Good morning, and welcome to the Park Ohio Third Quarter 2022 Results Conference Call. At this time, all participants are in a listen only mode. After the presentation, the company will conduct a question and answer session. Today's conference is also being recorded. If you have any objections, you may disconnect at this time.
Before we get started, I want to remind everyone that certain statements Made on today's call may be forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. A list of relevant risks and uncertainties may be found in the earnings press release as well as the company's 2021 10 ks, which was filed on March 16, 2022 with the SEC. Additionally, the company may discuss adjusted EPS and EBITDA as defined. Adjusted EPS and EBITDA as defined are not measures of performance under generally accepted accounting principles.
For a reconciliation of EPS to adjusted EPS For a reconciliation of net income attributable to Park Ohio common shareholders to EBITDA as If signed, please refer to the company's recent earnings release. I will now turn the conference over to Mr. Matthew Crawford, Chairman, President and CEO. Please proceed, Mr. Crawford.
Thank you, and thank you all for joining the call this morning. Generally, we're pleased with the results during the quarter as we continue to see strong activity across our business and increasing consolidated earnings momentum. The 22% increase in sales was driven by Strong customer demand across most end markets, ongoing new business activity and increasing demand in some markets which have trailed during the last several years, namely rail, aerospace and oil and gas. Earnings have been slower to respond, but our results show continued improvement As a result of price adjustments, operating leverage, key investments which lower our operating costs and now the largely completed cycle of restructuring, which resized or closed 14 global locations without any significant customer attrition. While we see no notable weakness in our demand forecast at this time, the ongoing Fed tightening cycle will continue to introduce demand risk into our forecast.
Despite this, we are buoyed by several factors. First, many of our customers have had their production constrained by freight, Supply chain and or labor issues. Regardless of end customer demand, we anticipate some amount of restocking at many of these production sites. 2nd, we continue to see record backlogs in our Engineered Products Group as we benefit from trends in infrastructure investments or reshoring. 3rd, we anticipate that any slowing in growth will provide us the opportunity to capitalize even more on the investments we have made to drive value and performance in our business.
Lastly, while the effects of COVID on labor and supply chains continues to linger, we'll begin to Pivot toward the additional focus of our balance sheet and harvesting some of the significant cash investments we made during the last couple of years to protect our valued customers. With that, I'll turn it over to Pat to cover the quarter.
Thank you, Matt. Our Q3 results reflect continued improvement in most parts of our business. First of all, we achieved record consolidated sales totaling $436,000,000 an increase of 22% year over year. End market demand was strong across each of our business segments. Sales in our Supply Technologies segment were again at record levels during the quarter and sales in Assembly Components and Engineered Products segment Grew 27% 15%, respectively, compared to the Q3 a year ago.
During the quarter, adjusted operating income and EBITDA improved both year over year and sequentially as a result of the strong end market demand, increased customer pricing and the impact of restructuring efforts implemented throughout our businesses. As a result, we generated positive operating cash flows during the quarter And we expect continued improvement in free cash flow for the remainder of the year. Our gross margins in the quarter were 11.6 percent compared to 11.2% last year. On an adjusted basis, our gross margins were 12.2% in the current quarter, An increase of 50 basis points year over year. The current inflationary environment has impacted our gross margins and has caused higher raw material, labor and operating costs in every aspect of our business.
We have been successful obtaining new pricing on many of our products And we'll continue to actively pursue price increases with our customers to offset these higher costs. SG and A expenses were $43,000,000 compared to $45,000,000 a year ago. As a percentage of net sales, SG and A Interest expense totaled $9,600,000 compared to $7,600,000 a year ago with the increase driven by higher interest rates on our revolving Credit facility compared to a year ago as well as higher average borrowings driven by the acquisitions we completed during the quarter and working capital needed to support the significantly higher sales levels. For the quarter, we recorded an income tax benefit of 3 which included discrete tax benefits totaling $2,400,000 or $0.19 per share related to increased federal research and development which we expect to realize in the future. Our GAAP EPS for the quarter was 0 point $5,000,000 of one time charges related primarily to plant closure and consolidation costs improved to $0.52 per share in the quarter.
Currency fluctuations negatively impacted our results by $0.03 per diluted share during the quarter. Operating cash flow in the Q3 was a positive $7,000,000 compared to a use of $38,000,000 in the 1st 6 months of the year. The positive cash flows in the 3rd quarter were driven by improved profitability and reduced levels of working capital required during the quarter. As we have stated on previous calls, supply chain challenges coupled with strong end market demand has resulted in additional investments and working capital compared to historical levels. We estimate the additional investments in working capital approximate $60,000,000 which will convert to cash over the next 12 to 18 months as working capital returns to normalized levels.
Our focus on increasing free cash flows in each of our business units is expected to reduce bank debt by $10,000,000 to $15,000,000 during the Q4. EBITDA as defined more than doubled year over year, improving to almost $29,000,000 from $13,000,000 a year ago And $25,000,000 last quarter. CapEx in the quarter year to date totaled $8,000,000 $24,000,000 respectively. We continue to expect our full year CapEx to approximate $30,000,000 to $32,000,000 Our liquidity at the end of the 3rd quarter was $164,000,000 which consisted of $54,000,000 of cash on hand $110,000,000 of unused borrowing capacity under our various banking arrangements, which included $24,000,000 of suppressed availability. In the Q3, we used cash and increased borrowings totaling $22,000,000 to complete the acquisitions of Southern Fasteners and Charter Automotive.
Turning now to our segment results. In Supply Technologies, net sales were a record $186,000,000 up 6% over the previous record set last quarter and up 21% compared to last year's Q3 sales of 154,000,000 This is the 3rd consecutive quarter of record sales in this segment in spite of currency headwinds that impacted sales by approximately $6,000,000 in the quarter. Average daily sales in our supply chain business increased 18% year over year, driving the overall segment sales record. Sales were strong across most of our end markets with the largest increases in semiconductor, powersports, heavy duty truck and civilian aerospace. Sales increased across all geographies with particular strength in North America.
In addition, our fastener manufacturing business continues to Well, delivering record quarterly sales in the 3rd quarter as demand for our proprietary sub piercing and clinch Fastening technology continues to increase with the automotive OEMs around the world. Our recently completed acquisitions of Southern Fasteners and Charter Automotive performed well during the quarter. Our integration efforts are being implemented and we expect both acquisitions to be accretive to our margins and our earnings per share. Adjusted operating income in this segment totaled $11,600,000 in the current quarter, an increase of almost $1,000,000 year over year as the profit flow through from higher sales levels was partially offset by higher freight costs, including ocean freight and blank sailings as well as higher product costs. We expect average daily demand to Components segment sales for the quarter were $153,000,000 compared to $120,000,000 a year ago, an increase of 27% year over year.
Sales in the current quarter were higher primarily due to increased volumes from business launched last year, which are now being produced at run rate volumes And the impact of increased customer pricing realized in the quarter. Segment operating income improved from a loss of $9,000,000 in the prior year To a loss of $2,000,000 in the current year quarter. On an adjusted basis, operating income was nearly breakeven in the current quarter compared to a loss of $5,500,000 in the prior year. Although our 3rd quarter results improved year over year and sequentially in this segment, Performance continues to be negatively affected by raw material pricing and higher labor and overhead costs. We continue to see sequential operating margin improvement in many of our products in this segment, including fuel related and molded and extruded rubber products as a result of improved customer pricing and operational improvements.
Segment loss In the quarter, we're isolated in one of our facilities and the impact of startup costs in our new aluminum plant in Mexico. We continue to aggressively pursue price increases on several programs across every product category to offset the increased raw material and operating costs in this segment. For the remainder of the year, we expect continued strong customer demand And improved operating performance compared to the 3rd quarter as a result of our initiatives. In In our Engineered Products segment, 2nd quarter sales were $97,000,000 up 15% compared to $84,000,000 a year ago, driven by increased customer demand in both our capital equipment and forge the machine products business. In our capital equipment Sales were up 8% compared to a year ago as customer demand for our equipment continues to be robust.
New equipment bookings in the 1st 9 months The year totaled $175,000,000 compared to $148,000,000 a year ago, an increase of 18%. Equipment backlogs totaled $166,000,000 at the end of September compared to $121,000,000 at the end of last year. In our Forged and Machine Products business, sales in the quarter were $30,000,000 which is their highest level since the Q1 of 2020 As our key end markets, including aerospace rail and oil and gas continue to improve from the previous 2 years. During the quarter, operating income in this segment was nearly $6,000,000 compared to less than $1,000,000 a year ago. The profitability improvement year over year was driven by the profit flow through from the higher sales levels and implemented operational improvements in product pricing initiatives.
We continue to see the benefits from cost reduction actions taken in prior quarters, including the consolidation of our crop forge facility Into our Canton Drop Forge operations. We expect the installation of the production equipment, which includes a 50,000 pound forging hammer To be substantially completed by the Q1 of next year. The additional production capacity will support large forgings to meet The increasing demand with our Aerospace and Defense customers. For the remainder of the year, we expect continued year over year improvement in Sales and operating income in this segment as we convert our strong equipment backlog into sales and from the continuing recovery in key end markets in our Forged and Machine Products business. Corporate expenses in the quarter of $7,500,000 were approximately in line With $7,400,000 a year ago.
And finally, with respect to our current year guidance, we continue to expect full year Consolidated revenues to be at record levels with year over year revenue growth currently estimated at approximately 18%. In addition, we expect significant improvement in profitability for the full year compared to last year, and we also expect our 4th quarter adjusted operating results To improve sequentially compared to the Q3. Now I'll turn the call back over to Matt.
Great. Thank you very much, Pat. I will open the line for questions.
Thank you. We will now be conducting a question and answer Our first question comes from the line of Dave Storms with Stonegate. Please proceed with your question.
Good morning and congrats on the record second quarter.
Just wondering if you
could start by just going in a little more about the backlogs that you're seeing in the engineering products and The timing of turning those into sales?
Hey, Dave, this is Pat. Throughout the last 6 to 9 months, we've seen record orders, record backlogs And the timing of those pushing those orders through production ranges from 6 to 9 months Given the equipment being ordered. We've seen continued improvement in revenues. We expect that to continue. Key hurdles in being able to push capital equipment through your production facility is the ability of getting the supply chain in line.
And over the last 6 months, we've seen some challenges on that front. We expect Continued improvement. So the backlogs we expect would kind of push through production through the first half of twenty twenty three.
Got it. Very helpful. Thank you. And then just kind of on that supply chain front, I know you mentioned that Freight has been a challenge. Are you seeing that starting to abate?
Or are things like the water levels in the Mississippi continuing to cause headaches?
This is Matt. No, I would say that, I mean, certainly ocean freight, which is where we were most constrained, both in terms of trained both in terms of blank sailings and pricing has stabilized. Certainly pricing has come down considerably. Also, I think has availability and timeliness has come in a bit as well. I mean, some of our lead times had lengthened out So I do think we're seeing more predictable shipments and we're seeing significantly better pricing.
And I think we'll continue to see that going into the New Year.
That's very helpful. And then from there, It sounds like you're starting to see demand remain strong and pick up as end users are resupplying shelves. Is that expected to continue into next year as well?
Yes. I mean, I think in my opening comments, I referenced It's hard to suggest that the Fed will not succeed in diminishing end customer demand. There's no question. So I think, our visibility is no better than anyone else's in terms of what that looks like, With 100% chance of recession, I believe, at this point. So the good news for us is that there is a fair amount of restocking that has to happen, As well as some industries that are still recovering, aerospace would be a notable one.
So we do believe that whatever happens with The end customer or consumer that we're better positioned than most. So that's positive. I would also say that given the robust growth in the business, some stabilization of The business would cause us, I think, to be able to take a breath. I think labor, I think, is Availability has stabilized, but it's still not great. So I think that, again, I think whatever we give up, I think, in terms of growth rate, I think will be mitigated by the restocking and also will be a benefit to our operations as we seek to rebuild our margin line meaningfully.
Understood. All very helpful. One more for me if I can. Just on the federal research and development credits, What's your visibility into those continuing into Q4 and beyond? Is that more of a one off?
Yes, David, this is Pat again. The current quarter R and D credits 80% reoccurring and 20% were really one off type credits. Well, one of the things that we've done over the last 3 years, really since the Tax Reform Act is we have been focused And our tax planning initiatives, around research and development credits, international Opportunities, and we're seeing the benefits of that. We do not expect our efforts and our initiatives to slow down. We feel there's a lot of opportunity for us to continue to focus on reducing our effective tax rate anywhere we can.
The Q3 was a good example of that.
That's all. Very helpful. Thank you both and I hope you have a great rest of the quarter.
Thanks. Thanks, Dave.
Thank you. Our next questions come from the line of Jacob Moore with KeyBanc Capital Markets. Please proceed with your questions.
This is Jacob on for Steve.
Good morning, Jacob. Good morning.
I just wanted to ask my first question on the timing And your free cash flow commentary, if end markets stay relatively stable or even strengthen into next year, Why are you confident that you'll be able to drive a big improvement in free cash flow and maybe what kind of levels are you targeting there?
Yes. Jacob, included in our working capital is embedded in efficiencies that have been caused by Supply chain constraints, customer pricing being dragged out within our receivables. So there's plenty of opportunity for us to eliminate the excess. Clearly, some of the Comments that Matt made around our supply chain and international freight and any improvement that we get Will result in lower inventory levels. So most of what we're referring to Relative to free cash flow going into next year is going to be a result of reducing that embedded working capital That we have since the start of the pandemic, which is roughly $60,000,000 as I mentioned in my comments.
Okay, got it. That makes sense. I mean, I guess, just a little bit to follow-up on that. If end markets are maybe flattish in 2023 2024, How much working capital overall do you think you need to run the business?
Yes, we typically and it varies by business, but we typically Feel a normalized level of working capital is $0.24 on the dollar. And I think that is the level That we're comfortable with and that gets us back to historic levels. We have initiatives in place across every one of our businesses And goals that have been established to reduce working capital to take out some of that excess that exists. So, if We see growth, which we expect to over the next year to 2. You can count on $0.24 On the dollar in terms of increased working capital.
Okay, great. That's good color. Thanks. And then So maybe a last one for me, just to put a point on the debt reduction commentary. Do you guys have a quantitative goal for where you'd like the balance sheet to be?
Maybe what are those targets look like as we look out to 2023 2024?
Yes. This is Matt Jacob. We have Pre pandemic, we had an intermediate goal, meaning an 18 month goal to 24 month goal to be 3 times Debt to EBITDA, we continue to stand by that goal. We think by the time we can we've got a couple of businesses inside our portfolio that Performing at peak levels, we've got some areas that we need to focus on improvement. As we rebuild the earnings line, We're going in the right direction.
I think that we're going to build off that success going into next year as we harvest some of the new business and become more efficient at it. We think the earnings line is going to continue to take care of itself. I think that, particularly as we get more efficient in the post COVID era. So I think that from that perspective, I think that and also begin to harvest some of this balance sheet. So we stand by our goal of 3 times.
We're a bit higher now, but we believe the earnings are artificially deflated and that we believe we've got some money to get off the balance sheet. Yes, that's still our goal.
Okay, great. And then if I could just one quick one. I know you guys have done some restructuring and you worked on some in plant working on in plant efficiencies. But are there any businesses that you think are And is it for divesting at this point?
Yes. I think that we, part of our Process over the last even predating the pandemic was around really focusing on our best products and businesses. So We have been focused on a capital allocation plan that really seeks to invest in businesses that we believe not only can grow, but can grow at a very accretive So, having said that, I think that we've got a great portfolio of businesses that work well together. But we've been unabashed in our desire to harvest assets where we see that it's appropriate. We've had a number of asset sales.
As you know, we continue to seek asset sales. It has not been in line with disposing of a full business, But we continue to be rigorous in how we look at our business portfolio and how we can invest in high growth, high margin businesses. So I certainly wouldn't put that off the table.
Okay, got it. Thanks for taking the questions this morning.
Thank you. Our next questions come from the line of Yoma Abbibi with JPMorgan. Please proceed with your questions.
Thank you. Good morning. My first question is regarding good morning, the cyclicality of the cash flows in a recession. Perhaps you can remind us what was the cyclicality of your cash flows and prior cycles? And how could that be different At this time around, given your current working capital build, if we do have a recession next year?
Yes, this is Pat. As I mentioned previously, we've got some excess working Which obviously in a recessionary period would tend to come out of the business quicker. In addition, we have in many of our businesses, but primarily in our supply chain business, When recessions affect our sales, you've seen great cash flow come through because our working capital Will be reduced. That's a big part of our business where we've got working capital intensive businesses as opposed to Capital intensive businesses, so in a recessionary period, our diversification plays very well, as it affects cash flow.
Okay. Thank you. That's helpful. And then my second question is regarding capital allocation. How do you think about allocating capital, more specifically purchasing your tradable bonds versus other uses of capital, Given that the returns for buying backed up bonds versus other returns and other investments?
This is Matt. Let me begin by echoing Pat's comments. You've been around the company a bit. So you know that to the extent that We enter a recession that causes us despite some of the restocking to see our revenue base decline. We have been the beneficiary of large amounts of cash flow.
I mean, we've got in current assets About $850,000,000 in the balance sheet. So the harvesting is pretty good there. It's not what we're looking to do, of course, But the scale of the opportunity is significant and proven over last business cycles and recession. So, again, not to suggest we're Sort of recession proof from that perspective. So we've got some manufacturing businesses that are less, but I would also suggest to you that the restructuring that we just have gone through that that we just have gone through that resized, 14 locations.
Those are some of the locations that were most Exposed, I think, to some of the recessionary environment. So I think we're in a good spot if that happens, number 1. Number 2, Look, our priority, we're cognizant of where the bonds are trading. We have had a history at times of purchasing some bonds back. But I would tell you that our instinct is to continue to focus on the business and to support the growth that's in front of us right now, which as you know is in excess of 20%.
So Our priority is going to be the business and supporting the business in the ways we have. And but we've got an eye on it as well.
Thank you very much. That's all I had.
Thank you. There are no further questions at this time. I would like to hand the call back Matthew Crawford for any closing comments.
Great. Thank you all for your time this morning. We appreciate your support and your Insightful questions and we look forward to showing continued improvements in the Q4. Thank you very much.
This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.