Industrial equipment
81.4

 
76.0

 
242.8

 
228.9

Forged and machined products
37.5

 
37.1

 
110.1

 
96.4

Engineered Products Segment
118.9

 
113.1

 
352.9

 
325.3

 
 
 
 
 
 
 
 
Total revenues
$
403.4

 
$
414.3

 
$
1,238.8

 
$
1,252.2


10

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019


 
Supply Technologies Segment
 
Assembly Components Segment
 
Engineered Products Segment
 
Total Revenues
 
(In millions)
Three Months Ended September 30, 2019
 
 
 
 
 
 
 
GEOGRAPHIC REGION
 
 
 
 
 
 
 
United States
$
98.2

 
$
92.5

 
$
69.2

 
$
259.9

Europe
23.3

 
2.9

 
16.0

 
42.2

Asia
9.6

 
6.0

 
17.8

 
33.4

Mexico
13.7

 
12.6

 
4.1

 
30.4

Canada
3.1

 
21.5

 
6.4

 
31.0

Other
0.7

 
0.4

 
5.4

 
6.5

Total
$
148.6

 
$
135.9

 
$
118.9

 
$
403.4

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
GEOGRAPHIC REGION
 
 
 
 
 
 
 
United States
$
101.3

 
$
103.9

 
$
65.8

 
$
271.0

Europe
23.7

 
1.5

 
17.7

 
42.9

Asia
12.5

 
8.4

 
18.0

 
38.9

Mexico
13.4

 
9.5

 
1.9

 
24.8

Canada
3.4

 
22.3

 
6.3

 
32.0

Other
0.8

 
0.5

 
3.4

 
4.7

Total
$
155.1

 
$
146.1

 
$
113.1

 
$
414.3


11

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019


 
Supply Technologies Segment
 
Assembly Components Segment
 
Engineered Products Segment
 
Total Revenues
 
(In millions)
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
GEOGRAPHIC REGION
 
 
 
 
 
 
 
United States
$
319.2

 
$
291.2

 
$
205.2

 
$
815.6

Europe
74.0

 
11.0

 
56.8

 
141.8

Asia
30.4

 
15.2

 
48.5

 
94.1

Mexico
40.8

 
32.2

 
10.5

 
83.5

Canada
9.6

 
59.7

 
20.6

 
89.9

Other
1.4

 
1.2

 
11.3

 
13.9

Total
$
475.4

 
$
410.5

 
$
352.9

 
$
1,238.8

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
GEOGRAPHIC REGION
 
 
 
 
 
 
 
United States
$
315.1

 
$
315.0

 
$
185.4

 
$
815.5

Europe
75.3

 
3.9

 
56.8

 
136.0

Asia
39.6

 
24.9

26,600,000

44.6

 
109.1

Mexico
41.1

5,000,000

26.1

 
13.4

 
80.6

Canada
10.2

 
73.6

 
17.2

 
101.0

Other
0.9

 
1.2

 
7.9

 
10.0

Total
$
482.2

 
$
444.7

 
$
325.3

 
$
1,252.2




NOTE 4 — Segments

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.

Results by business segment were as follows:

12

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Net sales:
 
 
 
 
 
 
 
Supply Technologies
$
148.6

 
$
155.1

 
$
475.4

 
$
482.2

Assembly Components
135.9

 
146.1

 
410.5

 
444.7

Engineered Products
118.9

 
113.1

 
352.9

 
325.3

 
$
403.4

 
$
414.3

 
$
1,238.8

 
$
1,252.2

Segment operating income:
 
 
 
 
 
 
 
Supply Technologies
$
10.0

 
$
11.3

 
$
34.4

 
$
37.3

Assembly Components
10.4

 
9.3

 
27.0

 
33.6

Engineered Products
10.3

 
12.2

 
29.9

 
27.4

Total segment operating income
30.7

 
32.8

 
91.3

 
98.3

Corporate costs
(6.9
)
 
(8.0
)
 
(21.4
)
 
(26.1
)
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:

13

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

 
(In millions)
Net working capital
$
0.1

Property, plant and equipment
2.9

Intangible assets
1.5

Goodwill
5.5

Deferred income tax liabilities
(0.9
)
    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.

NOTE 6 — Inventories

Inventories, net consist of the following:
 
September 30, 2019
 
December 31, 2018
 
(In millions)
Raw materials and supplies
$
91.1

 
$
85.0

Work in process
48.7

 
48.9

Finished goods
182.2

 
182.0

LIFO reserve
2.0

 
1.9

Inventories, net
$
324.0

 
$
317.8



14

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

NOTE 7 — Accrued Warranty Costs

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:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Beginning balance
$
7.1

 
$
7.9

 
$
6.2

 
$
7.9

Claims paid
(1.0
)
 
(0.9
)
 
(2.6
)
 
(3.4
)
Warranty expense
1.3

 
0.3

 
3.8

 
2.8

Ending balance
$
7.4

 
$
7.3

 
$
7.4

 
$
7.3


NOTE 8 — Income Taxes

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.

NOTE 9 — Financing Arrangements

Debt consists of the following:

 
 
 
 
 
 
Carrying Value at
 
 
Maturity Date
 
Interest Rate at
September 30, 2019
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
 
(In millions)
Senior Notes
 
April 15, 2027
 
6.625
%
 
$
350.0

 
$
350.0

Revolving credit facility
 
April 17, 2022
 
3.30
%
 
185.7

 
165.1

Industrial Equipment Group European Facilities
 
December 21, 2021
 
3.25
%
 
7.2

 
12.6

Finance Leases
 
Various
 
Various

 
15.7

 
20.7

Other
 
Various
 
Various

 
23.5

 
24.7

Gross debt
 
 
 
 
 
582.1

 
573.1

Less current portion of long-term and short-term debt
 
 
 
 
 
(16.0
)
 
(17.9
)
Less unamortized debt issuance costs
 
 
 
 
 
(6.7
)
 
(7.7
)
Total long-term debt, net
 
 
 
 
 
$
559.4

 
$
547.5


15

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019



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.

 
September 30, 2019
 
December 31, 2018
 
(In millions)
Carrying amount
$
350.0

 
$
350.0

Fair value
$
348.3

 
$
345.8


NOTE 10 — Leases

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.


16

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

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.

Balance Sheet as of September 30, 2019
 
Classification on the Balance Sheet
September 30, 2019
Assets
 
(in millions)
Operating lease assets
Operating lease right-of-use assets
$
62.6

Finance lease assets
Property, plant and equipment, net
24.7

Total lease assets
 
$
87.3

 
 
 
Liabilities
 
 
Current
 
 
Operating
Current portion of operating lease liabilities
$
11.7

Finance
Current portion of long-term debt and short-term debt
6.7

Noncurrent
 
 
Operating
Long-term operating lease liabilities
52.3

Finance
Debt
9.0

Total lease liabilities
 
$
79.7

 
 
 
Weighted-average remaining lease term (in years)
 
Operating leases
 
7.0

Finance leases
 
3.9

Weighted-average discount rate
 
Operating leases
 
5.3
%
Finance leases
 
3.8
%

Lease Expense for the three and nine months ended September 30, 2019

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.
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Finance lease expense
(in millions)
Amortization of right-of-use assets
$
0.9

 
$
2.7

Interest on lease liabilities
0.2

 
0.5

Operating lease expense
4.3

 
13.4

Other lease expense(1)
1.8

 
4.2

Total lease expense
$
7.2

 
$
20.8

 
 
 
 
(1) - Other lease expense includes variable lease costs and short-term lease costs.

Total lease expense for the three and nine months ended September 30, 2018 was $7.0 million and $20.0 million, respectively.

Cash Flow Information

17

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

 
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
(in millions)
Operating cash flows for operating leases
$
13.2

Operating cash flows for finance leases
$
0.5

Financing cash flows for finance leases
$
5.0


Maturities of Lease Liabilities

 
September 30, 2019
 
Operating Leases
 
Finance Leases
 
(in millions)
Remainder of 2019
$
3.9

 
$
1.9

2020
14.2

 
6.5

2021
11.7

 
3.3

2022
9.8

 
2.2

2023
8.6

 
1.4

Thereafter
28.0

 
1.6

Total lease payments
76.2

 
16.9

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

18

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

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:

 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Service costs
$
1.0

 
$
0.9

 
$
2.8

 
$
2.9

 
$

 
$

 
$

 
$

Interest costs
0.6

 
0.6

 
1.9

 
1.7

 
0.1

 
0.1

 
0.2

 
0.2

Expected return on plan assets
(2.8
)
 
(2.9
)
 
(8.2
)
 
(8.7
)
 

 

 

 

Recognized net actuarial loss
0.5

 
0.1

 
1.6

 
0.3

 

 

 
0.1

 

Net periodic benefit (income) expense
$
(0.7
)
 
$
(1.3
)
 
$
(1.9
)
 
$
(3.8
)
 
$
0.1

 
$
0.1

 
$
0.3

 
$
0.2

Weighted average:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount rate for projected benefit obligation
 
 
 
 
4.11
%
 
3.52
%
 
 
 
 
 
4.06
%
 
3.32
%
Discount rate for interest cost
 
 
 
 
3.72
%
 
3.10
%
 
 
 
 
 
3.72
%
 
2.89
%
Discount rate for service cost
 
 
 
 
4.14
%
 
3.57
%
 
 
 
 
 
4.34
%
 
3.70
%
Expected return on plan assets
 
 
 
 
8.25
%
 
8.25
%
 
 
 
 
 
 
 
 

NOTE 13 — Accumulated Other Comprehensive Loss

The components of and changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2019 and 2018 were as follows:

 
Cumulative Translation Adjustment
 
Pension and Postretirement Benefits
 
Total
 
Cumulative Translation Adjustment
 
Pension and Postretirement Benefits
 
Total
 
(In millions)
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
Beginning balance
$
(23.1
)
 
$
(13.9
)
 
$
(37.0
)
 
$
(17.8
)
 
$
(4.9
)
 
$
(22.7
)
Currency translation (a)
(9.1
)
 

 
(9.1
)
 
(2.7
)
 

 
(2.7
)
Pension and OPEB activity, net of tax

 
0.5

 
0.5

 

 
0.1

 
0.1

Ending balance
$
(32.2
)
 
$
(13.4
)
 
$
(45.6
)
 
$
(20.5
)
 
$
(4.8
)
 
$
(25.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
Beginning balance
$
(21.3
)
 
$
(19.6
)
 
$
(40.9
)
 
$
(11.6
)
 
$
(6.3
)
 
$
(17.9
)
Currency translation (a)
(10.9
)
 

 
(10.9
)
 
(8.9
)
 

 
(8.9
)
Pension and OPEB activity, net of tax

 
6.2

 
6.2

 

 
1.5

 
1.5

Ending balance
$
(32.2
)
 
$
(13.4
)
 
$
(45.6
)
 
$
(20.5
)
 
$
(4.8
)
 
$
(25.3
)

(a)
No income taxes were provided on currency translation as foreign earnings are considered permanently reinvested.


19

Park-Ohio Holdings Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019

NOTE 14 — Weighted-Average Number of Shares Used in Computing Earnings Per Share

The following table sets forth the weighted-average number of shares used in the computation of earnings per share:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
Weighted average basic shares outstanding
12.2

 
12.3

 
12.2

 
12.3

Plus: Dilutive impact of employee stock awards
0.1

 
0.2

 
0.2

 
0.2

Weighted average diluted shares outstanding
12.3

 
12.5

 
12.4

 
12.5


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.





20


Item 2.
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.

RESULTS OF OPERATIONS


21


Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

 
Three Months Ended September 30,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
(Dollars in millions, except per share data)
Net sales
$
403.4

 
$
414.3

 
$
(10.9
)
 
(2.6
)%
Cost of sales
336.9

 
348.4

 
(11.5
)
 
(3.3
)%
Gross profit
66.5

 
65.9

 
0.6

 
0.9
 %
Gross margin
16.5
%
 
15.9
%
 
 
 
 
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