Ampco-Pittsburgh Corporation: Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. 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 12.362 million common shares outstanding as of May 3, 2018.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $115.1 million | $103.5 million |
| Loss from operations | $(1.1) million | $(2.6) million |
| Operating margin | (1.0%) | (2.5%) |
| Net income (loss) | $1.4 million | $(4.7) million |
| Net income (loss) attributable to Ampco-Pittsburgh | $0.9 million | $(4.8) million |
| Attributable earnings (loss) per diluted share | $0.08 | $(0.39) |
| Net cash used in operating activities | $(10.9) million | $(5.5) million |
Sales increased 11.2% year over year. Forged and Cast Engineered Products sales rose to $93.9 million from $81.7 million, while Air and Liquid Processing sales declined to $21.2 million from $21.8 million. Segment income before taxes was $3.1 million, compared with $2.0 million in the prior-year quarter.
Cash and cash equivalents were $23.0 million at March 31, 2018, compared with $20.7 million at December 31, 2017. Operating cash flow was negative primarily because of increased investment in trade working capital. Capital expenditures were $2.9 million, and management identified approximately $5.0 million of additional capital expenditure commitments expected over the next 12 to 18 months.
Total debt was $82.7 million at quarter-end, including $45.2 million classified as current and $37.4 million classified as long-term. Revolver borrowings were $36.4 million, with approximately $40.0 million of remaining availability. The company was in compliance with applicable debt covenants. Dividends remained suspended.
Material changes versus the prior comparable period
- Revenue increased $11.6 million, driven primarily by higher shipment volumes and improved pricing in the Forged and Cast Engineered Products segment.
- Operating loss narrowed by $1.5 million despite higher raw material and operating costs and unfavorable cost absorption from a temporarily idled cast-roll foundry.
- Other income improved by $3.8 million, primarily from an approximately $2.4 million favorable contractual settlement and approximately $1.1 million of higher pension and postretirement benefit income.
- Net attributable results improved from a $4.8 million loss to $0.9 million of income.
- Operating cash use increased by $5.4 million because of working-capital investment supporting higher activity.
- Backlog increased to $347.4 million from $326.4 million at December 31, 2017 and $258.5 million at March 31, 2017. Forged and Cast backlog was $301.0 million; Air and Liquid backlog was $46.3 million.
- The company adopted ASC 606 using the modified retrospective method with no cumulative-effect adjustment because revenue timing was unchanged. Adoption of ASU 2016-01 increased retained earnings by $0.6 million and reduced accumulated other comprehensive income by the same amount at January 1, 2018.
Guidance, outlook, risks and unusual items
Management did not provide formal quantitative full-year guidance. Management expects market conditions for forged and cast products to remain difficult but cited potential benefits from tariffs and reduced Chinese output in North America and Europe, improved customer financial results, and elevated oil and gas activity. The Air and Liquid segment remains exposed to weak fossil-fuel power-generation demand, partly offset by marine defense activity and improving air-handling and heat-exchanger demand.
Unusual items included the favorable contractual settlement, higher pension and postretirement benefit income, favorable warranty reserve adjustments of approximately $4.7 million in the Forged and Cast segment, and tax effects related to the 2017 Tax Cuts and Jobs Act. The company released a $1.2 million valuation allowance on certain foreign deferred tax assets and recorded tax associated with deemed repatriated foreign earnings.
Asbestos litigation remains a significant contingency. The asbestos liability reserve was $142.9 million and the related insurance receivable was $95.4 million at March 31, 2018. Approximately 7,004 asbestos claims were pending at quarter-end. Management warns that actual claims, defense costs, insurance recoveries, insurer solvency, coverage disputes and future legal developments could materially change recorded liabilities, recoveries, liquidity and operating results. No reserve has been recorded for costs expected after 2026.
Other risks include foreign-exchange and commodity-price exposure, pension obligations, environmental remediation, customer and market concentration, competitive pricing, higher raw material costs, and the company’s substantial secured debt. The filing states that there were no material changes in market risk or risk factors from the 2017 Form 10-K. Management stated that disclosure controls were effective as of March 31, 2018.
Important facts for investors to verify
- Whether improved order intake and the $347.4 million backlog convert into sustained revenue, margins and operating cash flow.
- The extent to which higher raw material costs and the idled cast-roll foundry continue to pressure profitability.
- Liquidity, revolver availability, covenant compliance and the timing of current debt maturities.
- The assumptions supporting the $142.9 million asbestos reserve and $95.4 million insurance receivable, including insurer solvency and coverage erosion from other claimants.
- The ultimate tax effects of the Tax Cuts and Jobs Act, GILTI accounting policy and deferred-tax valuation allowances.
- The effect of the June 1, 2018 freeze of participation in a domestic defined-benefit pension plan, including the required remeasurement and resulting liability impact.
- The sustainability of earnings given the approximately $2.4 million contractual settlement and other favorable, potentially nonrecurring items recognized in the quarter.