Ampco-Pittsburgh Corporation — Q3 2019 Form 10-Q Summary
Business context and reporting period
Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. This unaudited report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Amounts are in thousands, except per-share data.
ASW Steel was sold on September 30, 2019, for net proceeds of $4,292 and is presented as discontinued operations. The Avonmore Plant was also sold for $3,700, and its operations ceased; those results remain in continuing operations.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $90,872 | $98,824 | $300,885 | $323,610 |
| Loss from continuing operations | $(1,340) | $(2,847) | $(13,952) | $(4,813) |
| Net loss attributable to Ampco-Pittsburgh | $(5,055) | $(7,039) | $(24,061) | $(9,092) |
| Continuing-operations loss per share | $(0.10) | $(0.24) | $(1.11) | $(0.20) |
| Net loss per share | $(0.40) | $(0.56) | $(1.91) | $(0.73) |
| Operating cash flow from continuing operations | Not provided | Not provided | $(8,194) | $1,555 |
Revenue declined approximately 8.0% in the quarter and 7.0% year to date. Reported continuing-operations loss margins were approximately 1.5% in Q3 and 4.6% for the nine months, compared with 2.9% and 1.5%, respectively, in the prior-year periods.
- Forged and Cast Engineered Products sales declined to $67,452 in Q3 and $231,299 year to date. The nine-month segment loss before taxes was $10,640, including the $10,082 Avonmore impairment charge and $1,366 of bad-debt expense.
- Air and Liquid Processing sales were $23,420 in Q3 and $69,586 year to date. Nine-month income before taxes was $7,371, down from $8,972.
- Backlog was $335,119 at September 30, 2019, versus $343,079 at December 31, 2018, and $354,225 at September 30, 2018.
- Adjusted non-GAAP loss or income from continuing operations was $(94) in Q3 and $3,721 for the nine months, excluding specified impairment, restructuring, Avonmore excess-cost and bad-debt items. This measure is not standardized under GAAP.
Cash flow, debt and liquidity
- Cash and cash equivalents were $9,829 at September 30, 2019, down from $19,713 at December 31, 2018.
- Continuing-operations operating cash flow was negative $8,194 for the first nine months, versus positive $1,555 in 2018. Capital expenditures were $7,156, and approximately $3,435 of additional capital expenditures were committed for the next 12 months.
- Total borrowings were $75,067, consisting principally of $38,444 under the revolving credit facility, $19,126 of sale-and-leaseback financing, and $13,311 of industrial revenue bonds.
- The revolving credit facility expires in May 2021, had approximately $21,000 of remaining availability at September 30, and was subject to collateral, covenant and minimum-availability requirements. The company reported compliance with applicable covenants.
- Proceeds from the ASW and Avonmore sales totaled $7,992 and were used to repay a portion of revolving-credit borrowings. Promissory notes and accrued interest of $26,474 were repaid in March 2019 using additional revolving borrowings.
Material changes versus the prior comparable period
- Year-to-date continuing-operations loss increased substantially, primarily because of the $10,082 Avonmore impairment charge, $1,366 British customer bankruptcy-related bad debt, restructuring and severance costs, and weaker Forged and Cast demand.
- Forged engineered product sales were pressured by weaker oil-and-gas demand, lower shipment volume, pricing pressure and unfavorable currency translation. Mill-roll pricing and domestic manufacturing efficiencies provided partial offset.
- Air and Liquid Processing profitability declined because of product mix, lower commercial pump activity, weaker industrial OEM heat-exchanger activity and competitive pricing pressure in air handling.
- Interest expense increased year over year because of the sale-and-leaseback financing, partially offset by repayment of the promissory notes.
- Q3 included a $2,304 net gain related to Avonmore pension curtailment and termination benefits. The nine-month 2018 period included a favorable third-party contractual settlement of approximately $2,425.
Outlook, commentary, risks and unusual items
- Management stated that U.S. and European roll-market conditions had softened, although recent indicators suggested demand stabilization and improving steel prices. Oil-and-gas demand remained weak because Permian Basin operators faced limited financing.
- The Avonmore closure is expected to reduce excess capacity and high cast-roll operating costs. Management also expects the ASW sale to have a major favorable strategic effect, but the company will rely on a long-term supply agreement with ASW for stainless-steel ingots.
- Management expects cash on hand, future operating cash flow and revolving-credit availability to fund operating and capital requirements, but cash declined materially and operating cash flow was negative through September 30.
- Asbestos liability was $212,953 and the related insurance receivable was $141,032 at September 30. Approximately 6,701 asbestos claims were pending, and management warned that changes in claim activity, settlement costs, insurer solvency or coverage assumptions could materially affect earnings, liquidity and financial position.
- Other stated risks include cyclical demand, global steel overcapacity, commodity-price increases or shortages, labor disruptions, currency fluctuations, restructuring execution and limited capital availability.
- The company adopted lease accounting guidance in 2019, recording a $5,893 operating lease right-of-use asset and liability at adoption, with no material effect on earnings or liquidity. The company was evaluating the forthcoming credit-loss standard, which it did not expect to affect liquidity.
Important facts for investors to verify
- Whether the post-sale operating-cost reductions at Avonmore and the ASW divestiture improve continuing-operations profitability.
- Actual availability and borrowing capacity under the revolving credit facility, including compliance with minimum-availability and fixed-charge covenants.
- Conversion of backlog into revenue, particularly the $282,298 Forged and Cast backlog and $52,821 Air and Liquid backlog.
- Working-capital trends, cash generation and the company’s ability to fund approximately $3,435 of committed capital expenditures.
- Future asbestos claims, settlement costs, insurance recoveries and potential changes to the $212,953 liability and $141,032 receivable.
- Whether weak oil-and-gas, automotive, industrial OEM and fossil-fuel power-generation markets continue to pressure demand and margins.
- The assumptions and exclusions underlying management’s non-GAAP adjusted results, particularly estimated Avonmore excess costs.