Park Ohio Holdings Corp (PKOH) 2013 Q4 法說會逐字稿

Good morning. Welcome to the Park-Ohio fourth-quarter 2013 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.

I will now turn the conference over to Mr. Edward Crawford, Chairman and CEO. Please proceed, Mr. Crawford.

Good morning, ladies and gentlemen. Let's begin with I would like Scott Emerick, our Chief Financial Officer to review the Safe Harbor statement. Scott?

Thank you, Ed. Good morning, everyone, and thank you for joining us today.

If you have not received a copy of our earnings press release you can find it on the Investor Relations section of our corporate website at www.pkoh.com. I want to remind everybody that certain statements we make on today's call both during opening remarks and during the question-and-answer session 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 in the Company's 2012 10-K filed with the SEC on March 15, 2013. 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 discuss as-adjusted earnings and EBITDA. As-adjusted earnings and EBITDA are not measures of performance under generally accepted accounting principles. For a reconciliation of net income from continuing operations to as-adjusted earnings and for a reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA, please refer to the Company's recent earnings release.

Any references we make to earnings per share are on a fully diluted basis. Back to you, Ed.

Thank you very much, Scott. I'd like to introduce Matt Crawford, Park-Ohio's COO and I have asked Matt to review our 2013 activities. Matt?

Thank you very much and good morning everyone. Our fourth quarter was much stronger than last year but not as strong as we originally forecasted. We'll touch on the key drivers to our performance as we go through the details of our results.

Let's start off with a summary of our US GAAP earnings and as-adjusted earnings for the quarter. We reported net income attributable to Park-Ohio common shareholders of $8.9 million, or $0.72 per share for the fourth quarter of 2013 compared to a $7.7 million, or $0.63 per share for the fourth quarter of 2012. This represented an earnings-per-share improvement of 14%.

Earnings on an as-adjusted basis were $0.85 per share for the fourth quarter of 2013 and $0.67 per share for the fourth quarter of 2012 representing an increase of 27%. Included in our press release is a reconciliation of our net income from continuing operations to as-adjusted earnings so I won't get into a lot of detail here; however, I will mention that we are adding back acquisition-related costs and cost of sales net of tax of $0.11 per share for the fourth quarter of 2013 to derive as-adjusted earnings.

These acquisition-related costs are directly associated with the inventory step up to fair value that was recorded in purchase accounting for the Henry Halstead and the QEF acquisitions. The entire inventory step up of $1.6 million was amortized in the fourth quarter to cost of goods sold as the purchased inventory was sold in the normal course of business.

Net sales during the quarter increased 13% to $309 million compared to $274 million in the prior year. The revenue increases is attributable to volume increases in the assembly components segment and the supply technology segment slightly offset by a volumes decline in our engineered components business primarily related to the sales of capital equipment.

On a sequential basis revenue increased 2% compared to the third quarter as we benefited from our fourth-quarter acquisitions. Gross profit decreased $900,000 to $47.3 million. The gross profit margin percentage was 15.3% in the fourth quarter, which is a 230 basis point decline compared to 17.6% gross profit margin in the fourth quarter of last year.

It is important to point out, however, that included in the gross profit and gross profit margin reduction is the $1.6 million of acquisition-related costs for the inventory step up that we just discussed and its associated 50 basis point reduction in profit margin. The remainder of the decline in gross margin percentage is largely due to the change in the sales mix between the comparable periods as the lower margin assembly components revenues were a higher percentage of consolidated revenues than had been in the prior year and the higher-margin engineered products segment revenues declined year-over-year.

Consolidated SG&A expenses of $27 million increased 3% compared to 2012; however, SG&A expenses as a percent of net sales declined 80 basis points to 8.9% in 2013 as compared to 9.7% in 2012. Interest expense of $7.1 million increased approximately $0.5 million in 2013 as our average debt outstanding increased as a result of the base acquisition.

Our effective tax rate for the fourth quarter of 2013 was 26.6%. We benefited from the reversal of a valuation allowance against state loss carryovers in the fourth quarter that reduced tax expense by approximately $1 million. Our full-year effective tax rate came in at a 32.2% after the recognition of this benefit.

Now let's focus on our segment results. First, let's review the supply technology segment performance.

Supply technology segment revenues represented 40% of the consolidated revenues during the fourth quarter of 2013. Revenues increased 15% over the prior year and totaled approximately $123 million. Approximately half of the revenue increase over 2012 is directly attributable to the fourth-quarter acquisitions of Henry Halstead and QEF.

The other half of our growth in the fourth quarter was organic growth. This growth was driven by power sports and recreational equipment which increased 21%, heavy-duty truck which increased 14% and semiconductor, which was up 70%.

Not only were these key markets up year over year but these markets were up sequentially with the third quarter as power sports and recreation equipment increased 9%, heavy-duty increased 13% and semiconductor increased 18%. We are very encouraged by the growth and momentum in these diversified markets of our supply technology segment as we head into 2014.

With the increase in net sales segment operating income increased $300,000 to $7.9 million. However, included as a deduction to the supply technology segment operating income is the $1.6 million of acquisition-related costs associated with the inventory step up that we discussed earlier.

If we normalized segment operating income to provide for a normal margin without the impact of these purchase accounting adjustments supply technology segment operating income would have been $9.5 million, which represents a $1.9 million, or 25% increase over the prior year. Segment operating margin would have been 7.7%, which would have been a 60 basis point improvement over the prior year's fourth-quarter segment operating income margin of 7.1%. We realized good product and customer mix in the fourth quarter and we remain committed to strong expense management as we leverage our continued growth.

Assembly components revenues represented 35% of consolidated revenues during Q4 of 2013. Net sales increased 30% to $109 million compared to 2012.

Just over 40% of the revenue increase is attributable to the Bates acquisition that was completed in the second quarter of 2013. The remainder of the revenue increase is primarily attributable to the organic growth in the aluminum business. On the strength of the new program launches secured in the aluminum business revenues increased 46% compared to the prior year.

Segment operating income grew $1.1 million to $6.6 million, which was a 20% improvement over the prior year. Segment operating income margin was 6.1% which declined from 6.6% in the prior year. We expect margins to improve in this segment as the new aluminum programs for the 2014 vehicles move past their initial launch phases.

Engineered products revenue represented 25% of consolidated revenues during the fourth quarter of 2013. Net sales decreased 7% to approximately $78 million compared to 2012.

Our forging business demand continued to be very strong in the quarter as revenues increased 9% over the prior year led by our rail business. However, the industrial equipment business net sales for original capital equipment declined in the quarter by 11%.

Based on our earlier in the year booking levels we expected and forecasted a stronger fourth quarter in the capital equipment business. However, the business unit was unable to complete projects as forecasted due to the inability to secure certain project materials on the bold timetable that we developed to meet our goals. While we missed our fourth-quarter revenue forecast by approximately $14 million for the industrial equipment business we are encouraged that we will see almost all of these unrealized, forecasted 2013 sales in the 2014 results.

As you know, this business can experience volatility in the timing of completed jobs and the associated revenue recognition related to percentage of completion accounting based on the job's complexity and size. Based on order bookings momentum that continues for the industrial equipment business in 2014 we are optimistic that 2014 will be a good year for this business. Very importantly, we should also note that we continue to realize steady aftermarket performance in this segment.

Engineered component segment operating income decreased 5% to $11.7 million. However, segment operating income margin was still relatively strong at 15% and compared favorably to the operating income margin of 14.6% in the fourth quarter of 2012. The slightly improved margins reflected the greater relationship of forging revenues compared to the industrial equipment business revenues between the two years and an overall better mix in the industrial equipment business in the fourth quarter of 2013.

I'd like to take a moment to highlight cash flows for the year. Operating cash flows were $60 million and compared to $56 million for 2012. Our improved earnings in 2013 were the primary contributor to the increased operating cash flows.

In addition, we generated $14 million of cash from investing activities as we sold a non-core business and a minority interest in a small forging business during the third quarter. Net capital expenditures were $22.7 million for 2013 coming in a little under our $25 million forecast as some spending was deferred until 2014.

Given our earnings in cash flow generation we reduced our gross leverage during the year to 3.3 and our net leverage to 2.8 times at the end of 2013. Overall we are pleased with our performance during the fourth quarter and the solid improvements year over year. Furthermore, we are very excited about our record sales and earnings and EBITDA performance for the full year of 2013 and we are excited to begin 2014 with what we believe to be tailwinds in our businesses for North American manufacturing, the automotive industry and the capital equipment business.

Turning to our outlook for 2014, we are forecasting full-year consolidated net sales to increase approximately 13%. All three segments are forecasted to experience good top-line growth. We expect half of our growth in supply technology segment to come from our fourth-quarter acquisitions and the other half from strong organic growth.

Our growth in the assembly component segment will come from an extra four months of revenue from the Bates acquisition and strong organic growth in the aluminum business of 35% to 40% following the continued ramp up in the new automotive platforms. We are also anticipating good growth in the engineered products segment primarily from the industrial equipment business as we benefit in 2014 from steady order patterns in the capital equipment business and from the projects that were delayed in the fourth quarter of 2013.

We are forecasting the second half of 2014 to be slightly stronger than the first half for consolidated performance mostly due to the timing of recognition of revenues from the industrial equipment business. We are expecting segment operating income and operating income margins to improve in 2014 for each segment.

After considering our updated mix of business based on our expected revenue levels we are forecasting our earnings from continuing operations per share to be in the range of $4.32 to $4.72 per share. We expect earnings from continuing operations per share to increase between 31% and 43% over our reported earnings from continuing operations per share of $3.31 during 2013. We expect earnings from continuing operations per share to increase between 18% and 29% over our adjusted earnings from continuing operations per share of $3.66 in 2013.

We are forecasting cash flows from operations to be approximately $70 million. In addition, we are forecasting EBITDA as defined to be in the range of $134 million to $140 million for 2014. Given these cash flow and earnings projections and excluding the financing impacts of any acquisitions that may take place in 2014, we are forecasting gross debt leverage to approximately 2.5 at the end of the year and net debt leverage to approximately 2.1 by the end of 2014.

We are forecasting net capital spending for 2014 to total approximately $25 million with $14 million of this amount representing growth capital primarily for the assembly components and engineered product segments. We expect depreciation and amortization to approximate $22 million. Finally we are forecasting our effective tax rate to be 34.2% for 2014.

Based on our estimate of earnings by tax jurisdiction and the fact that tax valuation allowances will not reverse to the same extent as in 2013, we expect our effective tax rate to increase in 2014. I'd like to close by saying how excited we were with the 2013 performance and how excited we are with the prospects of 2014 as we accelerate our performance.

Thank you very much. I'll now turn the call back over to Ed.

Matt, thank you very much for a very comprehensive review of the 2013 activities. Generally I would make some general comments but I think that's been well described and some of the accomplishments in 2013 we are pleased with the stock at the level and our bonds are trading at $112, so things are in order and we feel that, and are optimistic about the future particularly 2014.

And I'd like to now take this opportunity to turn over the lines to questions. Thank you.

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions). Ajay Kejriwal.

Good to see you guiding to 13% revenue growth for 2014. And maybe I missed this but could you provide, Ed, some color on how much of that growth would be organic versus acquisitions?

Matt, why don't you break down the detail, or Scott.

Yes, I can comment on that. Actually our outlook is heavy organic growth next year. It's about 70% of that increase with 30% of it being through acquisition.

And those acquisitions, I know you did a couple smaller deals last several months, so the 30% is that from acquisitions already done in 2013, or is it future acquisitions?

We have not put any presumption of an acquisition in the 2014 business plan. So the only acquisitions to which Scott is referring to in the 30% are related to the Bates acquisition that we'll take up a few months at the beginning of the year and the relatively small acquisitions of QEF and Henry Halstead that were completed towards the end of the year. But no, there is no assumption of additional acquisition.

Into that number. So to the extent you could do more deals that would be upside to this number?

Correct.

And then on that organic, I know, Matt, you gave some details. Looks like the aluminum business should see a nice ramp and then also the engineered products business. Would you care to talk a little bit about the supply tech business as well, how should we think about that business into 2014?

Sure, Ajay. Well, I mentioned a few segments that are improving. I think we have seen some momentum, most notably in the three areas I discussed, not the least of which is heavy-duty truck.

Our major customer there seems to be emerging from a pretty slow last couple of years so we expect to see the benefit of that, but that really doesn't tell the whole story, Ajay. We've been talking for a while now about really restructuring the way we go to market to try and accelerate growth whether that be relative to our strategy of following our customers internationally or whether that means moving some pieces around the chessboard relative to personnel domestically. So while I do think we are getting some benefit from some key markets, specifically the ones I mentioned during my comments, I think I would understate the momentum we have in what we are looking at from a quoting perspective.

Good. And then could you clarify on that 35% to 40% growth in aluminum. Is that for all of the aluminum components segment or is it just that aluminum business?

It's the all related ramp up of additional contracts.

It's just, Ajay, just because it's by my number, I want to be clear, we were referring specifically to aluminum components, not for the segment.

Right. So just the aluminum business because the segment has other pieces in it, right?

Yes, exactly. In fact, aluminum is a minority of the segment although growing more quickly. But no we don't usually, as you know, forecast by business unit. But in this case given the sensitivity towards the launches in that particular area and the amount we've been spending to achieve them, we thought it was worthwhile to give a sense of the growth rate inside that particular business.

Good, and then maybe talk a little bit about the margins. It looks like you are forecasting for roughly 0.5 in margin improvement, so that's good. Is that mostly driven by top line leverage or do you have any other elements like cost cutting that you are factoring in in that margin improvement?

Yes, Ajay, it's certainly top line. There's no question.

You know our business well enough to know that we do see nice operating leverage, depending on the business they all have a certain degree of operating leverage, so clearly that is part of it. Nowhere is that more present than the aluminum products division in making sure that we can begin to see the measured profitability with the sales growth.

And also I think our highest quality of earnings, of course, is our capital equipment business, which is inside engineered components. And we are seeing that return to what we have historically seen as the mix that they have had in our business I think should buoy it as well. So it's top line in mix, I would say.

Good. And one last one for me before I pass it on, any update on the trends into the quarter, the weather, any impact you've seen in any of your businesses and then just how the quarter has been at 2.5 months into 1Q.

There have been a minority of our businesses that have discussed, one with distinct issues related to business interruption related to weather, happens to be a very high-margin business for us, so clearly we have seen issues related to weather. I would say that manifested itself in the aggregate numbers as maybe a little bit of a slower start then we would've expected but not necessarily meaningful to our year forecast.

So you would still expect year-on-year growth in the first quarter, right?

I don't know that we want to forecast by quarter, Ajay. I think we've tried to stay away from that. I think I did make a comment that we expected the year to be slightly back-end loaded but I don't know that we want to give more detail on that at this point.

All right. That's fair. Thank you very much.

Steve Barger, KeyBanc.

I'm going to ask the margin question in another way. If we look at your incremental contribution margin in 4Q it was around 2%, it was around 4% for the full year.

The guidance implies incrementals in the 10% to 15% range, which is more in line with what you achieved in 2011 and 2012. Is that a reasonable way for us to be thinking about your incremental margin going forward as you think about your mix and how you expect the top line to grow?

I think the way the business has changed so much from 2012 with the FRS acquisition, really the Company has changed a lot. So I am not sure you can go back to 2010 and 2011 and draw conclusions on consolidated margins. I think the way Matt characterized it with the volume increases that we are getting next year at the top line and then the improved mix we are getting, especially with the rebound in capital equipment business, those are the primary drivers to that margin improvement.

Okay. And for the $14 million in growth capital, can you talk about some of the specific projects you will be funding, or maybe finishing up?

Sure. I'll address generally the two largest. We continue to invest really disproportionately in the aluminum business.

That is -- obviously continues to be a focus for the growth of the Company and really achieving the commeasurate profitability with the sales. So that continues to be a primary focus.

And also for the first time in a long time we are spending a little money in our forge group. The forge group I think has some really unique opportunities related to it, a competitive advantage we have relative to our process and raw material source. So that's one you don't hear us talk a lot about but we are refocusing some of our energies as it relates to improving capacity in our forge business.

And lastly, and I think I may have mentioned this on the last call, we are seeing an opportunity to extend some of our fuel filler technology into China. So we are spending a little bit of money there on a relative basis to build a manufacturing cell surrounding our fuel filler technology to support GM Shanghai.

Got it. And for those last two, the forge and the fuel filler, will that start to generate benefits in 2014, or is that more like an out year benefit?

Certainly the forge one is an out year. The lead time on putting together a forge line is pretty dramatic so that is definitely an out year. I don't recall exactly when we are going to see revenue from the GM Shanghai opportunity but best case it would be late year, probably out year as well.

Okay. And I was trying to write fast and I may have missed it, did you say that the aluminum business should be fully ramped, or did you say when the aluminum ramp should be fully ramped this year?

Number one, clearly the ramp up is going at a slower pace than we anticipated. That's by the trailing of the earnings.

The ramp is under full speed at this point and outlined by Matthew's talk, discussion on growth in that particular unit, but will not reach its peak as we are ramping -- the finals. Two tranches of business came in. We've talked about the $125 million with the orders then the $100 million.

The $225 million in orders we have taken in the last year and a half. We are not even into, just beginning to get into the second $100 million. So the full impact of all of that on the operating income of the aluminum effort will not be reached until the latter part of this year.

Got it. And in terms of new programs that are out there, there was a lot of news in the quarter about Ford coming out with in aluminum body, which I know is a long way away from ever getting into production. But is there any new business you are looking at that may give you the next leg or something to think about for where the business goes?

Well, number one, we have talked about having in our current plans somewhere between $250 million and $350 million in revenue from those locations, those five units. We are on the way there.

We thought we had 100% of the business committed to at least $250 million. The Dart has been a disappointment, it's been a disappointment to Chrysler, it's been a disappointment to everyone in the auto business. The Dart is selling at half the volumes they projected.

So we are in discussions right now to redeploy that 50% of the capacity. In Phase 1 of this, Steve, the Dart, the Grand Cherokee and the Dart came along at the same time.

The Grand Cherokee is running ahead of schedule, slightly. The Dart is running at 50%. So we have 50% capacity there that we have now released in discussions with the customer to be deployed in other business.

So there's a little extra bump coming there. We've got the equipment but when you are thinking about reducing $35 million or $40 million worth of a products on the equipment and you are only producing $20 million, you've got to fill that hole.

But there is tremendous, I don't know where the capacity will come from, but we are hesitating in going deeper until we see the real earnings of this Company. So as indicated we have firstly sold out the capacity we have, we are ramping up to it. It should hit all -- everything should be on, we'll replace this business from the Dart.

There's plenty of business around. But the F-150, the Ram truck, all those companies, all those front knuckles are going all aluminum and incidentally, everything in China is going aluminum.

So it's real. But before we invest any additional new CapEx in the business I want to see the returns advanced EBIT to the levels that we anticipated. So we are not active at this point trying to grow this business beyond the current level and we are going to wait for the earnings to catch up and they will.

Fortunately we've had a change in the CEO there, a gentleman who has worked with us, with me for some 30 years, has decided to retire and we've been able to pick up a very talented person that brings 12 years of experience at the operating level.

And we have the business, we have the platforms. Now it's really pressing in on the operations and making it a more efficient, less scrap and higher EBIT. So that's the real project for 2014.

That is a great detailed answer. I appreciate the color. Shifting to supply technologies, I think last quarter you talked about a couple of new sales hires.

Can you just discuss how they are ramping? Are they signing new customers, have they been able to get deeper with existing customers? Just how is that initiative going?

As I just mentioned, I didn't dodge this question, we moved the chairs and the deck so to speak and made some new hires focusing on our strategy around international expansion but also refocusing our intensity and our strategy about customer solicitation here in the US. Those sales cycle times as you know are longer than three months. So I really don't want to get into details relative to current customer activity other than to say the style and scope of which we are attacking the market is meaningfully improved.

Okay. And I understand the sales cycles are long there but you have relationships with some of those customers already. So presumably that should be a little bit of a tailwind as you go into have those conversations.

Yes, I think we have always been pretty good at getting more business from current customers. Our intensity has switched to new customer development.

Got it. In both the US and Europe? Or more focused in Europe?

I think the European initiative is 18 to 24 months old now and has been bearing some fruit but focused largely on pursuing our current customers. The shift we experienced in strategy, both personnel and strategy, for sales mid-to-late last year was focused on really new business development, new customer names, new opportunities in the US.

Steve, one other thought on the personnel. As we moved further down the road on the N5 you will be hearing about changes, all positive changes, different ways to approach the markets, different skills at different times.

The aluminum business right now needs a real dose, for example, of operations, operations progress, progress, scrap down, headcounts -- all the things -- we get half the business. So we are going to continue to change personnel here and the sales initiative that Matt is talking about at Savi Tech is great.

It's new era, new people, new ideas, different customers. So we're making decisions now that affect not 2014, we're talking about things that are happening in 2015 and 2016 now. We have to have a make sure we have the team to fit the size of the Company going forward.

That's a great answer. Thank you.

And last one for me and I'll get back in line. I heard you say that there are no acquisitions built into the revenue forecast but what is the likelihood of deals, or can you talk about what kind of activities or conversations you are seeing right now in terms of the number of conversations that are taking place?

Well, we are very active. Quite frankly we see more transactions than we've ever seen before but there's a process here and if you would look into the foreseeable future for 2014 we hope to accomplish, again, a couple of strategically identified bolt-ons, the ones we like that fit right onto a current silo.

We're not looking to buy any hotels. We are interested just getting things that fit that our management can take on.

So you make an acquisition we can turn it over to someone running the silo. So I doubt if we are stretching but there are plenty of opportunities in North America and in Europe for companies under $75 million in volume in revenues that will fit the Company, but it's a long progress as you know.

You have to check a lot of boxes but we are active. We will always stay active but we are pretty strict on what we will move on.

So hopefully something will happen. But what we have out there, the guidance we have out there, is without any additional push from acquisitions.

And if we get something it's like anything else it takes a long time to get a transaction done at the right price and for the right reasons. So we haven't put anything in house yet today but we are working on it and hopefully we can get something finished before the end of the year.

But somehow it just always takes until the end of the year. I don't know why.

I want to point out, take this opportunity. You think of at the end of the year when you think about the quarter and when you think about 2013, and we've talked about this. If you've been around a long time at Park-Ohio we've always talked about this capital equipment business.

You're supposed to get the orders in January. You don't get them until February and they are always supposed to be shipped before the end of the year.

This is clearly a year, and I am really disappointed in fact, we were talking, and firming up the guidance in November. And that's how strongly we felt about where we were with the capital equipment business.

But everyone got so busy so quickly the parts necessary for us to complete the machines that we already sold that were sitting on the floor we couldn't get the parts in. So we couldn't take percentage of completion.

So when you take $14 million worth of sales basically that have been moved forward, as Matt said, think of it this way. If you use the historical margins of that particular capital equipment part of the business, when you give up $14.8 million in sales you also give up $0.11 in EPS.

So we only have 12.3 million shares and all these shareholders on this line, so the leverage here is incredible. It hurt this way because it's going the wrong way for us.

But if we completed, or if it had been $14 million of sales above what we were planned we would be talking upside. So it's disappointing but it's clearly something that hasn't been lost, it's been pushed downstream.

Understood. Thanks very much for that. I'll get back in line.

Jay Harris, Goldsmith & Harris.

Going back to these parts that got delayed. Can you give a little more color -- what other segments of manufacturing might have been not yours particularly but in general might have been adversely affected by the inability of the suppliers to ship on time?

I'm not sure I understand your question.

Well, you had ordered parts for your engineered products that didn't come in on time.

Let me back up and say, Jay, that I think my dad characterized one piece of a very complicated puzzle. Forecasting in that business, and you have been around long enough to remember this, I think, is an extreme challenge.

The timing of when orders will be received compared to when the timing of when they will want the piece of equipment, these are very very complicated negotiations and often characterize themselves, or manifest themselves in some volatility relative to earnings. Certain contracts, some in our business, weak account for on a completed contract basis, certainly we account for on a percentage of completion.

So I think my dad did a nice job of characterizing one of the issues that impacted our fourth-quarter results for that business but it was really a variety of issues including the inability to receive certain parts. It also included the ability to get in some labor hours over the holidays. It included customers who deferred a receipt of equipment.

It includes some foreign operations, having manufacturing issues. So we got hit by a variety of things that while not fundamental to the business impacted the results in what already is a pretty volatile or challenging business to forecast.

I was just looking, and perhaps you don't have the answer, but I was just looking for some insight as to what was happening outside the Company that might apply to other sectors of the economy. Are the customers in terms of these particular suppliers not being able to get the parts out of the door? That's all.

No. Let's not focus too much on that individual comment, and I would not make this a something we can extrapolate to outside our business. This was just a variety of negatives which impacted our ability to forecast that business well in the very end of the year.

Let's go on. You indicated on your last conference call that you had sold 25% interest in your forging business, I think to the local steel company. What kind of a capital expenditures are required to expand this business as you would like to have it expanded over the next few years?

The prior questioner, Steve Barger I think, asked me about CapEx --

I'm not talking about CapEx in 2014, I'm talking about the forging business, the CapEx in the forging business over, to expand it --

I understand the question, Jay, I was just commenting that we are clearly reinvigorated in our desire to invest in that business. We have not mentioned that often over the years.

It has been a business that generates a lot of cash. But we certainly believe that the opportunity over the next three years could be as much as $10 million to $12 million in incremental investment opportunity.

And was there, other than selling the 25% interest and getting that cash in the door, were there other quid pro quos that you might be able to comment on in terms of that partnership relationship?

Yes, I think the reason, for the strategic reason we pursued this is our manufacturing site is essentially on property for this mill. And so they have been extremely strategic partners as it relates to raw material. They have been strategic in terms of our ability to share other resources, so it makes a lot of sense.

They have a tremendous interest in seeing our business grow, so it's not just a simple as capital. In fact I would list capital as maybe the last on the list of four or five other reasons, burrowed specifically in our geographic location and burrowed in our raw material relationship.

All right. And then finally, recently there has been a suggestion out of Washington that the truck industry upgrade their motors in 2015, not that may or may not happen. What would be the impact on the flow of business that you do with that industry should these rules go through?

Our principal truck relationship is through supply technologies, Jay. So as long as they are making trucks we are not exposed from a technology standpoint.

So it's really the build rate that would affect us. And the truck industry, as you may know, it is pretty typical of them to go through changes in design relative to regulation.

It's happened, just in my involvement with the business over maybe 15 years plus, it's happened it seems like three or four times. So I would anticipate that if it happens again there will be significant shifting.

We will see a year where people pre-buy to get a better deal and then we will see a significant drop-off in demand. But it is something the industry, unlike any other that I really follow, seems to be able to manage.

All right. Thank you very much. Keep up the good work.

Thomas VanBuskirk, Sidoti & Company.

Just to go back to a couple of things. Can you help me connect the dots a little bit between the issues that you had in the fourth quarter in terms of parts deliveries and so forth and the delay in getting the capital equipment finished.

And then your more general comments about the back-end loaded nature of how revenue is going to fall in 2014. I'm just trying to get a sense of in terms of the parts deliveries and so forth and other issues, fixing the problems from the fourth quarter, how far you are along in already getting that business completed, or whether -- how long that is all going to take and how those two things relate and whether the weather was a factor in any of that?

I'll take the first part of that. I use one example of parts delivery.

If you are building at a machine there are is tremendous amount of components you buy and some you build yourself. It's like building an erector set.

So not one thing impacted the delivery of those items in that quarter. A whole series of things. Some could have been weather-related, some could be pure hours, it could be numerous things.

So I was mentioning 1 of 15 to 20 variables including the customers. If they are not ready at a particular location and they decide they don't want it shipped, they can prevent that by saying we are not ready to put the machine in.

But anyone's been around this Company as long as I have in the last 20 years we have had this, in 10 of the last 20 years we have slippage in the fourth quarter of capital equipment due to a whole series of things when you are building an Erector set, so this is not new. It came up very very quickly and it has to be, even in process it has to be a certain level of completion for us to take it into earnings and revenues.

Now that was not done, it's going to be taken in in 2014. So this is not a new event, it's not a surprise, it's a surprise we couldn't get it out to us and it affected our earnings but it has happened before and we can't control this down.

You are building the machines. It takes a year to build these machines from scratch. This is not one day.

If you get the order in March you could start building this machine. It sells for millions of dollars. And you've got to buy thousands and thousands of components, so this is not as simple as just clamping a bunch of nuts and bolts on it.

This is a highly engineered -- that's why the margins are so high in this business. So it happened. Let's not seize on one idea, just the parts.

It's a whole potpourri of ideas that prevented that from going out. We wish it had gone out in the fourth quarter and quite frankly we thought it was. It didn't.

But it's going to go out soon. So I'm disappointed about it but this is the way the capital equipment business evolves over years and years and years. Because you have to depend on a lot of outside suppliers to send all the pieces to put the widget together.

Let's focus on for a second 2014 and just say that there's really no connection per se between an event we've already made way too much of as it relates to an issue we had at the end of fourth quarter, some timing issues. As it relates to 2014, really what we mean by back half is our business doesn't seem to have the seasonality it once did.

So the back half really we're referring to is not necessarily a significant revenue swings as it relates to the overall business, certainly nothing material. It relates to what we hope to be a couple things that either relative to timing or relative to improvement, when I say improvement obviously I am referring to general aluminum, are going to kick in incrementally a little more profitability in the second half than the first.

That's really it. I don't think it's going to be material in any way, but it was just our effort to try and not suggest there's huge volatility, just our way to suggest that we felt the back half would be slightly stronger than the first half. That's it. I wouldn't read any more into it than that.

Okay. No, that answers the question. I was just trying to see if there was a connection between the two statements and also to see how far you are in getting the other issues fixed, but that sounds like it's a complicated question.

Once again, I don't want to leave this with the idea -- I've said it once I will say it again, nothing fundamentally was wrong with that business in the fourth quarter of last year. There were timing issues related to the business but also related simply to accounting issues that presented that prevented us from meeting our expectation. Nothing fundamentally is wrong or different with the business.

No, I totally get that. I'm just trying to model the quarters a little bit in terms of seasonality and front half versus back half, that kind of stuff.

Just one quick follow-up on heavy-duty truck. That had become a much smaller vertical obviously in the past couple of years than in the past because of what the industry went through. The first piece of that is do you think the rebound there is sustainable and are we at the point already where it is now a meaningful contributor to revenue for the segment and to segment growth?

Yes, truck has always been meaningful. It's less meaningful than it once was.

But having said that operating leverage means a lot in the supply tech business. So incremental revenue from truck is one of a handful of bellwethers for the business.

So I think that while it doesn't mean as much as it once does I think that what we at least seem to be seeing in the crystal ball at this moment is improved numbers year over year. In terms of stability in the industry you would be hard pressed to find someone that would be in a position or would want to predict this industry long term. I'll just sort of take what we can get, which seems to be a little bit of a wind at our back year over year.

Tom, one of the things you really, and everyone who has tried to predict the truck market it's rather unusual, it's lumpy at best. But the aging of the fleet is something we keep our eye on and clearly the aging of the fleet, the trucks on the road they are piling up these miles every single day.

There is a built-in demand. It's coming. Because they can only take them so long and only rebuild them so many times.

So I think we are close to a point where the aging of the fleet is going to catch up and produce new truck sales. And I think the change in admissions and everything else is all going to play a part of it.

But their trucks are out there every single day, running running running, and we are going to get a run here and we are looking forward to it because it hasn't been an exciting business to be in it for two years. But it is coming and it is perking up right now, so I think it's about ready to run, personally. Hopefully, I'm correct, but the aging of the fleet should be considered.

I appreciate that. Thanks a lot.

Mike Hughes, SGF Capital.

Thanks for all the details in the prepared remarks. First question, on the corporate costs, $6.3 million in the fourth quarter, is that kind of a good run rate for 2014?

I'd say it is reasonable. It's a reasonable run rate. I'll give you some guidance on corporate costs for 2014 and tell you that they will be in the $24 million range to $25 million range.

Okay. And in my understanding, I think you have said in the past the heavy-duty truck given you have one large customer there carries a little bit lower margin, is that correct on the assembly component side?

It is correct on the supply technology side.

I'm sorry, supply tech, I meant.

And let me back up and say we deal with a lot of people in the heavy-duty truck industry. From an OEM perspective we have some concentration, we do a lot of business with the tiers.

So that's a significant portion of what we call our truck revenue as well. But yes, it is marginally -- it's in a lower margin but it also is a completely different model on cost to serve, so some of that is mitigated but it's clearly a lower margin business.

Mike, one other additional comment to that. Being a lumpy business as it is we have to maintain the capability, you just can't cut out the ability to respond to the trucking company, especially like Volvo.

They will go from 10 miles an hour to 40 miles an hour and they will do it all in about two months. So we have to stay alert and on our toes at all times to be able to pick up any quick ramp up in that business and it always comes fast when it comes. So there's a little bit extra cost of carrying that along as you prepare for the volume because it's like anything, the warehouses where that is involved where the trucking is done from is not being fully utilized.

Okay. And then last question on assembly components and then within assembly components the aluminum business, you mentioned scrapping a little bit of an issue. Is there, as these new businesses ramp, is there more of a warranty expense issue too or just the 6.1% margin in the quarter was a little bit disappointing, so how do you see that building over the year?

I agree with you, it was disappointing. There is no warranty issues it's just that when you are bringing up a new product, you're part of the design is being in the aluminum casting safety critical business, some aspects of the aluminum casting business, the machining that don't require the safety critical nature relative to the process and we have in bringing up a lot of new platforms, 12 to 15 new platforms all at the same time, the scrap isn't an issue but it could be an issue.

We program in the pricing model a certain scrap rate before doing the launch period and we're not far off that. But we expect it to come down very very quickly when we get into the full launch.

So we are right at that turning point and the amount of scrap, although it is reprocessed and put back into the system, if you have to make it twice it is not good. Scrap doesn't result in shipments under quality because of our strict quality standards to our customer, but it is just an internal absorption that it's expected but we are at a point now where that should stop.

Okay great. Thanks for all the color.

[John Balm], private investor.

Hi guys. Great quarter, great year, look forward to a good year in 2014.

Comment and a question. First comment, congratulations on the net debt production especially the projection for 2014. I know you guys have been working on that a long time and the balance sheet issues always help.

Eddie, back to you. I know you set some pretty strong sales guidance, I think in the range of $2 billion in five years from last year. Are you still on target for that and do you see any proportionality differences in the three silos when you actually attain that level? Thank you.

John, we achieved the run rate that we expected, and this is each year to get to the total of the $2 billion, we have to achieve a run rate for the previous year. We carry into 2014 achieving our first of the five legs. Now we are working on the second leg, the second, and that requires a higher increase in revenue.

So we have to work harder but we are still committed to the N5 and the combination again organic growth and acquisitions. So one down and the five to go and we expect to keep achieving that goal. That's what we have in mind but we're not going to do it at the cost of not making a profit and getting the cash flow.

So in that giving things away. And we are not paying too much for the acquisitions. So we are going to be in discipline and we want to do that, actually, I would like to exceed that if it's possible, but then the result is it is a goal but it's important to make sure that we bring the margins along with it.

All right. Thank you very much. Looking forward to good stuff in 2014.

Okay, my sheet here doesn't reflect any additional questions. I want to thank everyone, all the stakeholders at Park-Ohio, the employees and the investors and the bondholders.

Over here we are pretty excited about it. It wasn't perfect but when you lead in all the categories, the key personnel, the employees here are all excited about the future. They think we have had a great year.

You can't grow this fast and can't stand strain without having a few surprises. And we are going to go after our 2014 goal and I look forward to seeing you and our annual meeting is going to be on June 12, 2014 in Cleveland, Ohio. If you're interested in coming we'd love to see some of the shareholders or bondholders.

You can contact Cindy Simmons at pkoh.com. Have a nice day. Thank you very much.

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