Park Ohio Holdings Corp (PKOH) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Park-Ohio Third Quarter 2017 Results Conference Call. (Operator Instructions) Today's conference is also being recorded. If you have any objections, you may disconnect at this time.

Before we get started, I wanted 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 in the company's 2016 10-K, which was filed on March 9, 2017, with the SEC.

Additionally, the company may discuss an adjusted earnings and EBITDA as defined. An adjusted earnings and EBITDA, as defined, are not measures of performance under generally accepted accounting principles. For a reconciliation of net income to as adjusted earnings and for a reconciliation of net income attributable to Park-Ohio common shareholders to EBITDA as defined, please refer to the company's recent earnings release.

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

Good morning, ladies and gentlemen and, welcome to Park-Ohio's Third Quarter 2017 Conference Call. I'll now turn the call over to Matthew Crawford, President of the company.

Thank you, and good morning. To begin, our third quarter was a mix bag of results, relative to our internal expectations. Our revenue was strong, we did have some unforeseen costs, which affected the bottom line. We expect these costs to moderate quickly and are pleased to confirm our guidance for 2017. I also want to highlight, as I begin, continued progress during the quarter related to important strategic initiatives, which include Supply Technologies continued investments in Europe, lots of heavy lifting relative to 2 new Chinese factories in our Assembly Components group, and improved global capital equipment order received in Q3.

I've mentioned these because our strategic initiatives, which each made significant progress in the third quarter, although they will not be financially significant until 2018. More on these later.

Operationally, we continue our focus on operating efficiencies, particularly in those businesses, which are very busy. Acquisition integration as well as cash flow on working capital optimization. We're also positioning the growth of the company for future growth by investing in new facilities and product offerings.

Financially, we ended the quarter with $81 million of cash on hand and over $200 million of unused borrowing availability under our revolving credit facility.

Relating to acquisitions, I would remind everyone that in the past 12 months, we have made 3 strategic and accretive acquisitions. One, GH, in December 2016 in our Engineered Products segment, two, Arrow Missile components in Q2 of 2017 in our Supply Technologies and Aerospace business. And 3, our most recent addition to Supply Technologies, Heads & All Threads, which closed in Q4.

The Heads & All Threads acquisition will enhance our global footprint, strengthen our market position for supply chain management services and bring new customers to our already diverse group of global clients.

The business, which has annual sales of approximately $35 million, is headquartered in the U.K. and is a leading European supplier of supply chain management services with locations in England, the Czech Republic, Poland and India.

Turning now to our third quarter 2017 results. Net sales of $352 million were up 13% year-over-year and represent our highest sales quarter in over 2 years.

As I will discuss in more detail below, the sales growth was driven by a combination of higher-end market demand for existing products, organic growth from new products and markets and sales from GH induction business, that was acquired in late 2016. Year-to-date, we generated net sales of $1.05 billion, which is 8% higher than the corresponding 2016 period.

During the quarter, we achieved GAAP EPS of $0.80 and adjusted EPS of $0.82 per diluted share for the 9 months ended September 30, our adjusted EPS is $2.37 per diluted share.

Sales grew in most of our businesses during Q3. In Supply Technologies and Engineered Products segment, growth was primarily driven by higher-end market demand for our products. Sales on our Assembly Components segment were mixed. Lower sales volumes were isolated to our molded and extruded rubber and plastic products lines. However, we continue to see higher sales volumes in our fuel filler pipe and fuel rail product lines where expansion in China and Mexico continues. Gross margins decreased from 17.4% in 2016 to 16.2% in 2017, due primarily to: One, startup and launch cost related to our new facilities in Canada and China; 2, lower absorption due to lower sales in our extruded rubber and plastic businesses; and 3, a different mix -- excuse me, different mix of revenues as well as additional upfront cost incurred in our Industrial Equipment group to prepare for the build out of significant new orders. Year-to-date, gross margins increased from 16.1% to 16.5% in 2017.

We were able to lower SG&A as a percent of sales year-over-year from 10.7% to 10.4% in 2017. This SG&A improvement was driven by higher sales levels compared to a year ago. Operating income was approximately $21 million, which is roughly equal to the third quarter of 2016. And on a year-to-date basis, operating income is up 28% on a GAAP basis and 12% on an adjusted basis.

On the third quarter interest expense was $7.8 million compared to $7.2 million in the prior year. The increase was due primarily to the debt incurred in connection with the GH acquisition and the higher balance on our senior notes. Our year-to-date effective interest rate was 6.1% in both years.

Year-to-date, on an adjusted basis, we earned pretax income of $42 million versus $36.6 million in 2016, an increase of 15%. Our effective income tax rate for Q3 2017 was a 21%. This rate included the reversal of various income tax accruals totaling $1.4 million relating to previous uncertain tax positions for which the statute of limitation expired.

In 2016's third quarter, as you may recall, we had similar reversal totaling $4 million, which resulted in a net tax benefit a year ago. For the full year 2017, including the reversal in Q3, as noted above, we expect our full year effective income tax rate to be approximately 30%. As a result, our adjusted net income in Q3 was lower than in Q3 of '16, driven by number 1, higher interest expense, number 2, higher effective tax rate.

In September year-to-date period, EPS adjusted was $2.37 per diluted share, compared to $2.35 per diluted share in 2016.

Excluding the reversal of tax accruals previously mentioned, our year-to-date adjusted EPS is up 11%. 2017 operating cash flows are $18 million. Our strong cash flow performance in Q3 was driven by earnings and efficient management of working capital, supported by a good growing sales mix.

Compared to a year ago, we improved our net working capital by 11 [bps.] Our CapEx in the quarter was $6.5 million, resulting in a year-to-date CapEx of about $19 million. For the full year 2017, we are forecasting CapEx of approximately $25 million to $30 million.

Now let's review our segment results. In Supply Technologies, sales were up 15% from $122 million in the 2016 period to $140 million in Q3. This increase is driven by higher customer demand in several of our key end markets and new business implemented in the second half of 2016.

We saw improved end-market demand in many end markets, highlighted by the increase in truck and truck-related market. We also experienced an increase in the year-over-year demand in power sports and recreational equipment, semiconductor and aerospace. We expect to see continued strengthening many of these end markets for the remainder of 2017 and into 2018. In addition, strong sales continued in our [fastener] manufacturing business, as sales were up 10% compared to a year ago driven by increase in global demand for our proprietary products. We made an investment in this business over the past several quarters, moving it to a new larger facility to support this planned future growth.

Operating income and Supply Technology was up to $10.9 million from $9.7 million, a year ago, an increase of 12% due primarily to profit flow-through from higher sales. Although, during the third quarter, operating income was modestly affected by higher facility cost related to this growth and the impact of foreign currency losses.

Year-to-date, our Supply Technologies were up -- sales were up 8%, segment operating income was up $3.8 million and operating margin was up 30 basis points. In our Assembly Components segment, sales were down $5 million from $133 million to $128 million in Q3. The decrease was driven by the lower sales volumes due to lower customer demand in our extruded rubber and plastic product lines. The lower rate of sales in these business lines will continue through the first half of 2018 until we kickoff production of a significant number of new jobs, which will reward our patience with this global strategy.

This decline was partially offset by higher sales in our fuel filler pipe and fuel rail product lines. For the quarter, sales in our aluminum business were comparable year-over-year. Segment operating income for Assembly Components was $11.4 million compared to $13.9 million a year ago. The decrease in operating margins was due, first, to the startup and launch cost related to 2 new facilities in China, which produced fuel rails as well as extrusion and molded rubber parts. And second, lower absorption in our extrusion rubber plants, as discussed above. Year-to-date, in Assembly Components, sales were down 2%, segment operating income was down $1.3 million and operating margin were down 20 basis points.

Turning now to our Engineered Products segment. Sales were up 47% from $57 million in Q3 2016 to $84 million in the current period.

The higher sales were the result of stronger demand in our induction heating and pipe threading businesses compared to last year and sales from the acquired GH business. Excluding the impact of GH, organic growth in this segment in 2017 quarter was up 24% year-over-year. Operating income in the segment was up 50% year-over-year, driven by higher sales levels. In our Industrial Equipment group, new equipment sales and after-market sales in Q3 were up 96% and 24% respectively over the same period a year ago.

Year-to-date, Engineered Products sales were up 28%, segment operating income was up $4.9 million and operating margin was up 110 basis points, driven by increased customer demand and the result of the inclusion of GH.

Although certain end-markets in this segment remain sluggish, primarily rail and military aerospace. We continue to experience an increase bookings for new equipments. Specifically, bookings in Q3 of 2017, excluding those related to GH, were 50% higher than 2Q -- than Q2 of 2017. Year-to-date, our bookings of new equipment are more than double than the bookings for the corresponding period a year ago.

I'd now like to comment on our 2017 earnings guidance. Based on our results through September 30 and our expectations for the fourth quarter, we are reaffirming our full year 2017 guidance of adjusted EPS between $3.15 and $3.35 per share. In conclusion -- we remain optimistic as we finish 2017 and expect continued growth and revenues into 2018.

We recognize that this recent quarter included some additional cost related to our strategic plan. But most importantly, we are well positioned for revenue growth and attractive end markets, and we continue to make organic and strategic investments today that will result in increasing sales and profitability into the future.

With our current strong financial liquidity of over $250 million, we're in a very good position to execute our strategy. Thank you very much.

Well, thank you, Matthew. 2017's third quarter results were very dull to me. So I will speak to the future, which I think is very bright for the company. [That's why a tech silo,] will continue to respond to the industrials surge taking place worldwide. This is a company that follows other companies as they grow, as they're starting to prosper. So we're excited about how we're participating in that particular activity. Again, on a worldwide basis, Engineered Products, and that's the process of capital equipment, oil and gas materials, trucking, has finally turned the corner. This historically has been a highest margin silo, and looks great for 2018 -- and beyond. Assembly Components will continue to grow, particularly China and Mexico.

And finally, the M&A activities will increase as good assets at fair value become available.

I would now like to open the lines for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Edward Marshall with Sidoti & Company.

So the cost you mentioned, unforeseen cost in prepared remarks. Can you talk about maybe define the scope, location et cetera? And then, I guess, sounds like you incurred cost of sales are rising maybe sooner and faster than you targeted? And going back to the cost cuts in '16, I'm just curious -- I wanted to make sure that you didn't cut too far? Are these people-related cost issues, with training et cetera? I think you mentioned some facility cost?

Yes. I'm Matt Crawford. I'll kick it off and perhaps someone can fill in the additional blanks. So the -- so what we tried to be very clear on is we have significant facility cost that we are absorbing and currently in the third period without the corresponding, at least, financial benefit. Our strategic plan for growth included the expansion of several of our key product lines into -- giving them a global presence in both Mexico and China. Those have come with a significant amount of booked orders. In many cases, we won't see that growth until the end of next year. But we've accelerated, given the amount of orders and demand, we've accelerated the pace at which we are building the facilities. And so -- and then I think I also noted in our Canadian business, I think you've witnessed the growth of that fastener business and significant margin opportunity there. So we've enlarged -- moved and enlarged that facility. So we've got a lot going on to accommodate growth. And in most cases, on the facility side, we have not benefited with the corresponding sale. So I don't need to remind you -- we don't have that many shares outstanding. A few hundred thousand dollars of growth expense, where we haven't seen the corresponding revenue yet, can very quickly become for $0.04, $0.05 a share. I would -- that's what I think we've been trying to discuss during the prepared comments. I would also comment that there is a -- I would say the only area in which we had to be pretty thoughtful, relative to rebuilding the team and maybe there's been some incremental cost relative to the how fast it's scaled, is it the Engineered Products segment. We are seeing, as I just mentioned, massive increases in backlog. There is no question that we are moving very quickly to replace, both in terms of quantity and quality, the people that aren't there from, as that business eroded the revenue line over the last 4 or 5 years. So as it returns, there's going to be some challenges, not necessarily on executing, per se, at the revenue lines but on executing at the margin lines. So once again, you only have to have a couple of blips as you rebuild that business in order to watch couple of cents a share in any given period. But the good news is, we've got the business. We're executing as quickly as possible. In any given 3 months, if it were to cost us a couple of cents, that's not important. What's important to us is rebuilding what is now, again, going to be a very strategic and important part of the contribution to our bottom line. So that's the one piece, I would say, there's some accuracy to that comment. But remember, that wasn't just last year. I mean that business was, sort of, adjusted and we made changes to that business over the last 5 years or 4 years as that business eroded. So it came back and we're going to struggle a little bit to get it right.

Edward, the -- we've not -- as part of our approach here, we have not really -- we've done everything to reduce our cost on facilities and individuals. Okay? That's something unfortunate in this '16, '17 trip, as we gain momentum here. But we have not taken out the ability to respond quickly. This capital equipment, these orders that are just flowing in the front door finally, after a long period of time. The factories are still there, and will incur, and I think we have already incurred some extra cost this year in the launching and getting ready to roll with that much business, which will be shipped in '18, a large portion of it. So there are some -- taking things -- from a slowdown [napping] view to full speed is not easy, but we have not given up on the way down the talent that we need is necessary to accomplish that efficiently.

Okay. And just to be clear. You talked about the expansion in Mexico and China. Are those -- just -- you talked about book orders. But I want to make sure that it goes beyond orders. Is there some commitment on the form of OEM to kind of continue using park for these kind of product lines that you are building out the capacity? I mean this is more than a, if they -- we build it, they will come back scenario, correct?

I'm not quite sure what your question means. I mean typically, the most significant vote of confidence you get from an OEM is when they book business with you and buy tooling for you. So I think that -- the commitment we've seen from them -- and once again, the OEMs I'm talking about now are not the big 3. We have seen our share of opportunities with the big 3, but I'm also talking about a myriad of Chinese companies and European companies who are also seeking to do business with us in some of the key product lines I've discussed. So this is not a 1-trick pony in terms of OE. This is not a 1-trick pony in terms of geography. And candidly, I think -- there's no more demonstration you get from an OEM wanting to do business with you than placing an order and buying tooling, to be honest with you.

This is Patrick Fogarty. Our strategy in both China and Mexico began with new orders booked to allow us to build out those plants. So this wasn't a build-it-and-they-will-come strategy. Once we have the orders, we expect to expand on those orders in those locations.

Got it. Sounds like a high class...

I just want to comment, maybe page back a little bit too. This is not a new story. I mean this fuel rail business has doubled and tripled in size since we acquired it. This is exactly what we thought would happen. We needed to make the investments, particularly in China, because our customers were demanding it. If we're going to continue to see that business become what we think it could be, particularly in a space that has incredible demand, globally and where we're a leader, we got to make some investments. So we had a nice run there, I think, where we took it from $30 million to $35 million up to $100 million and got to maximize every inch of every corner of every building we had. But you've heard us discuss this business. This is a globally important product line with myriad of Tier 1 partners and OE partners. And you know what, for us to see seize that advantage, it's time to invest. So this isn't really new news.

Right, right. Okay. I'm glad, I gave you the forum for that. I'm curious on acquisitions, I mean you're getting more active. I guess the last -- I guess the 3 out of 4 of the last deals were done internationally. Are you finding the multiples, internationally, are more reasonable than what you're seeing in the U.S.? Or I guess in North America? Are you seeing any rationalization, domestically?

Edward. What is clear, for example, what you're seeing in Europe there is, for the first time, we are really taking in into that sector of Eurozone or Europe, Supply Technologies and the systems and what they stand for. Keep in mind, this is -- the momentum there is because we bought one company who will lead to another company who will lead us to another company. So that area is just loaded with these small or midsize companies that have special relations with the customers that really haven't ever heard of Frances or our technology. So it's -- on fire over there with the number of people that are interested. And when you make acquisitions like we have with outstanding companies, with leaders, that have been in the business for a long time. That flows to one to another person's saying, look it works.

So it's -- that is very strong right now. And I think for the first time, from the M&A viewpoint, I see a move -- it's not a softening, but I don't see the pressure from the private equity firms that existed even a year ago or 6 months ago. And I think you're going to see that -- as we move forward in acquisitions, I think it's going to reflect that we can add to the silos we have at reasonable prices and get the type of return that we're talking about. And just seems to be less pressure at this point from the private guys. And when I mean less pressure, the multiples are coming down. So this is good. I really -- we haven't been really active. As you know, we've been doing small deals transactional, add-ons, referrals. What -- I see that changing. I see opportunities of scale in the future. But I want to address this $0.05 shortfall. Simply, this is not a hole in the road where the truck could fall into. This is a pebble. I mean it's a little amount of money. I know it's a target. But the money we spent, we'll get that $0.05 back and more in the future because we are in a serious growth mode here, and we're ready to go. And things are in our way and particularly, if there's any effort, any effort or success in the tax reductions, then I'm hearing out of Washington. They are all aimed at companies like ourselves, they have a lot of EBIT. So I've been more excited about what the potential is here. It's been a long time. But this $0.05 is just as a pebble in the road compared to a boulder. I mean -- and I want to make that very, very clear. I'm not disappointed about that. It's just, we're running the business, as you know, long term. So we're going to do things, when we can to make -- to enhance the future.

Our next question comes from the line of Steve Barger with KeyBanc.

This is Ken Neumann on for Steve. So first question I have is around Supply Technology and the operating leverage you guys expect to generate out of that business. With the revenue up as much as it is, I understand, the startup cost, and the launch cost you incurred this quarter. Trying to get a better sense of how quickly do those cost moderate? And can we expect operating margins or -- excuse me, incremental margins to, kind of, get back to a normalized value whether it's this year or is that something that's early 2018 phenomena?

Yes, I'll start, Ken. Every now and then we have this conversation, particularly, when the truck market gets stronger. You know, some of the margin -- if you've heard us talking detail about how we think about Supply Technologies, we talk a lot about running the business on return on invested capital, which means margin is important, but it's not singularly how we measure the business. This is a working capital intensive business. So we think about our investment, our operating efficiencies, relative to our margin. So to be clear, sometimes, in a growth period, particularly in lower margin accounts but higher return invested capital accounts, we can see margin degradation that is fantastic. Meaning, we are getting incremental products with a current customer, perhaps, at a lower margin, but at no incremental cost. So it's infinite return on investment, if you will, but yes, it's a lower margin. So mix is an important to understand in this business. And I would articulate that the third quarter, in particular, saw what I would consider, from return on invested capital, outstanding returns. But it had some degradations to our margins. So very difficult to measure this business just [as it affected] gross margin line. Having said that, there are some areas which we did absorb, what I would call, more on a period absorbing some cost that are more short term in nature. The first -- and your guess is as good as mine, is foreign currency exposure. We've done a lot of business building outside of the U.S.. And one of the prices for poker of doing business with global OEMs is sometimes, you get currency risk. So Pat can go into detail what that means, but it impacted performance of Supply Technologies. Once again, not something we talk about a lot, but as we are sort of -- maybe we feel -- sound a little defensive about feeling as though we're a few cents short. But it matters, a few hundred thousand dollars of currency exposure on $150 million business suddenly becomes important in that context. Number 2, we have spent money growing some facilities space. That will moderate going into 2018, particularly, in the middle of 2018 as that part of the business fills out and continues to grow.

So -- and lastly, we do have some strategic initiatives. We've discussed on prior calls, related to the build out of an MRO business. A build out of an aerospace business. Those businesses are contributing but they're still early in the stages of development. So they are not contributing necessarily in a accretive way that we would expect. So I would tell you, each of those I think has a period in which they were moderate -- the facility cost will moderate over the next 6 months. The strategic initiatives could be a little longer. Currencies, you're guess is as good as mine. And mix is something that we just wouldn't focus too much on, because it is what it is. And believe me, every time a low margin account, higher return on capital investment buys another whatever, that's a good thing for Park-Ohio and Supply Technologies. So my point here is, the margin profile of this business has not changed.

But for the reasons we've discussed, we are modestly below where we expect them to be in the third quarter over the long term period.

That is helpful, and trust me I understand the small share count, and how just a little bit EBIT can impact EPS either other positively or negatively here. I guess as a follow up to that, we have seen some material inflation kind of creep up this quarter during -- could you provide any color on your ability to push price to offset inflation and any color on how you're looking at price cost going forward?

Yes, now that's an excellent question. 2 -- I'll comment on both sides. On the customer side, we continue to do our best with large relationships to index pricing to adjust with some collar around inflationary or deflationary things going on in the marketplace. That can be challenging, given the broad amount of SPs we service. But we certainly do the best we can, relative to things like wire rod and other key raw material components to go into some of our broader classes of products. So we do work on that. On the customer side, undoubtedly, the market has, for a lot of our products, has stiffened up, if you will. We're particularly cautious right now as we go into the renegotiation period, which we're always in, with current contracts, recognizing the period of low hanging fruits to resource or push around, if you will, suppliers on the cost side is probably coming to an end. I would not suggest that's translated into significant cost increases, but we are cognizant that the raw material markets are stiffening up a bit.

Okay. And then just one last question for me. You've talked about this visibility into 2018, and your confidence for continued growth and continued operating income growth and EBITDA growth. As you look at the orders, which you talked about earlier, can you maybe talk about what's in backlog that's ready to ship in 2018? What gives you that confidence for year-over-year improvement?

Ken, this is Pat Fogarty. In Q3, at least in our Capital Equipment business, we booked $64 million of new equipment orders. Those orders would begin to flow through in the first quarter of '18, maybe we'll get a little bit of recognition in the fourth quarter of '17, but those will occur in 2018. And what's important here, is the continued growth in our bookings in Q4 and Q1 of next year to carry out the rest of the year. So we're obviously very optimistic because the trend in new bookings continues to increase. And we're hopeful that continues into the fourth quarter and first quarter next year. And that will have significant benefits to 2018.

Our next question comes from the line of Marco Rodriguez with Stonegate Capital Markets.

Just a couple of quick follow-ups to just kind of sure that I'm following some of the trends here. Just on the investments that you've made on the new facilities. If I'm understanding you correctly, there's Mexico, 2 in China and one in Canada for fasteners. And I'm assuming the fasteners is inside of your Supply Technologies, and the China and Mexico facilities are all Assembly Components. Am I understanding it correctly?

Correct, correct.

Got you. And then in terms of the facilities, the increase in orders that you're seeing from clients, are these new clients that are driving these types investments for you guys or are they existing clients?

They are combination. But unquestionably, I think -- particularly as we refer to the Chinese developments, the Chinese facilities have the highest percentage of brand new customers. For example, our ability to access directly Chinese OEMs is a function of being localized, bottom line. So I would say -- a little bit of both in each location, But disproportionately, current customers, in Mexico and Canada and disproportionately new customers in China.

Got you. And in terms of the expectation as far as those orders kind of translate into revenues, if I'm understanding you correctly, for both Supply Technologies and Assembly Components is kind of mid-'18 when you'll start to see some of those revenues come through? And then maybe it'll ramp better in Q4, and then we'll see significant leverage in fiscal '19?

You know -- to be quite honest and Pat, maybe if can jump in. We have not completed our business planning process for 2018. So I would -- I feel as though, each of those initiatives will, we'll benefit from particularly, yes at the top line, but particularly at the bottom line as we begin to complete and absorb some of those excess costs. So I think they'll be meaningful in [2017] and 2018, but to comment exclusively at this point could be difficult.

I agree with Matt's comments. I would say that as it relates to those revenues comparing it to 2017, we're starting to see those revenues be realized, and that'll start in 2018 and continue throughout the course of the year. And then obviously, we'll be in full production mode as we get into 2019.

That's fair, I appreciate that. Then on your comments on the Engineered Products side, that business seems to be picking back up. And I think you said the challenges you're seeing there now as just, kind of, bringing back in the bodies to support that growth that you're seeing. Can you talk about -- is that just a challenge of maybe there's is a tight labor market? Or is that a training aspect you need to get people back up to speed with there?

I think it's a -- listen, I mean they were in a bit of a sustained downturn, and now we're talking about bookings that are way, way up. We also have a more diverse. Last 2 years, part of our strategic plan was to add to our global position on the induction hardening side. So we, sort of, grown our footprint, grown the markets that we're trying to penetrate, grown our expectations of how we can attack the after-market business in each of those geographies which are -- is our most valuable part of the business, from a financial perspective. So I would say that the HR picture, for lack of a better way of saying it, is more complex than it was, 4 or 5 years ago. And I think, also, the average size order is smaller than it was 4 or 5 years ago. That period being dominated by large oil and gas and steel orders. So I think it's a more complex picture. And also, I think we've seen some attrition during the last, call it, 3 or 4 years. So also, I think the labor market is a bit tighter than it was 3 or 4 years ago. So I wouldn't single out any one of those things, other to say that business is accelerating and these are problems that are not something we weren't familiar with. This business, over the last decade or so, has had a couple of these cycles. But you can't flip the switch overnight. So each of the issues I've mentioned, are an HR challenge, and we're working through it.

Got you. And last quick question. On the acquisition announced here in October, Heads & Threads, I know you guys have stated that its got an annual revenue of around $35 million kind of run rate. Can you maybe talk a little bit about their historical -- what kind of has been their growth rate? What sort of expectations do you have for that? And what is the margin profile look, in comparison to your aggregate numbers there in Supply Technologies?

Marco, this is Pat. Heads & All Threads, over the last 3 or 4 years, has been achieving double-digit growth rate. They've been able to achieve that with some great end-markets and great customers that are our global customers that we expect to grow with. As far as their margin profile. I would say it's greater than what we see in our overall Supply Tech business, but not significantly greater than the margins that we get in our business today. We obviously believe we can improve on that through our sourcing efforts and being able to source product all over the world, better than what they do today. We believe the opportunity from a sales standpoint is take some of their customers that are really concentrated locally within England and in Czech Republic being able to grow with them globally in our operations, not only within Europe but also in Asia and in the states.

Got you. And does that business, from a revenue standpoint, have any sort of seasonality or should we be kind of thinking about that as far as kind of like a straight line across all 4 quarters?

I would view it more as a straight line. Their end-markets are -- don't experience the cyclicality that you may see in some of our other end-markets.

Next question comes from the line of Matthew Paige with Gabelli and Company.

I just wanted to build on your M&A commentary. I know you said you want to stay within your current silos. But are there any other technologies or products that you'd like to see in your overall portfolio?

Yes, absolutely, the ones that we're -- we've got our fingers in is aerospace, little bit particularly in Europe. This is an area we would like to go, particularly, over the next 5 years, particularly with this new engine that GE is building. We have designs on entry into that business with, clearly, that would be outside of the current silos. But we're very interested there. And we think we can make some progress at fair multiples at this particular point. But we'd really like that -- we really are beginning to think in terms of the future. We've been stuck with the concept that it's got to fit in one of the silos. But if we get an aerospace entry, which I think we will -- into the aerospace business, we need one of the size that will get us in there and get the recognition and get the -- all these aerospace companies, the plants, and everything all certified. So it's not easy to move business around and take business. You really have to buy a company to be in that sector in any meaningful way. And that's a target. Clearly, it's been on the agenda, and it will continue to become more important as we go forward.

Our next question comes from the line of Chris Van Horn with B. Riley, FBR.

I just want to ask, you obviously -- you're inquisitive by nature and you talked about ROAC as a big metric. Are there any businesses and I know historically, you typically don't divest a lot. And are there any businesses that may not be meeting those requirements that you have? Are you looking at anything in the portfolio?

Well, let's address the portfolio. And you're correct, we do not have a lot turnover I mean, out bound companies. We've looked at it over and over again. One of the areas that I commented not too much in the last couple of years is the hidden value of the assets of these companies. We've historically -- we've done 86 acquisitions at Park-Ohio in 25 years. We are a holder of assets. We buy them at great value and we are just stacked up with companies that are tremendously value, not reflected in the current price of the stock. But the issue is, we got a lot of inbound calls for products we have, particularly in the forging business in units. But we had a such a low base in a lot of these companies, particularly the successful ones, the capital equipment companies. We have such a low base and such a history of EBITDA and cash flow. Keep in mind, this company was built from $60 million to $1.5 billion without doing stock and lot of acquisitions with stock. And that's why, we still only had 12.4 million shares out. So clearly, we like and will do acquisitions. But we have had opportunities to sell more than once. Units that we have at extremely margins that -- at extremely high margins 8, 9. Private equity is dying to have some of our assets. But our assets are throwing off, and are very reliable relative to cash flow and growth. And some -- there's no one in the portfolio who doesn't have a chance of growth. But keep in mind, we've been investing money, particularly a lot of our cash flow that we've earned and have generated particularly in the last couple of years. We have a lots of opportunity that's why we made this bets -- bets in Spain and particularly in Italy. We see a absolutely bright, bright future for that capital equipment business that we were already in that we made 2 acquisitions, and it's finally coming home. We can tell by the interest in the orders in the backlog. So we were right there. But we have assets. And I can just tell you simply, every time this comes up, I just take the earnings per share, I take the multiple, I take the taxes. When I get finished selling it after taxes and making all this profit and sharing it with the government, I don't have as good return, and where am I going to deploy the money. I hope that answers the question, but it's not easy. Because we have been great, great buyers of assets. And again, hidden value -- as the largest shareholder, representing one of the largest shareholders in this company, we're very comfortable with our assets and the value. And but we just have a problem, particularly in the assets that we bought in the first 15 years, we had such a little base in it. Goodness gracious, the gains, and we have things that we can sell from 5x from what we have invested in them. That sounds good until you pay the taxes.

Okay, great. Thanks for the color there, it makes a lot of sense. I just want you to comment, if you don't mind, on the -- what's going on in the auto market and maybe some of your exposure in the passenger car side. I know it's just one segment or one-end market, but I'm just curious what you're seeing here?

Are you referring to the North America or globally?

More so, North America but if you want to comment globally, that would be great too.

Year, I mean, I think -- I would -- my comments would be consistent and the fact that our strategy to diversify our footprint and expose ourselves in our products to a broader range of OE's and Tier ones through localization of production continues to be the propelling force in our growth. We also see global bill rates to be stable to up. So we viewed as at key drivers of our business over the next few years. So that, I think, would be the key point I would make. Certainly, if you look at smaller pieces and ask where is the North American market? I don't think we should suggest anything different than what you hear, which is, the markets that we see have generally plateaued. So we're not seeing incremental growth in North American market. The good news is, our portfolio is more light truck then car. So we've not been, I think, damaged. Although, I can certainly think of few places we have. We generally have not been damaged by the follow up in the small -- in the car space. So we've weathered that, I think, conversion fairly well. But we see volumes as having plateaued. But once again, we're focused more on, sort of, growth in the global market.

Okay, thanks Matt for the color. And then just final one for me, just a little bit more on the mechanical side. Cash flow, year-to-date seems to be down a little bit compared to last year, maybe on the working capital side. I'm wondering, is there anything you can comment on there?

This is Patrick Fogarty. No, our cash flow, as we mentioned earlier, our networking capital days are down, 11 days. In order to support the growth in our revenues, we have invested in working capital this year. We still are expecting our operating cash flow to be in the range of $45 million to $50 million for the full year. So we are on track. I think when you look at our quarter-to-quarter cash flows from an operating viewpoint, the second quarter was down a little bit but the third quarter was up over $18 million in operating cash flow, and we expect the fourth quarter to be strong as well. So we are on target with where we thought we would be from a cash flow perspective.

There are no further questions in queue. I'd like to hand the call back over to management for closing comments.

Well, I want to thank everyone for joining us today. We're very fairly optimistic about 2018 and beyond. And we sure have a lot of opportunities. We've gone out and raised this incredible amount of capital, which we're sending on. So we've got little cost standard just 350 versus 250, we're absorbing that. We haven't fired anything off in size. We're surely prepared to do that. But quite frankly, we're going to continue to stay on point. We have the pieces. We have the silos. We've got the people. We've been patient. We've struggled through '16. We all know about that story. And we're rebounding in '17. We're going to be back on track, again, year-over-year growth and revenue and earnings per share. Thank you very much. Look forward to seeing you next time.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.