Ampco-Pittsburgh Corporation — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2016. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. On March 3, 2016, the company acquired Åkers AB and affiliates, including a 60% interest in a Chinese joint venture.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $93.3 million, versus $60.0 million | $156.9 million, versus $125.1 million |
| Loss from operations | $(4.9) million, versus $(0.8) million | $(9.8) million, versus $(0.3) million |
| Net loss attributable to shareholders | $(6.5) million, or $(0.53) per share | $(9.4) million, or $(0.81) per share |
| Operating margin | (5.2%), versus (1.3%) | (6.3%), versus (0.2%) |
| Operating cash flow | Not separately provided | $(14.5) million, versus $5.4 million provided |
Cost of products sold was 83.0% of sales in the quarter and 81.9% year to date, compared with 80.4% and 80.2%, respectively, in the prior-year periods. Management attributed approximately 240 basis points of the increase to purchase-accounting inventory write-ups related to Åkers; most of that inventory had been sold by June 30. Selling and administrative expense was $15.2 million for the quarter and $28.7 million year to date, including Åkers costs and acquisition-related expenses.
Cash and cash equivalents were $46.5 million at June 30, 2016, down from $95.1 million at December 31, 2015. Approximately $13.0 million was held by foreign operations. Total debt was approximately $44.4 million, consisting of $19.1 million current debt and $25.3 million noncurrent debt. The company entered into a new five-year senior secured asset-based revolving facility with initial commitments of $100 million and reported approximately $42 million of availability at quarter end. Letters of credit outstanding totaled approximately $27.1 million.
Material changes versus the prior comparable period
- Sales increased 55.6% in the quarter and 25.4% year to date, primarily because of the Åkers acquisition. Åkers contributed approximately $40.4 million of quarterly sales and $53.0 million of year-to-date sales.
- The Forged and Cast Engineered Products segment reported sales of $71.6 million for the quarter and $113.1 million year to date, but loss before taxes of $3.6 million and $6.0 million, respectively, versus a prior-year quarterly loss of $0.6 million and year-to-date income of $1.0 million.
- Air and Liquid Processing sales were $21.7 million for the quarter and $43.7 million year to date, compared with $22.4 million and $44.8 million. Segment income before taxes was $2.7 million and $5.3 million.
- Åkers generated losses before income taxes of approximately $4.1 million for the quarter and $5.1 million year to date, including purchase-accounting effects of approximately $2.9 million and $4.5 million.
- Backlog increased to approximately $249.3 million at June 30, 2016, compared with $141.8 million at December 31, 2015 and $150.7 million at June 30, 2015. Åkers represented approximately $112.0 million of the current backlog.
- Net cash used in operating activities deteriorated by $19.8 million year to date, while investing cash use increased principally because of the $27.0 million cash portion of the Åkers acquisition.
- The quarterly dividend was reduced from $0.18 to $0.09 per share effective with the March 2016 declaration; dividends declared were $0 for the quarter and $0.09 year to date, versus $0.18 and $0.36 in the prior-year periods.
Outlook, risks, contingencies, and unusual items
- Management stated that global roll demand remained weak, with excess steelmaking capacity, oversupply of rolls, unfavorable foreign exchange, pricing pressure, and operations significantly below capacity. Pricing had begun to stabilize, and improved steel-coil pricing and customer results could support future roll pricing.
- Backlog was substantially higher, but management noted that legacy cast-roll backlog had declined and approximately $68.7 million of Forged and Cast backlog was expected to ship after 2016.
- The Chinese joint venture has incurred losses since 2009 and is expected to continue doing so through 2016 and 2017. Its carrying value was $1.7 million at June 30, 2016, and it relies substantially on its 51% partner for financing and working capital.
- Asbestos liabilities were $161.1 million, with related insurance receivables of $119.2 million. Approximately 6,594 asbestos claims were pending at June 30, 2016. Insurance recoveries are subject to policy limits, litigation outcomes, insurer solvency, coverage erosion from Howden claims, and other uncertainties. Future adjustments could materially affect earnings, liquidity, and financial position.
- Environmental liabilities were approximately $0.3 million. Standby and commercial letters of credit totaled approximately $27.1 million, and Åkers-related surety bonds covered approximately $4.0 million of pension-related obligations.
- Income tax expense included valuation allowances of approximately $1.4 million against certain international deferred tax assets. Failure to achieve forecasted income could require additional valuation allowances and materially increase tax expense.
- In July 2016, the company announced a modification to Åkers National Roll Company retiree health benefits effective January 1, 2017. The financial statement impact was still being evaluated.
- Management stated that available cash and expected future operating cash flow should be sufficient for operating and capital needs, but operating cash flow was negative year to date and cash declined materially.
Most important facts for investors to verify
- Whether Åkers can improve profitability after purchase-accounting effects subside and whether integration delivers expected synergies.
- The company’s ability to convert its increased backlog into profitable shipments amid weak global steel demand and pricing pressure.
- Revolving-facility availability, covenant compliance, collateral requirements, and debt maturities, including the $22.6 million of Åkers promissory notes due March 2019.
- Cash generation, working-capital requirements, and the sustainability of liquidity following the $48.7 million year-to-date cash decrease.
- Potential changes to asbestos reserves and insurance recoveries, including the outcome of pending coverage litigation and insurer solvency risk.
- The carrying value and ongoing funding needs of the Chinese joint venture.
- Whether additional tax valuation allowances or retiree-benefit changes will materially affect future earnings and equity.