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Park-Ohio Holdings (NASDAQ:PKOH)
Q1 2020 Earnings Call
May 07, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Park-Ohio first-quarter 2020 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 want to remind everyone that certain statements made on today's call may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. A list of relevant risks and uncertainties may be found in the earnings press release, as well as in the company's 2019 10-K, which was filed on March 12, 2020 with the SEC. Additionally, the company may discuss adjusted EPS and EBITDA as defined. Adjusted EPS and EBITDA as defined are not measures of performance under generally accepted accounting principles.

For a reconciliation of EPS to adjusted EPS 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 will now like to turn the conference over to Mr. Matthew Crawford, chairman, CEO, and president. Please proceed, Mr.

Crawford.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Good afternoon and thank you for joining our first-quarter 2020 call. I want to begin by thanking our entire Park-Ohio team for helping navigate this incredibly difficult time. I'm aware of the personal sacrifices that all of us are making, and I'm thankful for the commitment that our team has made to keep everyone safe and support our customers. I also want to express our best wishes for a speedy recovery to the small handful of COVID-19 cases throughout our global workforce.

Pat Fogarty is here with me as well, and I will have him cover in detail the first quarter in a moment. But before I do, I want to discuss a few things about our approach to managing COVID-19 and the challenging business environment we expect to encounter at least through the remainder of 2020. Despite a robust start to the year, our focus during the second half of March turned very quickly to managing the rapidly changing business and health environment. First, since almost all of our businesses were deemed essential under local law, we worked quickly to manage health and safety.

Many work from home, but many also work throughout our facilities. Our pandemic task force and business leadership moved quickly to implement safety protocol, including social distancing, temperature monitoring, appropriate use of PPE, barriers and hygiene practices. Second, we urgently worked to understand the changing needs of our customers and to respond with changes to our cost structure. Unfortunately, that included a significant reduction in headcount, salary levels and hours worked.

We continue to also focus intensely on operating costs and have meaningfully reduced all discretionary spending. We accomplished these needed changes while still fulfilling our customer requirements and making sure that we have not lost our ability to participate in the upside as things slowly improve. Also, Pat and his extended finance team are putting considerable focus on our liquidity to ensure business stability, which he will discuss in a moment. Lastly, we continue to spend time during the crisis to focus on process improvements.

Whether that includes permanent changes to our overhead cost structure, our investments in process efficiencies, we intend to emerge from this period as a better company with improved quality of earnings during recessionary periods. Now I want to mention a few things that I think are important to remember about Park-Ohio during this period. We are committed to a decentralized entrepreneurial management culture. This is especially important during times of rapid change.

Our business leaders are nimble and are keen to attacking problems quickly and with ingenuity. This does not mean we lack teamwork. Our leadership has been particularly collaborative during this time, and I want to thank all of them, as well as our teammates at the corporate office for their commitment to Park-Ohio and their work to spread best practices. Our diversification is a tremendous strength.

Whether it's geographic, end market, product or financial, we have built a business which can withstand difficult times. Even now, some of our geographic locations, for example, China, are seeing sequential improvements. And some end markets, even here domestically, have met or even slightly exceeded our expectations. So while we expect demand for the foreseeable future to be at disappointing levels, we do believe there will be bright spots in our portfolio.

Third, our strategy remains intact. First, we had strengthened our liquidity position, which has allowed us to preserve our commitment to long-term growth. Second, we recently completed our reinvestment phase affecting a number of our businesses. While we anticipated a better environment into which we would emerge from this effort, we are now positioned to reduce capital expense and still fully participate in an upcoming recovery.

Lastly, our commitment to margin enhancement is unwavering. As many may recall, we had made progress on this front, including pricing strategies, supply chain work and process improvements, which we were excited to see performed during 2020. While these may be less productive at lower revenue, we do expect continued progress and, perhaps, even some acceleration to our strategy during these times. Thank you.

And now I'll turn it over to Pat.

Pat Fogarty -- Vice President and Chief Financial Officer

Thank you, Matt, and good afternoon. Our first-quarter results reflected the initial impact of the COVID-19 global pandemic. Each of our business segments were affected during the quarter as government regulations force many customer facilities to shut down their operations. During the month of March, weakening demand in most of our end markets began and intensified throughout the month of April and into the early part of May.

Although many of our operations remain open and ship product to essential businesses, our automotive operations were idled throughout the month of March, and for most of our plants, remain shut down. Our Asian and European operations, which were affected by the pandemic earlier than in North America, have started back up, although at low levels of production. We expect most of our locations that have been shut down will be back in production at some time during the month of May. We have put in place the necessary safety protocols to provide a safe work environment for our employees during the start-up phase at each of our locations around the world.

In response to the current business environment, we have taken significant actions to reduce operating costs, aggressively manage working capital and eliminate noncritical capital expenditures. Our cost-reduction actions included personnel layoffs affecting approximately 2,700 employees, which represents approximately 40% of our global workforce. Salary reductions across all locations took place, including executive compensation and reduced board fees and the reduction in various discretionary spend items like travel and production and office-related supplies. We also announced the suspension of the quarterly dividend paid to our shareholders in our current press release.

As we have done in prior recessionary periods, we have focused our attention on converting working capital to cash, including reducing inventory levels and increasing customer collection efforts. In addition, we have eliminated noncritical capital expenditures and expect capex to be less than $20 million during 2020. As of March 31, our liquidity position was strong at $237 million. This includes cash on hand of $57 million and $180 million of unused borrowing capacity under various banking arrangements.

Despite the challenging operating conditions expected for the next several months, we believe we have sufficient liquidity to manage through this period. Also, current maturities under various global debt arrangements totaled $17 million for 2020, which includes $7 million under equipment finance leases and $9 million of payments due under international debt arrangements in Europe and Asia. The term of our primary $375 million revolving credit facility expires in 2024, and our $350 million of senior notes mature in 2027. Turning now to the first-quarter financial results.

We began the year with positive momentum as net sales and net income were in line with our internal expectations. The COVID-19 pandemic began impacting our operations in early March and affected many of our key end markets around the world. As a result, our first-quarter consolidated net sales declined and totaled $366 million compared to $420 million a year ago. Consolidated gross margins in the first quarter were 14.7% compared to 15.5% a year ago.

We took early actions to implement cost reductions, as I previously mentioned, which started with our locations in China, where we announced the consolidation of our Shanghai operation into our location in Changshu. SG&A expenses were $41 million compared to $43 million a year ago. The decrease was due primarily to actions taken to reduce costs in response to current market conditions. As a percentage of net sales, SG&A expenses were 11.2% compared to 10.2% in 2019 as a result of the lower sales levels in 2020.

We expect a significant reduction in SG&A expenses throughout the year as we manage these expenses with the decline in volume. Operating income was $13 million in the first quarter compared to $22.5 million a year ago. The decline in operating income was seen in each of our three business segments, which I will discuss later in my comments. Interest expense was down slightly to $8 million in the quarter, the decrease in interest expense compared to a year ago reflects lower interest rates in 2020.

Our first-quarter effective tax rate was 81% compared to 25% a year ago. The increase in our tax rate is a result of the loss of tax deductions and foreign tax credits that cannot be claimed or carried forward and a result of the expected mix and taxable income in our various tax jurisdictions around the world. The impact of these items on our first-quarter income tax expense was an increase of approximately $3.7 million or $0.30 per diluted share. Our GAAP earnings per share were $0.10 per share, and on an adjusted basis, EPS was $0.13, down from a year ago due to lower sales volumes and the higher income tax rate.

EBITDA as defined was $25.5 million during the first quarter compared to $35 million a year ago. During the first quarter, we used $3.9 million in support of operating activities compared to positive operating cash flow of $6.6 million in the 2019 quarter. The decline is due to the lower profitability in the current-year quarter. We expect to generate positive operating and free cash flow during the second quarter due to aggressive actions taken to reduce working capital and from the lower sales volumes.

Capex during the first quarter was $4.9 million in support of finalizing prior-year growth projects in our assembly components and engineered products segments. As I mentioned earlier, we have curtailed our capital spending in response to current operating conditions. Turning now to our segment results. In supply technologies, net sales were $141 million, down from $165 million a year ago.

Many of our customers in this segment continue to operate during this period, but demand levels were negatively impacted by the downturn in the global economy, which began in the early part of March. Sales for the quarter reflect a year-over-year decline in most of our key end markets, including heavy-duty truck, which was down 32% year over year; consumer products, which was down 22%; and the aerospace and defense market, which was down 30% year over year. The sales decline in these end markets was somewhat offset by strong year-over-year growth in the semiconductor market, which was up 47% year over year. For the first two months of the year, sales in most of our end markets in this segment were in line with the beginning of year forecast and ahead of 2019 levels, until customer production declined during the month of March.

In addition to cost cutting efforts which took place, we are reducing inventory levels by canceling and deferring deliveries to match up with customer demand. We currently are not aware of any disruption in our supply chains during this period of lower demand around the world. In addition, net sales in this segment were up 3% compared to the fourth quarter of last year, as new customer and business wins helped offset some of the macroeconomic downturn in the first quarter. Also, we continue to see positive trends in our customer margins due to actions taken in the second half of 2019, which improved customer and supplier pricing.

Operating income in the segment decreased to $9.2 million and operating income margin was 6.5%. The year-over-year decline in operating margins was a result of lower sales volumes, which impacted the absorption of operating costs in several locations. Moving to our assembly components segment. Sales were $128 million compared to $138 million last year.

For the first two months of 2020, sales in this segment were strong and in line with our forecast, which was a result of volume increases in the new business we launched in 2019. However, during the month of March, the majority of our plants in North America closed down production in compliance with federal and state orders, resulting in a sharp decline in sales in the last month of the quarter. The majority of our plants continue to be shut down, and we anticipate the North American automotive production will begin to start up during the week of May 18. It is unclear at this time what the production outlook will look like during the months of May and June, although a slow recovery of volumes is anticipated.

Segment operating income was $6.3 million in the current year compared to $8.3 million a year ago, and segment operating margins were 4.9% in the first quarter. These decreases were the result of the shutdown in production, which began during the month of March. In response to these market conditions, our operating teams took aggressive actions to reduce costs. Such actions included significant employee layoffs and furloughs across all plant locations, permanent headcount reductions and salary and other compensation reductions.

Also, we announced the closing of one location in China and implemented various cuts in discretionary spending. In this segment alone, employee layoffs approximated 75% of the total workforce. We are confident that we have taken timely and appropriate action to reduce costs during this difficult time and believe we are prepared for an orderly restart in our plants when global automotive production begins to recover. In our engineered products segment, sales in the first quarter were $97 million compared to $117 million a year ago.

The decrease in sales was due primarily to lower demand from certain key end markets, primarily oil and gas, and a decline in order levels of new equipment as customers have delayed or canceled orders for new capital equipment in response to the global pandemic. In our forged and machined products business, sales were negatively impacted by the significant decline in oil prices, which reduced demand for our oil and gas products and weaker end demand in other markets such as rail and agriculture. On a positive note, our industrial equipment aftermarket sales during the quarter were strong, helping to offset the reduced levels of new equipment production. Our capital equipment business in Asia and Europe were impacted early by the pandemic and are now back in operation.

We continue to monitor future demand levels in these locations so that our businesses are positioned to bring back employees in an efficient manner during the restart of production. Operating income in this segment was $3.8 million in the current year compared to $8.1 million a year ago, driven by the lower sales levels and unfavorable sales mix. We also took aggressive actions to reduce cost in this segment in response to lower demand levels, which included headcount and salary reductions and other spending cuts. And finally, from a segment perspective, corporate expenses were $6.3 million in the quarter compared to $7 million last year.

The decrease in expenses was due primarily to cost-reduction actions and lower employee compensation. Before I turn the call back over to Matt, I want to emphasize a few points, which I made earlier. Over the past six weeks, our management teams have been committed to the task of realigning their businesses to deal with the impact of this global pandemic. This included downsizing our footprint around the world and laying off approximately 2,700 full-time associates, as well as cutting variable and fixed expenses in each business and at every location.

The impact of these actions total over $120 million in cost reductions on an annualized basis. At this time, we believe our consolidated revenues in the second quarter will be down significantly due to the plant shutdowns that have taken place. And overall, despite the significant actions that we have taken, we expect to incur operating losses due to the high levels of unabsorbed costs in certain businesses. Most importantly, we are managing working capital to preserve our strong liquidity.

At the beginning of the second quarter, our bank availability was $180 million and cash balances totaled $57 million. Although we expect our liquidity to decrease during the second quarter, we believe we have sufficient bank availability and liquidity to manage through this downturn caused by the pandemic and believe we have the financial position to support our working capital requirements as we emerge from this current environment. Finally, as we discussed in our year-end call, we will not be providing 2020 EPS guidance due to the uncertainty of the economic impacts of the COVID-19 pandemic. Now I'll turn the call back over to Matt.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Great. Thank you, Pat. We'll now open the line up for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Your first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

Edward Marshall -- Sidoti and Company -- Analyst

Matthew, Pat, good afternoon. Hope everyone's doing safe. Hope you're safe and sound. I want to talk about, if I could, the margin progression maybe throughout the year as you move through.

And I'm trying to look at the cost takeout and maybe an improving mix later in the year, albeit volumes are relatively low. So I'm just trying to get a feel for kind of how you look at the margin progression quarter to quarter.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yeah. And I'll let Pat -- give Pat a minute to think while I say that modeling this environment is extremely difficult. We do have a number of businesses that have relatively high fixed costs. So determining and modeling margin enhancement, particularly as we look at some of the businesses being below 50% utilization is quite a challenge.

So our contribution rates in these businesses range probably from about 20% to 35% or 40%. So I think we've got opportunity but modeling the revenue recovery at this point is extremely difficult. Would you like to add, Pat?

Pat Fogarty -- Vice President and Chief Financial Officer

Yeah, that's fair. And I would say that as we look into the second quarter, that obviously is the most difficult quarter to be able to estimate because volumes are jumping around, especially in the tail end of this month and into June. And it's very unclear as to where the automotive production levels will be toward the end of the second quarter. As we get into Q3 and, hopefully, we get to a more normalized level, clearly, we should start to see margin improvement based on actions that we have taken.

We hope and believe that we will emerge a much more profitable and a better quality of earnings. And so I guess, if you were to model, I would just suggest that Q2 will be the trough and things will be improving after that.

Edward Marshall -- Sidoti and Company -- Analyst

Got it. Got it. Maybe if I could ask it in another way, too. If I were to look at the -- and quantify the cost takeout that's already been implemented, whether it's on an hourly basis or in a progression of SG&A on the salary side.

Can you talk about is that to maintain at the existing level of business? Or did you kind of get ahead of it and maybe the incrementals or the decrementals will change slightly in a more favorable way? I'm just trying to think that through if I could.

Pat Fogarty -- Vice President and Chief Financial Officer

Of the $120 million in annualized cost reductions, about $10 million would be considered SG&A-related on an annualized basis. The rest would be primarily variable costs that have been taken out as a result of the lower volumes.

Edward Marshall -- Sidoti and Company -- Analyst

Got it. OK. If I look at the comments that you made around, say, the recovery in China, you've mentioned in the press release about the order book in the second half of May and kind of the pace that you anticipate through June. I'm wondering if you could -- if there's any way to quantify that order book down or up on a year-over-year basis or maybe a book-to-bill kind of related to Q1.

Just kind of get a sense as to the framework there that we're working from.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yes. I'll begin just by giving some context to that question. One of the problems of that is we have obviously COVID-related softness. Some of our underlying markets came into COVID being a little softer.

We saw some weakness in rail. We saw some weak weakness in Class 8 truck. So honestly, I think that it's going to be really hard, other than I think we recognize the explicit impact of plant shutdowns on our April and May results. I think forecasting a recovery at this point, particularly given some of the underlying softness in the markets I discussed and even more notably, perhaps, oil and gas, is very difficult.

Edward Marshall -- Sidoti and Company -- Analyst

Sure. And the final one for me. When I think about engineered products, one of the things that surprised me in the release was kind of how fast that -- and I would have thought kind of big longer order projects, bigger capital equipment, that might have held in a little bit longer. Maybe that fits kind of that already saw some weakness as it relates to energy.

First, could you quantify that? And secondly, I guess maybe you can talk about the direct or indirect impact energy has or maybe the percent of sales, indirect or direct, that energy has for engineered products.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yes. I mean, we traditionally feel as though our equipment business is a later cycle business, and that has tended to be true. It was true in '08, '09. I think that it tended to be true recently as well.

I think that the shock here to the oil patch, as well as COVID maybe has resulted in maybe more extreme actions than we're accustomed to in terms of deferrals, in some cases, cancellations early in an order process. But I think that this has acted out in a slightly different way. And of course, not knowing how long this will hang over some of our key end markets, we've tried to be thoughtful in terms of managing key customer relationships. So the dynamics, I think, have been a little bit different and perhaps a little bit more aggressive than we've seen in a typical recessionary period vis-a-vis cancellations and deferrals of receipt, which may be impacted the business a bit more quickly.

And I want to leave -- before I let Pat sort of clean up on the oil and gas piece, I want to say what has continued to conduct itself quite well, even surprisingly given the significance of the plant shutdowns globally, is the aftermarket business. And we don't talk about that enough, and that continued to perform at expectations.

Pat Fogarty -- Vice President and Chief Financial Officer

Yes. Ed, I'll add relative to the capital equipment business. Our locations in Italy and Spain were shut down during the month of March. And so as our business, when you think of the revenues are recognized under a percentage of completion basis, their production was down.

So therefore, they were not unable to recognize any revenue. So that affected the quarter. And then other locations, for example, our Erie Press acquisition, our operation in Pennsylvania. Pennsylvania shut down, and they were deemed nonessential.

And so they weren't getting the percentage of completion revenue in the quarter, so that affected that segment. The forged and machined products group, the oil and gas market was down as we entered into the year, and it really dried up in the first quarter. And that affected our Canton Drop Forge plant, which is a very profitable plant. So those are the things that really affected engineered products.

As Matt mentioned, our aftermarket business was right in line with our beginning of the year forecast and margins were as good as they have been historically, so we're happy with the performance there.

Edward Marshall -- Sidoti and Company -- Analyst

Appreciate the comments. Thanks and good luck in managing the current environment.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Thanks.

Operator

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Good afternoon, guys. So I hear you on the operating loss for 2Q, and we can all take our best guess on revenue. But just thinking about this from a decremental standpoint, it was around 20% in 1Q. When you think about your offsetting cost cuts, can you limit 2Q to that 20%? Or is that worse because of under-absorption?

Pat Fogarty -- Vice President and Chief Financial Officer

Yeah. I think that's going to be determined based on where volume shake out in the month of June, so it's difficult for me to answer that right now. Although our revenues, when you think about our assembly components segment, so much in many of our plants were shut down for more than half of the quarter. So there'll be no absorption during that one and a half months, so I would expect it to be worse from that standpoint.

Steve Barger -- KeyBanc Capital Markets -- Analyst

And definitely, you would expect the biggest sequential revenue decline to be in assembly.

Pat Fogarty -- Vice President and Chief Financial Officer

Absolutely.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. Maybe on a somewhat more positive note, Matt, can you talk about process improvements, where you're taking actions first? Any comments on specific programs where you see opportunities?

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yeah. I think that -- I appreciate the question, first of all. We have not lost our focus on some of the pillars of our improvement of our -- our quality of earnings improvement process. So our ability to focus and continue to challenge price across the board, both strategically and in terms of underperforming accounts, hasn't lost a step.

In fact, arguably, we have a little more time to focus on it, so we are extremely engaged at that level and would expect to use this opportunity. While it's hard to renegotiate contracts per se during this period, we certainly have the opportunity, I think, to continue to identify strategies around key accounts, so that's -- in key products and services. So that's number one. Number two, Pat mentioned briefly about consolidation.

We talked about one plant closure. But we're challenging our footprint very meaningfully, recognizing that it could be a while until we're at prior revenue levels. So I think he just sort of tipped his hand to one of the things that's going on, but we have a variety of locations throughout the business that are what I'll call under review, whether in terms of the right size footprint or the right location. I don't think conclusions have been made at this point.

But I think the point is this is a wonderful opportunity to see how our business can operate with lower overhead rates. I also want to highlight that while I think that the business of procurement and sourcing and the sort of operating side of the business was diminished visibly and meaningfully during April, the engineering community didn't take time off. So while many new programs might have been pushed out or new business is lagging, work on the engineering side and the new business side continue to be robust as well. And then lastly, we have scalably cut back capex.

But that does not mean – sub-$20 million is still a lot of money, Steve, and you were around a few years ago when our total capex was in that range. So we are continuing to prioritize high-return -- or excuse me, quick-return projects. And those include opportunities to reduce variances, whether they be scrap-related or labor-related. And I applaud our team that's out there saying it was really tough to focus on these things when your plant was running at 90%, 95%, 100% of capacity and we have plants that are shut down, where we've got teams working to improve the operations and impact those variances from the moment we reopened.

So some of that money, we continue to spend, both in terms of capex and personnel expense through the cycle. So I've given you a flavor of four areas that, in my opinion, continued relatively untouched through the process.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. No, it's very good commentary. Thanks. And it caught my ear when you said that some end markets have met or exceeded expectations.

Any commentary on that? And as you've looked at April trends, anything that looks like it's coming out of it sooner than some of the others?

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yes. I don't want to -- I felt strongly to say that because I want to promote the concept of our diverse end markets that we have. I don't think we saw a material amount of people overperform or expect that in the near term. But we're honored to be supplying, for example, manufacturers of respirators, for example.

So we've got some great customers that are doing well, but I want to give that in the context of diversity rather than to suggest it's going to be a material cost variance.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. One last for me. We've all been, I think, operating under this theory that if auto production slowed, that some of the fuel efficiency and light-weighting programs will be down less than overall production or that automakers would use the slowdown to accelerate some of those initiatives. Is that actually happening? Are you seeing that in China? Or are the automakers talking about wanting to pursue that more quickly using this lower-volume environment?

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yes. As I referenced, I think that the engineering community, particularly in the automotive space, continues to evolve and continues to focus on those issues and others that you've mentioned. Unfortunately, I think the overarching -- and I think the technology road maps, so that's a positive, I think the technology road maps are being impacted. How? We don't know.

And what we do know is the primary automotive investors, the OEs, are cash-strapped, so it seems clear those technology road maps will be impacted. How much and for how long? We really don't know, Steve. In a more short-term and meaningful way, what we've seen is the push out of new programs. So in some ways, to the extent we're on the incumbent program, we can benefit from that.

But by and large, that is a challenge for us. As you know, we have been winning programs, growing our business, investing capital. So by and large, the short-term impact of this experience will be to really delay some of the exciting things that were going on in the business. Generally, I hear those programs are pushed out three or four months, not a year.

But unfortunately, that, I think, was something that we were excited to see and how they launch and at what rates will be interesting to watch. But I don't know if that answers the question. I think there's a lot going on in the engineering community, whether or not some of these more interesting technology road maps can make sense, I don't know. What I do know is they will continue to want fuel efficiency.

They will continue to want lighter vehicles. So I still feel, strategically, we're positioned in the right place, but the long-term impact is uncertain to me.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Thank you.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Thanks, Steve.

Operator

Your next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Good afternoon, guys. Thank you for taking my questions. I was wondering if maybe you could provide maybe a little bit more some color on the magnitude of declines you guys saw maybe in March as comparison to January and February and if maybe if you could comment a little bit by segment what you saw in April as well.

Pat Fogarty -- Vice President and Chief Financial Officer

Sure, Marco. Let's start with the segment that has affected the most, and that's the assembly components segment, which is primarily an automotive-driven segment. By mid-March, most of our plants were idled. In April, they were completely idled.

In May, we expect them to be idled through mid-month unless things get pushed out by the OEMs throughout the month of May. So as I look into the second quarter, two-thirds of the quarter is going to be idled based on our estimates, maybe a little less. So that's how the assembly components segment gets affected. In supply technologies, the North American customers were seeing a decline in demand.

A lot of their businesses are deemed essential, so they will be operating. We're back up in operation in China, and so some of the businesses outside of North America seem to be back in production and performing well. In the last segment, engineered products, we expect pretty much the same type of quarter in the second quarter as in Q1, pending what happens with our aftermarket business. We saw that as a strong part of the quarter.

We're seeing some slowdown in that area. But hopefully, that will pick up as we get through the month of March.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. That's helpful. And then if you can just kind of remind us here on the assembly components side. Can you walk through maybe the mechanics between when the OE start to open up their facilities, how quickly would they be putting orders to you and then your quick turnaround? Or are there substantial lead times that kind of need to be put forth to you guys well in advance, if you will?

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Marco, this is Matt. So let's just sort of back up and understand the scale of the issue. Sort of you may have noticed already, the OEs have talked about -- have pushed back potential opening of some of the assembly facilities a couple of times. I think now resonating around a May 18 date.

I think there will be releases at some of the component and engine plants in advance of that. But I think you cannot overstate the risk to the pace at which they will reopen these plants, meaning one shift, not three. I can't think you can overstate the risk to some of the supply chain. You may be following some of the concerns over the supply chain out of Mexico, which would affect every major OEM and every major platform.

Mexico has had some different restrictions around the work environment, and that has put at risk some of that supply chain. So I do think we'll begin to see releases here in the near term, but we can assume, while the base may be next to nothing during April, I think we can assume that the incremental improvements will be baby steps.

Operator

Your next question comes from the line of George Melas with MKH Management. Please proceed with your question.

George Melas -- MKH Management Company, LLC -- Analyst

Hi, good afternoon, guys.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Hey, George, how are you?

George Melas -- MKH Management Company, LLC -- Analyst

Thank you, sir. Sobering conference call, and thanks for all the information. I have a question regarding your liquidity. You guys talked about being cash flow from operations positive in the second quarter.

And also, I think you mentioned being free cash flow positive in the second quarter, but also, you said your liquidity would decline a little bit. So maybe you can sort of take those various points and maybe try to elaborate on that.

Pat Fogarty -- Vice President and Chief Financial Officer

Sure. I'll take that, George. Sure. So our current bank, our main bank facility is an asset-based loan.

And so depending on the collateral base, each month really dictates what our availability is. And so my comments that our liquidity would drop in the second quarter is primarily because we expect our receivables to drop in the current month, as well as inventory, which will give us less availability during the quarter. To the extent that our cash flow is below the drop in collateral, we would expect our availability to go down. And so that's really what is meant by that.

And when we talk about our availability and the decline that we expect to see, it's probably in terms of percentages. It's probably a 15% to 20% decline from where it is at the end of the first quarter, which will tell you that we have significant availability to manage through this crisis that we're seeing.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

George, I can't miss the opportunity to make sure that you take our comments in context. You're right, this experience and our commitment to you to give us the best picture we know or can see is a bit sobering. I think you used a good word there. But I want to tell you, our lack of visibility doesn't mean that we are not optimistic about what we've done in our future.

It's impossible for us to really appreciate how these incentives and how the injection of capital that will continue for the next couple of months, that the government has put into the system, will impact our business. We have seen anecdotal evidence where we benefited from weaker competitors, not material at this point, but we've seen some of those opportunities. And we continue to believe that we have made the right investments over the last 18 months to propel our strategic advantage forward. So I want to make sure that you understand that we -- our inability to see out over three or four quarters is prohibiting us from really talking too much about that and, unfortunately, focusing on the current period.

But we're confident we're going to get through this, and we're confident we will be there to appreciate the improvements in the economy that maybe it will be later this year, maybe it will be in 2021, but it's coming.

George Melas -- MKH Management Company, LLC -- Analyst

OK. Yes. That's very helpful. And I think all the work you guys have done to reinforce management to -- in the last year and a half and to drive improvements in the businesses was a huge, great preparation for what you're facing now.

Maybe just a question on the working capital, and I don't know, Pat, if there's any way to estimate that. But is there a way to estimate how much you expect working capital to be positive in the June quarter as you draw down -- as ARs and inventory come down?

Pat Fogarty -- Vice President and Chief Financial Officer

Yeah. Well, clearly, we expect our working capital to decline during this period of time. I think in general, our total company working capital represents about 25% of revenue. So I think that's probably a good barometer to use.

As revenues fall, we should expect to see that percentage come out of working capital.

George Melas -- MKH Management Company, LLC -- Analyst

OK. Great. Thanks for having me.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Thank you.

Operator

Our next question is a follow-up from Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Guys, sorry about that. I guess one of the benefits of working from home, I lost the connection there to the call, so I apologize.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

No problem.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Yeah. I was wondering if I could circle back around, and I'm not sure if I missed this question after I lost connection, but on liquidity. In your prepared remarks, you obviously talked about the aggressive stance you're going to be taking to working capital and reduction of capex. Can you maybe talk a little bit more about how those liquidations there on the working capital side impacts your borrowing base on your revolver?

Pat Fogarty -- Vice President and Chief Financial Officer

So our main revolver, Marco, has availability at the end of March of $170 million of the $180 million total company availability. That availability is based on the collateral behind it, which is our domestic receivables and inventory. So as that asset base declines, we would expect availability to decline. As we pay down and generate cash flow and pay down that debt, we would expect our availability to jump back up.

So what we're seeing in the second quarter, clearly, as working capital falls, we're going to generate cash flow. We're going to pay down debt, but we also recognize that the collateral behind it is going to drop as well. As we've mentioned, we have significant availability. We expect significant availability throughout this period of time based on where we see our collateral base falling.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Got it. And last one for me. Understandable, all the defensive actions you're taking. And one of the call -- one of the questions earlier was discussing a potential offensive move that you guys can come out of this situation in a much more leaner and operational-efficient company.

But I was wondering if you can maybe talk about any other additional offensive opportunities you might see, whether that be M&A-related or anything of that nature.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Yeah. No, I appreciate that question, Marco, because we have always come out of recessionary periods a stronger company. And most of the time, we've laid the seeds, sometimes, most often through acquisition for our next significant leg up. So we are clearly keen on doing that again, given the opportunity.

And I think that the work that we've done on the balance sheet, we believe, will give us the flexibility given the right opportunity. I will tell you, the way the M&A environment is working right now is, I think, given the shock to the system, it is clear that troubled suppliers that we compete with in our varied businesses, largely, will continue to be, I think, propped up generally by their banking institutions. I think that there is an intense interest on behalf of the banking community and the government to make sure that at least during this time period, that people have an opportunity to try and succeed and emerge from it. So we probably won't see those opportunities until later this summer, where people, I think, are asked to develop a forecast and talk about what their business looks like in more of an extended period of lower volume.

But you're right, that is part of our playbook and will continue to be. And it sure would be nice to find something, and I hope we do. But at this point, the deal flow, I think you'll find from -- you'll hear from everyone is pretty slow because this happens so quickly, and people are trying to work through it with their bank's support and their stakeholders' support.

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

Thank you, guys. I appreciate your time.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Matthew Crawford for closing remarks.

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Great. Well, thank you very much for joining us today. I hope we gave you the best information we have. Perhaps, it wasn't the best of news, but we are very optimistic about the future and feel as though we're doing the right things every day to make sure that we're going to have a better business.

So thank you for your support.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Matthew Crawford -- Chairman, Chief Executive Officer, and President

Pat Fogarty -- Vice President and Chief Financial Officer

Edward Marshall -- Sidoti and Company -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Marco Rodriguez -- Stonegate Capital Markets -- Analyst

George Melas -- MKH Management Company, LLC -- Analyst

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