Park Ohio Holdings Corp (PKOH) 2006 Q3 法說會逐字稿

Good morning and welcome to the Park-Ohio third-quarter 2006 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 the conference call begins, please remember that the Company will be discussing some issues that are historical and some issues that are forward-looking. When the Company speaks about future results or events, there are a variety of factors that may materially change the actual results from those projected.

A list of relevant factors may be found in the earnings press release, as well as in the Company's 2005 10-K, filed with the SEC on March 16th, 2006. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, the Company may be discussing EBITDA. EBITDA is not a measure or a performance under generally accepted accounting principles, and is considered to be a non-GAAP financial measure as defined by the SEC. The Company may present EBITDA because management believes that EBITDA could be useful to investors as an indication of their ability to incur and service debt, and because EBITDA as a measure used under their credit facility to determine whether they may incur additional debt under such facilities.

For a reconciliation from income before income taxes to EBITDA, please refer to the Company's current performance on Form 8-K, furnished to the SEC on October 30th, 2006. Now the meeting will be turned over to Mr. Edward F. Crawford, Chairman and Chief Executive Officer. Gentlemen, you may begin.

Good morning, ladies and gentlemen. Welcome to the third-quarter Park-Ohio review. May I introduce the President and CEO of the Company, Matthew Crawford.

Thank you very much and thank you for joining our third-quarter conference call. Revenue was up sharply again by almost 10% to $257 million. EBITDA grew by 5.2% to $18.3 million. Earnings per share on a tax-adjusted basis, though, were flat at 33% year-over-year.

As a general comment before we get into the specific segments, similar to the second quarter, the numbers really don't indicate how excited we are about the success we're having in most of our units and how well our team is executing against strong and growing demand. The lack of increases in profitability year-to-date is again due largely to a significant underperformance of our relatively small rubber business. Without this burden, our earnings would much better show the success of our business strategies.

Now looking at the units specifically, ILS revenue was very strong again, growing at 8.2%. Sales to the truck market led the way, complemented by a significant new relationship in the appliance industry and solid growth in the semiconductor space. EBIT grew by 7.3%, representing a similar margin as opposed to third quarter of 2005. We were slightly weaker than our internal plan, though, at the margin line due to consolidation costs associated with the completion of the PPG effort.

Aluminum Products, revenue fell 9.6% for the quarter. This shortfall was caused principally by additional weakness in volumes at our domestic auto customers, most notably Chrysler's four-wheel-drive product lines. This poor performance was -- I guess the point I'm trying to make is we're expecting -- we're continuing to see strong performance in [cording] activity here; particular interest in our low-pressure casting facilities.

EBIT was hit particularly hard during the third quarter, showing a slight loss for the first time in -- I think ever, as far as I can recall. This was largely due to the volume decreases, but also included significant onetime costs associated with the startup of the new program, which we expect to add $60 million in new business once it is fully rolled out in mid-2007.

Manufactured Products revenue was up again strongly by 25.4%. Every business in this segment showed significant growth. The most notable incremental contribution came from the oil and gas segment, where we continue to see significant new interest in North America, as well as Asia, and we have seen a record backlog.

We also are continuing strong interest in our forging division, which is experiencing significant growth, particularly from the military ground assault vehicles, and the commercial strength from people like Boeing on the 777 and 747. EBIT also showed a significant leap of 36%. This expansion with led again by the oil and gas businesses and the forging division, which deal largely in highly-engineered and proprietary products.

These results were offset by poor results, again, (technical difficulty) business. As most of you recall, this division represents less than 3% of our revenue, but has had significant operational inefficiencies and pricing issues, which have led to a multimillion dollar loss so far this year.

During our last call, I mentioned that we are in the process of making changes. We have, both in pricing and management at this point, and we expect the improvement to begin in the fourth quarter of this year.

From a cash perspective, net debt stayed essentially flat during the quarter, with our North American bank lines coming down a small bit (technical difficulty) going up a slight bit, which is to be expected with the international expectations of our growth on the global front.

Interest expense increased $900,000 year-over-year, largely due to (technical difficulty) and somewhat higher borrowings. Non-cash working capital decreased by $1 million during the quarter. We're still up significantly for the year. We expect to be year-over-year on the order of about $130 million higher in revenue in 2006 to 2005, and this was why we continue to expense relatively high investments in working capital and specifically accounts receivable.

Capital expenditures were $1.9 million during the quarter, bringing our year-to-date amount to $9.4 million. We expect capital expenditures to be about $12 million for the year, 12 to 13, somewhat below our estimates.

Unused bank line at the end of the quarter was $48 million. With the acquisition of NABS during the fourth quarter, which Ed will talk about, for $21 million, which was funded with our bank line, we obviously will not achieve our year-end goal of debt paydown, and now expect a target of about $160 million. This is still slightly higher than our expectations, due mostly to the significant backlog previously mentioned in the capital equipment groups, which is likely to extend through year end.

As you can see, we are extremely excited about the strong performance in most of our business units and the significant backlogs we are seeing. We are concerned, though, about (technical difficulty) volume cuts at our domestic auto customers and continued uncertainty around how quickly the rubber group will improve. We expect to meet the lower end of our previous guidance (technical difficulty) $1.65 to $1.75.

Thank you. And with that, I will turn it back over to our chairman and CEO, Ed Crawford.

Let me give you a little color on a continuing view of the aluminum business. The volume in our customers came down faster than we anticipated, but clearly we are still committed to what we have in the aluminum components business. The $60 million in backlog is onstream; has been (indiscernible), which means approved for shipment. These shipments will not begin until the first part of '07.

But clearly, as I've indicated, this is a process -- we are rebuilding this unit. It is going to be a very strong unit in the future. So I'm still optimistic about '07 and '08 and beyond. We do have a place in this business, we got good customers, we've got good equipment, we've put ourselves in the right position, and (indiscernible) transition. But it will be there for the future.

As far as this crash -- I like to call it -- in the manufacturing business and our rubber components (technical difficulty) largely due to taking contracts without the proper adjustment relatives to raw materials. This has been addressed. There's been a complete change -- this is not fixing the tire at the company; this is replacing the whole front end.

We've gone right from the COO right on down to the accounting. No irregularities; no misjudgment; just commitments to (technical difficulty) longer-term volumes that (technical difficulty) necessary adjustments that I believe are important in a business like this. But we've made those, we've corrected them. We've been in very, very, very strong discussions with all our customers.

And as I say today, we still have the same customers we had, but we've been able to get the adjustments necessary. This will be fixed and will have dramatic impact as it spins back to the profitable in '07.

It's not a pretty picture. But we are addressing it. This can happen when you try to difficulty) participate in this auto business. I think we've got a good strategy and will be (technical difficulty).

I want to point out that this company in the last five years, we still do approximately 20%, 21% of our total sales in auto, but it hasn't increased, and the company has grown 45% to 46%. So we understand that we are growing this business -- and this is a segue into NABS -- we're growing this business -- every single time we think about the future, we think about getting less and less auto and truck and trying to pick spots.

So we are aware of it. (technical difficulty) but we are trying to make it less important in the future. What we have is great, but I don't think you'll see us investing deeper into the auto sector in the future.

I really want to talk about NABS. This acquisition -- it's kind of a funny name. I hope some of the principles that we invited to be on this call this morning to at least listen to what I believe is an incredible story about ILS. This is another investment in our largest sales unit. The company is 65% to 70% logistic supply chain management. And although this is not big in numbers and dollars, it is surely big in the impact on the company.

This is a very sophisticated management team, blue-chip customers. This is a whole new base of customers. The lead in this particular or largest account, when you think about computer electronics, consumer products industry, you want to have IBM as a customer. This is our largest customer on this side.

But more important, this is about beginning our process and accelerating our process to expand our supply chain management concept into Hungary, into Singapore, into India. There's a great opportunity here for consolidation domestically, great management, great customers. We have an opportunity short-term that won't have much of an effect. But I will assure you with the opportunity we have at (indiscernible) to consolidate and make things better and bring some of the skills to NABS and vice versa.

I would take one product line, for example, that we're very excited about; they did a big job in labels. It doesn't sound like much, but they did a big job in labels. In our whole ILS division we have no label business. And I was at one of our largest accounts with Matt last week and talked about the new prospects of labels.

So it's about good people, about great customers, great locations, a new industry for us. We have been negotiating with this company for five years. And finally after five we were able to get everyone to agree that we can do together what this company, although very sophisticated, could not do by itself.

So we are very pleased to have made this acquisition; it's an important part of it. We continue to build around our core business, which is supply chain management. We continue to be mindful of the fact that we want to get further and further away from the industrial sector.

So we do have a plan here. I'm personally not pleased with the third, particularly when you think about what happened to us in our rubber business. A small little company gets in trouble -- not trouble, but tries to get long-term contracts that will work -- just doesn't work. So the long and the short of it is another lesson learned in the industrial world, particularly in dealing with the auto-related customers.

But there are friends -- Ford, Chrysler and General Motors. We still have and will continue to expand our base relative to sales outside the Big Three. We were able to recently sign a new order with a great company called [Azaki].

So there are things that are within our control; some are not. The auto industry, a little meltdown here; it was anticipated. We're moving towards it; we're going to fill the plants. And the rest of the company, particularly the capital goods business is -- I don't know -- Matt used the word smoking. But I mean, this is very, very solid. There is well over a new hundred million dollars in new business in just the capital goods business going forward.

So we go into end this year a little tattered here, but I'll assure you that with the backlog and any recovery in the automobile business at all, even if it maintains itself, we are on the right track. This ILS business is going to continue to grow. Capital goods looks solid. The aluminum business has a future. And manufacturing, absent this one wart, is a very balanced, well-managed unit.

On that vantage point, I would like to turn the microphone over to questions.

Philip [Volopicelli] of Goldman Sachs.

Thank you very much. I just wanted to touch a little bit more on the working capital and the debt at the end of the year. You said that 160 would be the amount on the revolver. Is that correct, Matt?

That is our new target, correct.

Okay. And we were previously somewhere around 140, so it looks like you're going to not get as much working capital out as you had previously assumed. Is that correct?

That is correct. And as I mentioned in my comments, the critical reason for that is specifically in the capital equipment group, ship dates on large equipment orders bear heavily on our working capital numbers at year-end.

So although we are displeased to see that we won't achieve our sort of pre-NABS goal, I think is the right way to put it, having said that, the money is in the right place. It's in our highest margin capital equipment business in orders that should be shipped shortly after the end of the year.

Okay. And then turning to the rubber business, I know we talked about it on the last call. What gives you guys confidence that you've turned the corner there? It sounds like you've got a new management team in there. Are the contracts effective immediately, the new contracts (technical difficulty)?

The pricing discussions that we've had over the last 45 days are pricing discussions that in every case begin immediately. So we will have an opportunity from the pricing side. We have addressed that, we have had conversations with the customers. We've had discussions about the increase in the raw rubber.

So as I (technical difficulty) the dial that in exactly because of the significance of the losses. But relative -- there is some near-term help in the form of pricing increases that are currently effective.

And going forward, the rubber costs will be on some sort of an index, is that correct? Or how does that work?

I think it actually depends on the account. But we believe we're on a more normalized basis now. So we will be in a better position to the extent there's a change in the markets again to more quickly address that.

This is Ed Crawford. There is a component of the new agreements that allow us to address on a percentage basis the raw materials of any dramatic week -- or that we can index it, not directly on the rubber prices, but we have the pass-through capability. That is where we got trapped this time.

Keep in mind what is amazing about this, and a little disappointing to me, quite frankly, is we were able to do this and make the changes necessary and not lose the business.

That is good. On the aluminum side, just my last question. What give you confidence that we're not going to see continued erosion from the Ford/GM/Chryslers of the world here in the fourth quarter? It sounds like the environment there is not getting any better anytime soon.

I'll comment on that first. I don't think we have --- as I pointed out in our earnings guidance for the year, it is a significant concern to us. Having said that, in the totality of our business, the domestic OEM business is a small enough piece we believe we can manage it.

Having said that, at the margin it is concerning to us. Our near-term optimism around GAMCO in the aluminum products segment has more to do with the new business coming online. So we expect in 2007 to begin to see improvement in that segment because of the new business. We are concerned at the margin about the volume at our current plants. We just believe that in the totality of the entire business that that can be managed.

Last week, we had the whole aluminum group in here on what I call emergency status here. They were here for three days to button down the hatches and really run dead lean as we can through this fourth quarter. So we understand the equation.

But quite frankly, we think, again, there's been quite a shakeout in the aluminum component manufacturers. And there is finally some very strong resistance, as you can see, against any further price bounce. So our company, along with others, are really putting [their foot down] and we're not going to go deeper in our margins.

And this is a real (technical difficulty) test case, and it will be won or lost shortly relative to who will continue supplying (technical difficulty) sector at the price-down mentality. This is not going to be part of the future.

This is a very interesting period. We have been very, very firm on our pricing here. We've been very, very firm (technical difficulty) where we're going. We have been able to pick up a considerable amount of new business in the agricultural area. But it is a tough period, it's going to be a tough period. And this is about who survives and who has the plant for the people, because there will be fewer people making these components a year from today.

Right. When does the GAMCO -- the new business come onstream? You said mid next year. Is it May, April (technical difficulty) -- do have a sense?

What I was alluding to is when it would be fully rolled out, would be mid next year. We are beginning to ship parts at the very end of this year, but I don't think it will have a meaningful, a profitability impact until the first quarter. So we do expect profitability impact in the first quarter; it just isn't -- we're not going to be fully rolled out to the 60 million until midyear.

Let me point out one more thing in the aluminum side. In the last 90 days, there have been negotiations with every single one of our customers relative to the price increases. (technical difficulty) on their side not to adjust aluminum; we kicked back a lot of things.

I really believe that this company at one time was an 8% or 9% EBIT company. I'm optimistic sometime in the future we can get there. This is a good company. And there are not many of us in this business and I -- I don't want to be the pied piper on this account with this particular division, but it's on its way.

Great. Thanks, guys.

Sarah Thompson of Lehman Brothers.

I guess a few more questions on the auto seg. I'm sure I fully understood it. So you're getting raw material pass-throughs or at some degree, if they are major changes from where we are right now? And then the price (technical difficulty) compensate you for the loss you've incurred heretofore on both, I guess theoretically, a volume and raw material basis?

Let's separate them, Sarah. Number one, the aluminum business has always had indexing on a monthly or quarterly basis. So there is no change in that policy. Where the iron companies (technical difficulty) get in trouble the last cycle year, they did not have that.

In the rubber contracts, historically there have been ability to negotiate raw material increases. Okay? It wasn't contractual, but this has been the historical part. As rubber went up, this followed. In this particular case, we got involved in a couple contracts in which the volume was there. The ability to pass on (technical difficulty), particularly in this year, was not there.

And it was great to have all that volume, but all that volume really hurt us because we never got the full absorption and we were never able to pass on the raw materials. Which as you know is a very, very high percentage of the sales price.

That has been corrected. In the future, any raw material increases will be passed on to our customers. That is part of, as Matt said, these 45 days of negotiations not only around price increases but around other aspects of the relationship.

This has been a very difficult period. But quite frankly, this company has always turned out quality parts on time with service to some of the most sophisticated people in the industry. We're talking people like Delphi, Azaki, some of the best customers. And quite frankly, we want a fair margin and we want the ability to index the rubber cost. And that is where we are now.

No, I understand that. But I guess I'm just trying to think about it -- so you've lost money heretofore because you were not able to pass through the costs. I understand you are able to pass through some changes from where we are today.

And we increased the prices.

But the prices increase adjusts for what you didn't make up before, I guess is the right way to think about it?

No, Sarah, I'm sorry. Are you referring to the rubber business or the aluminum?

The rubber business.

In the rubber business, we readdressed in the current period looking forward two pieces of the puzzle. One was -- they are all price increase. Some of it was predicated specifically on the cost of rubber and how that could be addressed going forward. And some of it was actually addressed on new pricing or new margin on the part. So in no case would I call it recapturing nine months' worth of lost profits, no.

Okay, but the repricing going forward should adjust some of it?

In some cases, to answer your question, we have addressed poor margin products on top of just increases in the rubber costs.

Got you. Okay.

And, Sarah, let me give how serious we are about this. If we had not accomplished the goals that are currently in place, you'd have been hearing of us (technical difficulty) [exiting] this business.

Yes. No, I have seen you guys do that in the past. So it sounds like you're (indiscernible) again.

Believe me, I was out of this business so fast, my hair would just be slightly whiter. But I will tell you, I was out. But we went to the customers, we made it clear -- we changed management, we made it very clear to the customers. They need -- one thing I can tell you -- this is an example of an absolutely depleted supply base of this quality. And I will tell you, in rubber and aluminum and forging and everything else, there is not many people around that can do this type of work for the auto companies at the level they want.

And when it gets down to it, if you're willing to say, hey look at, I'm losing money. I get my price increase or I'm not (technical difficulty), that sounds pretty serious. And you know me, and when I say that, they understood it as a fact. And I hope they are listening because (indiscernible).

Got it, got it.

(multiple speakers) business here for free.

No, I understand. A couple other questions on the auto side. One is I may have just missed this, but did you talk about quantify the launch costs -- drag on the numbers?

We did not, Sarah.

Can you give us a ballpark?

I don't think that the performance -- the lack of performance in that division was a combination of those factors. But it was (technical difficulty) issues. I don't think -- I don't want to get (indiscernible) on the launch costs unless I had the exact number in front of me.

It is not insignificant, but if we were to build that I back in, it wouldn't make this a 9% business, I can tell you that.

Okay, fair enough. And then (technical difficulty) obviously the estimates out there right there are kind of down 13% to 14% on fourth quarter for the Big Three. Is that what is factored into your guidance?

There is no question that I -- our decision to reconfirm at least the lower end of our previously announced range, Sarah, has everything to do with the strength of the 80% of our business that is not auto; it has nothing to do with the 20% that is. The risk clearly is what you have just said, it is built into our estimates.

But we're concerned. Frankly, it is the Achilles Heel in our year's forecast. But the reality of it is the backlogs are so strong in the businesses that I've talked about, particularly in the higher margin businesses, where we are optimistic about overcoming all those risks that you've talked about in the auto segment.

Once again, (technical difficulty) is 80% of the business.

No, I know -- (technical difficulty)

But it certainly does get complicated when that business is changing as rapidly as it is. But, Sarah, to answer your question, we are aware of the extra sort of deepening volume cuts in the auto business in the fourth quarter.

Sarah, again this is -- it's hard to believe, but when you look at the unknown (technical difficulty) the unknowns is where the aluminum business (indiscernible) because of. But the mere fact that we are still maintaining the guidance, although we think we will be on the lower end of it -- we thought we'd maybe be on the higher end of it.

But the net result is the two issues that are affecting us -- the unknowns that have affected us in the third quarter and the first nine months of this year have been dealt with. Okay? And that means the rubber business and the aluminum business relative, we don't think they will do (technical difficulty) damage as they did to us in the first part of the year in the fourth quarter. I've taken steps to make sure that there all the necessary backstops to any further deterioration in those two.

Okay, that is great. And then I had two other quick questions. One is on your (technical difficulty) normal working capital accounts were pretty much as expected, but your other current assets are up by $20 million. What is that?

Sarah, this is Rich Elliott, CFO. A lot of that is percentage completion accounting for the capital equipment group. When we take the revenue but we have not yet invoiced the customer because the percentage completion is in advance of the billing, that builds up in other current assets. So you can view that other current asset increase as an analog to receivables. So it will turn into receivables as soon as the billing point hits.

Got you, okay. So then your year-end number, you said working capital is going to be higher-than-expected because you have cash tied up in the capital equipment. That should then shift to receivables by year-end (technical difficulty)?

Receivables and there are a few ship dates that may end up being slightly after the end of the year.

Okay. And then just last question, on D&A, it seems to have come down a bunch in the third quarter -- kind of [4.8] in the first quarter, 5 in the second quarter, [4.3] in the third quarter. Is there anything going on?

There are just ongoing changes period-to-period. There is no significant change that drives that.

Okay, great. That is all I had. Thank you.

Richard Paget with Morgan Joseph.

Good morning, everyone. I wonder if we could get back to talking about some margins. Looking at Manufactured Products, margins were still pretty good, rubber issues aside. What is going on there -- are you guys getting better pricing? Is it volumes have picked up? Is it a mix issue?

Honestly, it's not anymore complicated than I said in my comments, Richard. We're seeing superstrong high-growth demand and backlog in some of our best margin products. Our oil and gas segment, as we've mentioned in the past, that is a significant business where we have proprietary designs to sell equipment and spare parts, that if you want to make oil and gas pipe and casings and couplings, you need our stuff. So that has been a particularly strong industry recently and the margins show it.

I think that also not only the forging business not only reaching full capacity -- not full capacity but darn close -- that has helped our margins, on many of the products we supply, we are sole source. So we have been kind of the beneficiary of spikes in demand, military particularly, but even now commercial. So that is sort of utilization issues, combined with good designs that we are sole source on.

So we are getting hit in the right places. And frankly, both of those areas, as I mentioned in my comments, we are not seeing a lightening of demand.

You know, that near 11% margin we can think of more of as a trend as opposed to a onetime (technical difficulty), like in business?

Yes, I think there is two reasons I believe that. One is is because, as I said, demand continues to look strong in those segments. The other reason is because we believe that any incremental improvement in the rubber business is going to significantly help the overall margin in the sector. So, yes, I do believe that.

(technical difficulty) year-over-year margins were essentially flat, but sequentially they were down. Is there seasonality involved or was it just the issue that you had talked about?

Well, there was some of that. We did not, as I mentioned, hit even our internal forecast. There were some extra costs associated with the launch of some new customers. Sometimes they hit more heavily in certain quarters than others, depending on the magnitude of the orders that we're ramping up.

As I've mentioned in prior quarters, the margins can jump around there. Particularly when we're growing the business, it could put pressure on the current period margins. We had some of that.

We are battling back -- I don't want to make it a big issue, because it's not the issue that I think will drive this in a significant way -- but clearly we battled back some raw material increases from the Far East. And we're either passing those along in the current period or we are working with our vendor base.

So we had a combination of some things that I think that drove our margin to be a little bit lower than we normally would like to see.

Okay. So there might be a lag with the price increases, but you do expect to get them?

Yes, exactly. And I don't want to make that the main issue there. It just was an intersection of two or three things. The product mix, I think even in an optimal environment, would have caused the margins to be a little lower sequentially. But there were some additional items that caused us some heartache.

And then with the acquisition of NABS, maybe you could give us a margin profile or how we should think about growth rates for that particular business.

I think on the margin side, that business is consistent with -- historically consistent with the margins that we've seen in ILS. Our expectations and the reason we paid what we did is we believe there is a lot of opportunity in a couple ways to help our business.

One is there is some reasonably low-hanging fruit. You know how we like to consolidate businesses and intend to bring some margin back to the Company. There is opportunity there. Not insignificantly, which is a little bit different than in other acquisitions we've made in this segment -- and dad talked about a little bit -- we see incremental revenue opportunities to ILS because the NABS senior executive team brings a lot of talent to the table. And we believe that not only can they grow their own business, but they can help us grow ours. So there is several different type of synergies there that would provide for a very optimistic look at the earnings going forward.

Relative to growth rate, as we mentioned, one of the attractions of this business is they are primarily focused in the information technology hardware business. That is a very interesting business to us, not only because we believe we can grow the NABS business and their participation in that industry by more than a 10% a year, we also believe that -- or sort of that double-digit we always earmark -- we certainly believe that that opens up new geographies and new types of customers in those parts of the world that they are already at, and they are already servicing.

So this is a significant play, not only in growth, not only in geography, not only in products, but also in terms of some of the kind of fully integrated approach that we take to extract some extra margins.

Let me point out this is another expansion of -- we talked about four or five years ago about our initiative at Applied Materials, and to get into that space in the semiconductor part of the world. This is important; this is a worldwide business. We are kind of on the other sides of it now when we are over there with IBM and others. And we all know how many fabs and how this business is going to expand offshore, in places like Taiwan, India, particularly.

And getting a foothold in India, an established foothold in India. In fact, before this, we didn't do a dollar's worth of business in India. So we are glad to be there with an established company.

So this is great for us to be able to look at the products and the customers we have and vice versa. So we see a lot of leverage, a disproportionate amount of leverage in working with this customer base, with their proven international team and bringing our products to their companies and vice versa.

This is very strong. It's a lot bigger in my mind than a transaction of a company of this size.

And then I'm assuming that you guys, being within guidance, that is assuming a fully taxed number?

Correct.

And then is 37% a good number to use for '07?

Yes, it is a reasonable estimate.

Okay, thanks. That is it for me.

John (indiscernible), a shareholder.

Picking up on the last one right there in -- your guidance was fully taxed. Maybe this is directed to Richard. Are we still looking at -- what are we looking at maybe more on federal tax? Are we still in the 20% cash taxes paid year-to-date and what you expect for the full year?

Yes, we're looking at about 37% overall expenses, of which only the state and foreign is cash. And that state and foreign, that has been running in the 11% to 13% range for the last several years, and I'd expect it to be about the same this year.

Okay, thank you. Are we looking at full-year depreciation and amortization of somewhere around $19 million?

Yes, that is correct.

And your guidance for full-year CapEx is (indiscernible) lower than previous -- you're looking at $12 million to $13 million. Are we picking up some $6 million in cash flow right there?

Yes, that is the net difference.

Okay. Anything new on the -- I know in the previous filing there was -- I think there might have been some land for sale in Michigan, and there were going to be some applicational proceeds to the Snow Dragon. Is there any new status on that land sale and maybe an update on the Snow Dragon?

I can touch on the land sale, John. We had been solicited with some very attractive sale leaseback rates to sell off a piece of property in an area of the country that we didn't feel was very promising for long-term value. We are very thoughtful about which facilities we feel we need to own versus lease. We believed that this was one was an appropriate one for sale leaseback, or an appropriate candidate.

At this juncture, we have closed that deal. It was closed last Friday. So the proceeds will show in the fourth quarter.

That is still per prior guidance, the proceeds?

I don't recall.

(multiple speakers) Not guidance -- was there somewhere around -- was it $5 million that was on the balance sheet?

The cash in is going to be a little under $8 million.

Okay.

Yes, that is correct.

And is that also going to be then applied towards the Snow Dragon facility or can you touch a little bit on Snow Dragon?

Let me bring you up to date on Snow Dragon. We are -- this is the month that really counts, although we have taken orders for approximately 16 Snow Dragons so far this year; I think we've shipped 12 of them to date.

What is unusual about this is the majority -- like 80% of them, believe it or not, are going to Moscow. So Moscow has been the first city -- I mean we have been all over Norway and America and there's a lot of rumblings. We have put together a distributor network that we needed to get these to the market. But quite frankly, the only buyers for cash at this point are the Russians in Moscow. Anybody who is going to go to Moscow is going to be well protected because we got Snow Dragons all over the place.

And we have a budget for an investment in Snow Dragon through the end of the year; we are still under that budget. We are controlling it. We are not giving this away; we are letting it develop itself, develop a good distributor network. But the product itself is up and running and performing very well and we're excited about it. But again, this is a development period.

But really by sometime in '07, '08, I hope everyone landing in their planes at LaGuardia or Cleveland will look outside and see our Snow Dragons melting the snow for a safety factor. But it's for real, just slow developing.

That is fantastic. Got a couple other housekeeping questions, but I'll take those off-line. Thank you, guys.

[Chris Daugherty] of CIBC World Markets.

In terms of growth opportunities, I think you talked about how you are almost sort of close to 100% capacity in the manufacturing group. I am just wondering any opportunities there are going to be on the top line, or are they purely going to be on increased margins or improved margins?

As you know, Chris, the manufacture and products group is an amalgamation of a number of different units. To the extent that there are capacity restraints, that would be only really in our forging group, and I don't think they're really meaningful. I think that that will continue -- we'll continue to see, I think, strong performance there. We have made some capital investments and some extra press capacity. So I don't see that as being a significant limitation.

The other businesses or at least the other drivers in that business are the capital equipment group and the rubber group. I think we've talked enough about rubber and are unlikely to go deeper there unless it is warranted. I think that the capital equipment group, because really what they are selling is engineering and proprietary stuff. Capacity there is not as much of an issue because they can't outsource if need be. So I would not view in the aggregate capacity being a issue for the growth of that business.

On the aluminum side, you still have somewhere between 50 and $100 million worth of embedded capacity in the five facilities that is still available. So there is ability to grow those businesses. We're targeting certain prospects, but of the five plants, two are sold out and the other three are in a position to take additional business which we are concentrating on.

So there is some upside there, because when we bought [Ancash], we got a lot of capacity. We're just starting to bring that on and redeploy it. So there is some real upside there without any major CapEx.

All right, thank you.

Sarah Thompson of Lehman Brothers.

Hey, it is actually Lawrence. Two quick clarifying questions. The $8 million of cash proceeds you expect to receive in the fourth quarter related to the sale leaseback, will the be used for debt reduction or investments in the Snow Dragon business or other businesses?

It is not really directly linked to Snow Dragon. I think in the past it was mentioned in the same breath because there was cash going out in one direction and cash coming in (technical difficulty). But there is really no link between the two. It just goes directly to debt paydown.

The total investment in the Dragon Business at this point is under $1 million. So let's get away from the $8 million. The dragon is a small, evolving effort. This is not a full-scale commitment to a multibillion dollar business yet.

: All right, great. And then can you provide us with the operating cash flow number for the third quarter? And then secondly, your expectations for the year?

I guess in terms of the cash flow number for the third quarter, I'd like to discuss that separately if we want to get into that. On the anticipated cash flow for the year, it really boils down to the debt reduction. We're anticipating, including the fourth quarter's activities, to be at about $160 million in revolver at the end of the year. That is going to be up a bit from the beginning of the year. And that will pretty well translate to cash flow actions for the year, including the acquisition.

Okay, thanks very much.

There appear to be no further questions. At this time, I would like to turn the floor back over to management for any closing remarks.

Ladies and gentlemen, again, want to thank you for your patience and continual support. We look forward to a positive report on the fourth quarter and a peak towards the future. But I think the two issues here that are holding us down or have been holding us down have been addressed in a very -- in a typical Park-Ohio manner. We've got them under control and they will hurt us less and not hurt us at all in the future. Thank you very much.

Thank you.

Thank you. This concludes today's third-quarter 2006 results conference call. You may now disconnect your lines at this time and have a wonderful day.