Ampco-Pittsburgh Corporation — 2019 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended March 31, 2019. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing.
The company classified ASW Steel Inc., its Canadian specialty-steel operation, as discontinued operations following an approved plan to sell the business. The company also planned to sell certain assets of its Avonmore, Pennsylvania cast-roll facility.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $107.5 million | $106.4 million |
| Loss from continuing operations | $12.0 million | $1.8 million |
| Net loss from continuing operations | $12.6 million | Net income of $1.5 million |
| Net loss attributable to Ampco-Pittsburgh | $15.1 million | Net income of $0.9 million |
| Continuing operations loss per diluted share | $1.00 | Income of $0.12 |
| Net loss per diluted share | $1.21 | Income of $0.08 |
| Operating cash flow from continuing operations | $(7.1) million | $(9.6) million |
| Capital expenditures | $1.4 million | $1.5 million |
Reported operating expenses included a $10.1 million impairment charge related to the planned Avonmore asset sale and $0.9 million of restructuring-related costs. Management reported non-GAAP adjusted income from continuing operations of $1.2 million, compared with $0.5 million in the prior-year quarter, after excluding the impairment, restructuring costs and estimated excess Avonmore costs. This measure is not standardized and should not be viewed as a GAAP substitute.
Net loss from discontinued operations was $2.2 million, compared with a $0.1 million loss in Q1 2018. Total assets were $565.3 million at March 31, 2019, and total shareholders’ equity was $83.7 million. Cash and cash equivalents were $10.4 million, down from $19.7 million at December 31, 2018.
Debt, liquidity and other balance-sheet matters
- Total borrowings were $77.3 million, consisting primarily of $40.0 million under the revolving credit facility, $18.6 million of sale-and-leaseback financing, $13.3 million of industrial revenue bonds, and other obligations.
- The company repaid approximately $26.5 million of principal and accrued interest on promissory notes on March 4, 2019, using additional revolving-credit borrowings.
- Remaining availability under the revolving credit facility was approximately $39.0 million at March 31, 2019. The facility expires in May 2021, and the company was in compliance with applicable covenants.
- The company adopted the new lease accounting standard on January 1, 2019, recording approximately $5.9 million of operating lease right-of-use assets and liabilities without an effect on operating results or liquidity.
- Asbestos liabilities totaled $225.1 million, offset by asbestos insurance receivables of $150.1 million. The estimates extend through 2052 and remain subject to significant uncertainty.
Material changes versus the prior comparable period
- Sales increased approximately 1.0%, but continuing-operations results deteriorated substantially because of the Avonmore impairment, restructuring costs, lower forged-engineered-product volumes and less favorable product mix.
- Forged and Cast Engineered Products sales were essentially flat at $85.3 million, while segment pretax results declined to a $10.0 million loss from $0.2 million of income, primarily because of the $10.1 million impairment charge.
- Air and Liquid Processing sales increased to $22.2 million from $21.2 million, but operating income declined approximately 5% due primarily to product mix.
- Forged engineered-product sales declined, particularly frac blocs sold to the oil and gas industry. Mill-roll demand and pricing improved.
- Backlog increased to $349.4 million from $343.1 million at December 31, 2018 and $345.8 million at March 31, 2018. Air and Liquid Processing backlog increased materially, driven partly by U.S. Navy shipbuilder orders.
- Other income declined versus Q1 2018 because the prior-year period included an approximately $2.4 million favorable third-party contractual settlement.
- Interest expense increased because of the September 2018 sale-and-leaseback financing, partly offset by lower interest after repayment of the promissory notes.
Outlook, commentary, risks and unusual items
Management stated that U.S. and European roll-market conditions continued to benefit from trade protection, while U.S. tariffs on Canadian primary steel adversely affected the Canadian operation and forged-engineered-product costs. The oil and gas slowdown that began in the second half of 2018 continued through Q1 2019. The company expects to exit the Canadian market through the ASW sale and intends to enter into a long-term supply agreement for steel ingots after the sale.
The Avonmore facility sale agreement was signed on May 6, 2019, with closing expected in the second half of 2019 after remaining customer commitments are completed. Management expects excess Avonmore costs to continue until the sale and cautioned that additional sale-related costs could occur.
Management expects funds on hand, future operating cash flow and revolving-credit availability to be sufficient for operational and capital requirements. Planned capital expenditures over the following 12 months were approximately $1.6 million. No formal earnings guidance was provided.
- Key risks include cyclical demand, global steel-industry overcapacity, commodity-price increases or shortages, labor disruptions, currency fluctuations, difficulty completing divestitures or restructuring, and limited access to capital.
- Asbestos claims pending increased to approximately 6,959 from 6,772 at the beginning of the quarter. Future changes in claims, settlement costs, defense costs, insurer solvency or coverage assumptions could materially affect results, liquidity and financial position.
- The company recorded a $328,000 environmental liability considered adequate by management based on information available at March 31, 2019.
- A retiree health-plan amendment reduced the related liability by $4.6 million and generated a $15,000 curtailment gain; the amendment becomes effective in 2020.
- Shareholders approved an increase in authorized common shares from 20 million to 40 million on May 9, 2019.
Investor verification checklist
- Verify the timing and final proceeds of the ASW and Avonmore divestitures, including any additional charges or supply arrangements.
- Assess whether operating losses and cash consumption improve after the Avonmore restructuring and the exit from Canadian specialty-steel operations.
- Monitor revolving-credit utilization, availability, covenant compliance and refinancing requirements through the May 2021 maturity.
- Reconcile management’s non-GAAP adjusted results to GAAP results and evaluate the judgments underlying estimated excess Avonmore costs.
- Review updates to asbestos claims, insurance recoveries, insurer credit quality and the long-term liability estimate through 2052.
- Track oil and gas demand, forged-engineered-product backlog, mill-roll pricing, and U.S. Navy-related Air and Liquid Processing orders.