Business Context and Reporting Period
Ampco-Pittsburgh Corporation filed an unaudited Form 10-Q for the quarter ended March 31, 2017. The company manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. Results include the acquired Åkers businesses for a full quarter and ASW Steel for the full period.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $103.5 million | $63.6 million |
| Loss from operations | $(2.4) million | $(5.0) million |
| Net loss attributable to shareholders | $(4.8) million | $(2.9) million |
| Loss per diluted share | $(0.39) | $(0.26) |
| Operating cash flow | $(5.5) million | $(5.0) million |
| Capital expenditures | $3.1 million | $0.6 million |
- Sales increased approximately 63%, primarily reflecting the full-quarter contribution from Åkers and ASW, higher roll shipments, and increased oil and gas-related forging sales.
- Product costs were 81.8% of sales versus 80.4% in the prior-year quarter. Selling and administrative expenses were 14.8% of sales versus 21.2%.
- Forged and Cast Engineered Products generated $81.7 million of sales and a $0.6 million pretax loss. Air and Liquid Processing generated $21.8 million of sales and $2.7 million of pretax income.
- Cash and equivalents declined to $21.0 million from $38.6 million at December 31, 2016; approximately $13.3 million was held by foreign operations.
- Total debt was $44.6 million, including $18.9 million current and $25.7 million long-term, compared with $52.2 million at December 31, 2016.
- The revolving credit facility had approximately $57.0 million of availability at March 31, 2017. The company was in compliance with its covenants and borrowed $7.0 million under the facility in April 2017.
- Backlog increased to $258.5 million from $233.6 million at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased by approximately $39.9 million, with approximately 80% of the Forged and Cast segment increase attributable to the full-quarter inclusion of Åkers and ASW.
- Operating loss improved by approximately $2.6 million, despite higher depreciation, amortization, freight, commissions, and lower segment margins.
- Net loss attributable to shareholders increased by approximately $1.9 million. The prior-year quarter benefited from an approximately $1.8 million pretax foreign-exchange gain and included approximately $1.8 million of acquisition-related costs and purchase-accounting effects.
- Interest expense increased to $1.2 million from $0.2 million because 2017 included a full quarter of acquisition-related and other debt costs.
- Other income and expense shifted from $1.2 million of income to $1.1 million of expense, primarily due to foreign-exchange losses in 2017 versus gains in 2016.
- Cash used in investing activities improved substantially because the prior-year period included the $27.0 million cash acquisition payment for Åkers. Financing cash flow included repayment of ASW debt in 2017.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal numerical earnings or revenue guidance was provided. Management reported that demand and order intake improved during late 2016 and the first quarter of 2017, and that customer results and protectionist measures may support future demand and pricing.
- The Forged and Cast segment continues to operate significantly below capacity because of excess global steelmaking capacity and oversupply of rolls. A portion of one cast roll plant was temporarily idled in April 2017, potentially for much of the year.
- Air and Liquid Processing benefited from strong pump activity, including U.S. Navy shipbuilder demand, but faces weakness in fossil-fueled power generation and OEM/commercial heat-exchange markets, as well as competitive pricing pressure.
- Asbestos liabilities were $166.3 million at March 31, 2017, with related insurance receivables of $112.3 million. The company states that actual costs and recoveries could differ materially from estimates because of claim volumes, settlement costs, insurance coverage, insurer solvency, and litigation outcomes.
- There were approximately 6,786 asbestos claims pending at quarter-end. Gross settlement and defense costs were approximately $4.9 million during the quarter, with most costs paid by insurers.
- Environmental compliance liabilities were estimated at approximately $2.5 million. The company also carries employee benefit obligations of approximately $91.6 million.
- A February 2017 retiree medical-benefits class action is being defended; management does not expect a material adverse effect, although the ultimate outcome is uncertain.
- Management states that funds on hand, expected operating cash flow, and revolver availability should be sufficient for operating and capital requirements. Future capital-expenditure commitments were approximately $4.8 million over the next 12 to 18 months.
- The company disclosed no material change in market-risk exposure and concluded that disclosure controls were effective as of March 31, 2017.
Important Facts for Investors to Verify
- Whether improved backlog and demand translate into sustainable volume, pricing, and margin improvement, particularly in the Forged and Cast segment.
- The duration and financial impact of the cast roll plant idling and continued below-capacity operations.
- Liquidity, cash burn, revolver borrowings, covenant compliance, and debt maturities, including the Åkers promissory notes due March 2019.
- The assumptions supporting asbestos reserves and insurance receivables, including future claims, coverage erosion, and insurer solvency.
- Whether the company can maintain its dividend while reporting losses and negative operating cash flow.
- The effect of foreign-exchange movements, commodity costs, pension obligations, and valuation allowances on future earnings and cash flow.