Ampco-Pittsburgh Corporation 2018 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2018, filed March 18, 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 had 1,922 active employees at year-end and operates in the United States, Europe, Canada and China through joint ventures.
In October 2018, the company approved the sale of ASW Steel Inc., its Canadian specialty steel operation. ASW was classified as a discontinued operation, and prior-period results were recast accordingly.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $419.4 million | $385.2 million | +8.9% |
| Gross margin excluding depreciation and amortization | 16.1% | 17.7% | Down 1.6 points |
| Loss from continuing operations | $43.6 million | $15.1 million | Worsened |
| Net loss attributable to Ampco-Pittsburgh | $69.3 million | $12.1 million | Worsened |
| Continuing-operations loss per share | $3.50 | $1.22 | Worsened |
| Total loss per share | $5.57 | $0.98 | Worsened |
| Operating cash flow from continuing operations | $6.7 million | $(19.0) million | Improved |
| Capital expenditures | $9.7 million | $13.0 million | Lower |
| Cash and equivalents of continuing operations | $19.7 million | $18.7 million | +$1.1 million |
| Total debt | $77.6 million | $66.2 million | +$11.5 million |
| Backlog | $343.1 million | $324.6 million | +5.7% |
Forged and Cast Engineered Products generated $329.5 million of sales, up from $297.3 million, and reported a $6.6 million operating loss versus a $6.9 million loss. Air and Liquid Processing generated $89.9 million of sales, up from $87.9 million, but reported a $22.1 million operating loss versus $10.7 million of operating income in 2017.
The Air and Liquid loss included a $32.9 million pretax asbestos litigation charge. The company reported $152.5 million of asbestos insurance receivables and $227.9 million of estimated asbestos liability at December 31, 2018.
Material changes versus the prior comparable period
- Sales increased primarily from higher mill-roll sales and forged engineered products. Mill-roll sales increased approximately $15.6 million and forged engineered products increased approximately $16.6 million.
- Gross margin declined because lower production levels, higher operating costs and equipment-maintenance issues offset the benefit of higher shipments and improved pricing.
- Air and Liquid Processing shifted from operating income of $10.7 million to an operating loss of $22.1 million, primarily because of the asbestos charge. Excluding that charge, management reported improvement from higher shipments, product mix and cost containment.
- ASW reported a $23.9 million loss from discontinued operations, including a $15.0 million after-tax-equivalent asset write-down to estimated fair value less costs to sell. ASW reported 2018 sales of $63.7 million versus $81.3 million in 2017.
- Cash flow from continuing operations improved because of lower working-capital investment and approximately $3.5 million of federal tax refunds.
- The company completed a $19.0 million sale-and-leaseback financing transaction. Because of repurchase provisions, the transaction was recorded as debt rather than a sale.
- Quarterly dividends were suspended beginning in the second quarter of 2017; only $35 thousand of dividends were paid in 2018, relating to previously issued restricted stock.
Debt, liquidity and cash flow
The company had $77.6 million of outstanding borrowings at year-end, including $14.3 million under its revolving credit facility, $18.5 million of sale-and-leaseback financing, $26.2 million of promissory notes and accrued interest, $13.3 million of industrial revenue bonds, $4.1 million of minority-shareholder debt and $1.2 million of capital leases.
The revolving credit facility has a $100 million initial capacity, an option for an additional $50 million subject to bank approval, and expires in May 2021. Remaining availability was approximately $35 million at year-end, subject to reserves. The company reported compliance with applicable covenants. Promissory notes and accrued interest totaling approximately $26.5 million were paid on March 4, 2019.
Management stated that cash on hand, expected operating cash flow and revolver availability should be sufficient for operations, capital expenditures and financial obligations. Expected capital expenditures over the next 12 months were approximately $888 thousand. Net asbestos-related payments were $6.9 million in 2018 and were expected to approximate $7.0 million in 2019.
Guidance, outlook, management commentary and risks
- Backlog increased to $343.1 million, with approximately 37% expected to be released after 2019. The Forged and Cast segment backlog was $298.7 million, including approximately $126.0 million expected after 2019; Air and Liquid backlog was $44.4 million and was expected to ship in 2019.
- Management cited improved roll-market conditions in the United States and Europe, but oil-and-gas order intake remained suppressed by supply-chain inventory adjustments. Forged engineered-product backlog declined approximately 50%, principally because of a contraction in the frac-bloc market.
- Air and Liquid faces weak fossil-fueled power-generation demand, partially offset by marine-defense activity and early industrial-market growth. Competitive pricing pressure remains in custom air handling.
- Management expects manufacturing efficiencies and cost-savings actions to mitigate inflationary pressures in 2019, but acknowledged that some commodity-cost increases may need to be absorbed.
- U.S. tariffs on imported primary steel and aluminum increased input-cost and competitive risks, particularly for Canadian operations. Brexit-related trade and regulatory uncertainty also affected the company’s risk outlook.
- Material contingencies include asbestos litigation, pension obligations, environmental remediation, collective-bargaining negotiations, commodity and foreign-exchange volatility, equipment outages, cyber risk and credit-facility covenant requirements.
- The company expects to negotiate collective bargaining agreements expiring in 2019; those agreements cover approximately 55% of employees subject to collective bargaining.
- Management intended to seek shareholder approval in 2019 to increase authorized common shares from 20 million to 40 million, citing limited remaining share availability and the need for financial flexibility.
Most important facts for investors to verify
- Whether the ASW sale was completed on expected terms in 2019 and the resulting cash, debt and operating impact.
- The actual development of asbestos claims, settlement costs, insurance recoveries and the sensitivity of the $227.9 million reserve and $152.5 million receivable.
- Revolver availability, covenant compliance and refinancing or repayment requirements after the March 2019 promissory-note payment.
- Whether backlog converts into revenue and cash flow, particularly the portion scheduled after 2019 and the reduced forged-engineered-product backlog.
- The ability of Air and Liquid Processing to restore profitability excluding the asbestos charge.
- The effects of tariffs, Brexit, foreign-exchange movements and commodity prices on margins and Canadian operations.
- Approval and potential dilution from the proposed increase in authorized common shares.
- The company’s ability to sustain operations while reporting substantial losses, negative retained earnings of $30.4 million and total shareholders’ equity of $93.0 million.