Park-Ohio Holdings Corp 2026 Q2 Earnings Call

Good morning to everyone. We're pleased to report a solid second quarter performance, which included a number of record or near-record financial performance metrics. More important is the continued success of our transformation efforts to become a business driven by organic growth in our most durable products and services. This transformation has and will continue to provide increased operating leverage as well as improved margin and cash flow performance. Additionally, we are positioned to increase our expectations for 2026 performance as we gain deeper visibility into what is not only a stable and growing industrial economy, but one that also appears to continue to broaden out from some of the drivers of growth over the past several quarters, most notably electrical infrastructure, data center, as well as aerospace and defense.

As it relates to our transformation, we continue to invest in productivity tools across the business and believe we are in the early innings of seeing these benefits both in operating expense reduction and reduced investment per dollar of revenue growth. Examples include more robust data management tools, facility optimization and automation investments, and importantly, infrastructure enhancements, particularly in the Engineered Products segment, where we continue to see consistently increased order and backlog activity across end markets, but particularly in defense and electric power-related. I want to thank all of our global associates for their commitment to operating excellence and their participation in the transformational work we are undergoing. I'll turn it over to Pat to review the second quarter results.

Thanks, Matt. Overall, our strong second quarter results exceeded our expectations and were highlighted by record consolidated revenues of $440 million, record revenues in both our Supply Technologies and Engineered Products segments, and continued sales growth in our Assembly Components segment. Also, we continue to see strong demand across most of our key end markets, including semiconductor, aerospace and defense, AI data center, electrical steel, heavy-duty truck, oil and gas, and power sports. The strong performance in our Engineered Products segment resulted from strong new equipment and aftermarket demand in many end markets and improved results from our Forged and Machined Products business. Finally, gross margin of 17.9% increased 90 basis points from a year ago, and operating income increased 22% year-over-year.

Based on our record sales in the first half of the year, continued strong end market demand in Supply Technologies, strong backlogs in Engineered Products, and ongoing operational improvements across several businesses, we are raising our full year 2026 guidance as follows. We are increasing net sales guidance to $1.7 billion-$1.73 billion. We are increasing adjusted EPS guidance to $3.10-$3.30 per diluted share. We are increasing EBITDA as defined guidance to a range of 8.5%-9%, and we are maintaining our previous guidance of free cash flow of $20 million-$30 million. Turning now to the details of our second quarter results. Total sales in the quarter were $440 million compared to $400 million a year ago, an increase of 10%. Sequentially compared to last quarter's, total sales were up 5%.

Sales in each business segment increased year-over-year and also increased sequentially, resulting from strong demand for most key end markets. Our year-over-year consolidated gross margin improvement of 90 basis points and the increased operating income increase of 22% were driven by margin flow-through from the record sales levels and profit enhancement initiatives implemented across several of our businesses. SG&A expenses in the quarter were approximately $53 million, or 12.1% of sales, compared to 11.7% of sales a year ago. The increase was driven primarily by general inflation, increases in personnel costs, and support for the higher sales levels. Second quarter interest expense of $12.3 million was $1.1 million higher than last year, due primarily to the higher interest rate on our senior secured notes that we refinanced in the third quarter of last year.

This increase was partially offset by lower interest rates on our revolving credit facility during the quarter. Our effective income tax rate was approximately 17% in quarter. The favorable effective tax rate year-to-date was driven by federal research & development tax credit benefits estimated for the year. We expect our full-year effective income tax rate to range between 17% and 20%. GAAP earnings per share for the quarter increased 30% year-over-year to $0.87 per diluted share. On an adjusted basis, earnings per share increased 24% to $0.93 per share compared to $0.75 in the second quarter of last year. During the quarter, cash flow from operations was $9 million, an improvement of $23 million compared to a year ago. The cash flow improvement was due to higher income levels and our ongoing efforts to reduce working capital in each business.

Capital spending totaled $11 million in the quarter, which included investments in information systems, automation equipment, which will drive improved plant floor efficiencies, and growth capital. We expect our full-year CapEx to be approximately $35 million-$40 million. Our liquidity continues to be strong and totaled approximately $189 million at the end of the quarter, which consisted of $48 million of cash on hand and $141 million of unused borrowing capacity under our various banking arrangements. Turning now to our segment results. In Supply Technologies, net sales increased 12% and totaled a record $209 million during the quarter, compared to $187 million in the second quarter of last year. Higher sales were driven by strong customer demand in most key end markets, including semiconductor, AI data center, powersports, aerospace & defense, heavy-duty truck, and agricultural and industrial equipment end markets.

Our supply chain business continues to benefit from increasing demand in the semiconductor, electrical, and AI data center sectors, which in total increased 29% year-over-year. In response to the growing demand trends in these interrelated end markets, we are expanding our global service center footprint in support of key customers and the expected demand for our supply chain services over the next several years. In addition, aerospace & defense demand continues to be strong and increased 10% during the quarter. Segment operating income in the second quarter was $19 million, an increase of 13% year-over-year, and operating margins were 8.8% compared to 8.7% a year ago. We continue to be on track to open our new state-of-the-art North American distribution center in the third quarter of this year.

We are confident that this facility will be a best-in-class service center operation with automated sorting and kitting and additional value-added services for our customers. We expect to see the margin benefits of this strategic investment beginning in 2027. Our faster manufacturing business performed well in the quarter as net sales grew 6% year-over-year. Global customer demand for our proprietary products continues to grow, resulting from the expanded use of lightweight materials and increased global production of EV and hybrid vehicles. In our Assembly Components segment, sales for the quarter totaled $101 million compared to $95 million a year ago, an increase of 7%, driven by new product sales launched last year in each product line and higher customer demand from various automotive platforms. Segment operating income totaled $5.3 million compared to $5.6 million last year and increased from $4.9 million last quarter.

We continue to focus on improving operating margins in this segment through improved margin flow-through from revenue growth from new programs as well as through profit enhancement initiatives. Several operating initiatives, such as increasing our rubber mixing production to support sales growth in our molded and extruded products and plant floor automation investments, are expected to improve operating margins. In our Engineered Products segment, sales were a record $129 million, up 10% compared to last year and up 3% compared to last quarter. The increase in sales was driven primarily by sales of aftermarket parts and services and strong new equipment backlogs in our Industrial Equipment Group, as well as higher sales in our Forged and Machine Products Group, which were up 25% year-over-year. New equipment bookings totaled $66 million.

Year to date, new equipment bookings totaled $153 million compared to $129 million for the same period last year, an increase of 19%. Our equipment backlog at the end of the second quarter increased 23% to $252 million compared to $205 million at the end of last year. The increased capital equipment sales in the quarter were driven by strong customer demand in several end markets including defense, electrical steel processing, oil and gas, agriculture, AI data center, and semiconductor markets. Both our industrial equipment and forging businesses continue to experience strong demand from both defense and AI data center-related sectors. We provide several products in support of these growing end markets, including transformer systems for IT equipment, induction furnaces for electrical steel processing, forgings for industrial turbines and various military applications, generators for emergency power, and various induction equipment used by data center cooling systems and for military applications.

Forging presses used to produce munitions for military use. During the quarter, segment operating income improved 50% to $9 million, compared to $6 million both a year ago and sequentially last quarter. The improved operating income resulted from strong sales in the quarter and improved operating performance across many locations, including our forged product locations. Finally, as we announced last quarter, as part of our ongoing portfolio optimization strategy, we engaged an investment banking firm to assist us with a formal review of strategic alternatives for our Southwest Steel Processing business, including a potential sale or other transaction. SSP is part of our Engineered Products segment. This review reflects our continued focus on aligning capital and resources toward higher growth, higher margin opportunities across our portfolio. We expect the process to be completed toward the end of this year.