Ampco-Pittsburgh Corporation 2019 Form 10-K Summary
Business context and reporting period
Ampco-Pittsburgh manufactures engineered specialty metal products and customized air and liquid processing equipment. Its two reportable segments are Forged and Cast Engineered Products and Air and Liquid Processing. This annual report covers the fiscal year ended December 31, 2019; comparative figures are for 2018. Unless otherwise stated, amounts are in thousands.
During 2019, the Corporation sold ASW Steel Inc. for net proceeds of approximately $4,292 and sold the Avonmore Plant for $3,700. ASW’s results are presented as discontinued operations; Avonmore’s results remain in continuing operations. The Corporation had 1,673 active employees at year-end.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $397,904 | $419,432 | Down 5.1% |
| Loss from continuing operations | $(10,475) | $(43,575) | Improved |
| Net loss attributable to Ampco-Pittsburgh | $(20,986) | $(69,335) | Improved |
| Net loss per share | $(1.67) | $(5.57) | Improved |
| Gross margin before depreciation and amortization | 18.0% | 16.1% | Improved |
| Cash flow from continuing operations | $(3,294) | $6,710 | Declined |
| Capital expenditures | $10,964 | $9,719 | Increased |
| Cash and cash equivalents | $6,960 | $19,713 | Down $12,753 |
| Total debt | $70,857 | $77,609 | Down $6,752 |
| Shareholders’ equity | $55,616 | $92,969 | Down $37,353 |
Consolidated operating costs exceeded sales, producing a continuing-operations loss of $10,908 before other income and expense. Selling and administrative expense declined to $53,643, or 13.5% of sales, from $58,068, or 13.8%, in 2018. Interest expense increased to $5,342 from $4,130.
The Forged and Cast Engineered Products segment generated sales of $305,630 and an operating loss of $6,130, compared with sales of $329,530 and a loss of $6,605 in 2018. Air and Liquid Processing generated sales of $92,274 and operating income of $10,002, compared with sales of $89,902 and an operating loss of $22,129 in 2018.
Debt and liquidity
- Revolving credit borrowings were $34,273 at year-end, with approximately $27,000 of remaining availability after standard reserves.
- The asset-based revolving facility has a $100,000 initial borrowing limit, a potential $50,000 increase subject to bank approval, and expires in May 2021.
- The facility is secured by substantially all assets other than real property and includes financial and operational covenants. The Corporation was in compliance at December 31, 2019.
- Total debt included $19,303 of sale-and-leaseback financing, $13,311 of industrial revenue bonds, $2,856 of minority shareholder loans and $1,114 of finance leases.
- Operating cash flow from continuing operations was negative, while receivables increased by $15,040 in cash-flow terms because of higher sales late in the year and slower collections.
- Management stated that cash on hand, future operating cash flow and revolving-facility availability are expected to fund operations, maintenance capital expenditures and financial obligations.
- Purchase commitments for capital expenditures were approximately $3,072 over the following 12 months.
Material changes versus 2018
- Sales declined primarily because forged engineered product sales fell approximately $40,000, or 67%, amid weak oil and gas demand. Mill roll sales and Air and Liquid sales increased.
- Profitability improved substantially because of the absence of the 2018 asbestos-related charge, lower Avonmore costs, higher mill roll sales, domestic operating efficiencies and lower selling and administrative expense.
- 2019 included a $10,082 Avonmore impairment charge, $2,350 of restructuring-related costs, $1,366 of bad debt expense and $1,803 of business interruption insurance proceeds.
- 2018 included a $32,910 asbestos-related charge and a $15,000 after-tax impairment charge related to ASW.
- Management’s non-GAAP adjusted income from continuing operations was $5,659 in 2019 versus an adjusted loss of $1,652 in 2018. This measure excludes specified unusual items and is not a GAAP measure.
- Backlog declined to $321,331 from $343,079. The Forged and Cast segment accounted for most of the reduction, which management attributed to customer ordering patterns rather than lost market share. Approximately 9% of total backlog was expected to be released after 2020.
- Quarterly cash dividends have remained suspended since the second quarter of 2017.
- The Corporation adopted the new lease accounting standard in 2019, recording an operating lease right-of-use asset and liability of approximately $5,893 at adoption without affecting earnings or liquidity.
Guidance, outlook, commentary and risks
Management did not provide formal numerical revenue or earnings guidance. It expects operational improvements, restructuring actions and the Avonmore disposal to reduce costs. Estimated annualized savings include approximately $2,300 from domestic forged-roll improvements, $4,000 from workforce reductions and approximately $4,572 of Avonmore excess costs eliminated relative to 2019. European cast-roll efficiency initiatives had begun but remained in progress.
Management described U.S. and European roll markets as softened by lower automotive and industrial activity, while noting signs of stabilization in demand and steel prices. Oil and gas demand remained weak. In Air and Liquid Processing, commercial heat exchanger activity and marine-defense demand were favorable, while industrial OEM activity and fossil-fuel power-generation demand were weaker and competitive pricing remained a pressure.
- Asbestos claims remained a significant contingency. The reserve for estimated costs through 2052 was $207,633, partially offset by an insurance receivable of $136,932. Approximately 6,102 claims were pending at year-end. Future costs and insurance recoveries could differ materially from estimates.
- Approximately 35% of employees were covered by collective bargaining agreements; agreements covering approximately 48% of unionized employees were scheduled to expire in 2020.
- Risks include cyclical steel and energy demand, excess global steel capacity, commodity price increases, graphite-electrode shortages, currency movements, tariffs, Brexit-related trade restrictions, work stoppages and dependence on specialized production equipment.
- The Corporation reported that its 30-day average global market capitalization at year-end was below the NYSE’s $50 million continued-listing threshold, although shareholders’ equity was $55.6 million. A future NYSE non-compliance notice or delisting could reduce shareholder liquidity.
- The filing discusses the coronavirus outbreak as a potential risk to international operations, supply chains, economies, sales and results; the extent of the impact was not determinable at the filing date.
- Pension and other postretirement benefit obligations were significant. Total funded deficits included $66,235 for U.S. pension benefits, $4,439 for foreign pension benefits and $11,398 for other postretirement benefits.
Most important facts for investors to verify
- Whether the $27,000 of revolving-credit availability and planned operating cash flow are sufficient given year-end cash of only $6,960 and negative 2019 operating cash flow.
- The May 2021 maturity and covenant requirements of the revolving credit facility, including the minimum fixed-charge coverage requirement if availability falls below the required threshold.
- The reasonableness of the asbestos reserve through 2052, the $136,932 insurance receivable and the solvency and coverage limits of relevant insurers.
- Whether expected savings from the Avonmore closure, workforce reductions and operating-efficiency programs are achieved and sustainable.
- Whether backlog conversion, customer ordering patterns and demand in the steel, oil and gas, industrial OEM, fossil-fuel and marine-defense markets support future sales.
- The potential effect of tariffs, Brexit, coronavirus-related disruption, commodity costs, foreign exchange and labor negotiations on margins and liquidity.
- The Corporation’s ability to maintain NYSE listing requirements and rebuild shareholders’ equity.
- The filing’s audited financial statements and effective management assessments of disclosure controls and internal control over financial reporting, noting that the smaller reporting company was not required to obtain an auditor’s internal-control opinion.