Ampco-Pittsburgh Corporation 2016 Q3 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, 2016, with comparisons to the prior-year periods.
The March 3, 2016 acquisition of Åkers expanded the Forged and Cast Engineered Products segment across the United States, Europe and China. Results include Åkers from the acquisition date.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $82.9 million | $58.1 million | $239.7 million | $183.2 million |
| Loss from operations | $(4.9) million | $(2.4) million | $(14.8) million | $(2.7) million |
| Net loss attributable to Ampco-Pittsburgh | $(27.4) million | $(1.5) million | $(36.8) million | $(2.0) million |
| Loss per diluted share | $(2.23) | $(0.14) | $(3.10) | $(0.19) |
| Operating margin | (6.0%) | (4.1%) | (6.2%) | (1.5%) |
| Cash flow from operations | Not separately reported | Not separately reported | $(13.2) million | $8.5 million |
Costs of products sold, excluding depreciation and amortization, were 81.2% of sales in the quarter and 81.7% year to date. Selling and administrative expenses were 18.2% of sales in both the quarter and year to date, versus approximately 15.0% in the comparable 2015 periods.
At September 30, 2016, cash and cash equivalents were $43.5 million, down from $95.1 million at December 31, 2015. Total debt was $44.7 million, comprising $19.1 million of current debt and $25.6 million of noncurrent debt. Revolving-credit availability was approximately $40.0 million.
Total assets were $587.6 million and total shareholders’ equity was $198.5 million at September 30, 2016. Backlog was approximately $260.4 million, compared with $141.8 million at December 31, 2015.
Material changes versus the prior comparable period
- Sales increased 42.6% in the third quarter and 30.9% for the nine-month period, primarily because of the Åkers acquisition. Åkers contributed approximately $33.7 million of third-quarter sales and $86.7 million of nine-month sales.
- Despite higher sales, operating losses widened because of weak global roll demand, excess steelmaking capacity, unfavorable pricing, lower utilization, Åkers operating losses, purchase-accounting effects and restructuring costs.
- The Forged and Cast Engineered Products segment generated sales of $62.9 million in the quarter and $176.1 million year to date, but reported pretax losses of $3.4 million and $9.4 million, respectively.
- Air and Liquid Processing sales declined 9% in the quarter and 4% year to date. Its pretax income was $2.0 million in the quarter and $7.3 million year to date, broadly comparable year to date with 2015 because of productivity and mix improvements.
- Operating cash flow shifted from $8.5 million provided in the first nine months of 2015 to $13.2 million used in 2016, reflecting larger operating losses and lower accounts payable, principally at Åkers.
- Quarterly and year-to-date net losses included deferred-tax valuation allowances of $26.9 million and $28.3 million, respectively. These allowances increased loss per share by approximately $2.19 and $2.39.
- The quarterly dividend was reduced from $0.18 to $0.09 per share beginning with the March 2016 declaration.
Guidance, outlook, risks and unusual items
- Management provided no specific numerical earnings or sales guidance. It stated that weak roll demand and pricing remain challenges, although pricing had begun to stabilize as steel-coil prices improved and customers reported better results.
- Management expects funds on hand, future operating cash flow and revolving-credit availability to finance operations and capital expenditures. Planned capital expenditures of approximately $5.3 million were expected over the following 6 to 12 months.
- Åkers reported losses before income taxes of approximately $4.7 million in the quarter and $8.7 million for the nine months, including restructuring and purchase-accounting effects. Third-quarter restructuring charges were approximately $1.3 million.
- On November 1, 2016, after the reporting date, the company acquired ASW Steel for approximately $13.1 million, consisting of $3.5 million in cash and $9.6 million of assumed debt.
- Asbestos liabilities were $156.1 million at September 30, 2016, with related insurance receivables of $114.9 million. The company cautioned that actual claims, insurance recoveries and future charges may differ materially from recorded estimates.
- Approximately 6,465 asbestos claims were pending at September 30, 2016. Coverage litigation and appeals remained pending, and insurance-carrier solvency and policy erosion were identified as risks.
- The company had approximately $23.8 million of standby and commercial letters of credit and approximately $4.0 million of Åkers-related surety bonds. Environmental liabilities were approximately $0.3 million.
- Foreign-exchange, commodity-price, pension, customer-demand, pricing, execution and acquisition-integration risks remain material. Management reported no material change in market-risk exposure from December 31, 2015.
Most important facts for investors to verify
- Whether the increased backlog converts into profitable shipments, particularly in the Forged and Cast Engineered Products segment.
- Åkers’ progress toward profitability, including realization of identified synergies and the effect of restructuring and purchase-accounting costs.
- Cash-generation trends, covenant compliance and remaining borrowing capacity under the asset-based revolving facility.
- The assumptions supporting the asbestos liability and insurance receivable, including future claims, settlement costs, coverage erosion and insurer solvency.
- The recoverability of deferred tax assets and the potential for additional valuation allowances.
- The purchase accounting, financing impact and operating contribution of the subsequent ASW Steel acquisition.