Ampco-Pittsburgh Corporation 2018 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 Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company had 12.495 million common shares outstanding on November 2, 2018.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $112.2 million | $103.9 million | $354.7 million | $318.0 million |
| Loss from operations | $(6.7) million | $(3.2) million | $(9.4) million | $(8.0) million |
| Net loss attributable to shareholders | $(7.0) million | $(2.2) million | $(9.1) million | $(8.9) million |
| Loss per diluted share | $(0.56) | $(0.18) | $(0.73) | $(0.72) |
| Operating margin | (6.0%) | (3.1%) | (2.7%) | (2.5%) |
| Net margin attributable to shareholders | (6.3%) | (2.1%) | (2.6%) | (2.8%) |
Revenue increased 8.0% in the quarter and 11.6% year to date. Forged and Cast Engineered Products generated sales of $88.1 million in the quarter and $285.0 million year to date, while Air and Liquid Processing generated $24.1 million and $69.7 million, respectively.
Segment results before taxes were a $5.4 million loss for Forged and Cast Engineered Products and $3.0 million of income for Air and Liquid Processing in Q3. Year-to-date segment results were a $6.0 million loss and $9.0 million of income, respectively. Corporate and other expense was $3.2 million in Q3 and $9.8 million year to date.
Cash flow from operations was $(8.2) million in the first nine months, compared with $(15.9) million in the prior-year period. Capital expenditures were $8.8 million, and management disclosed approximately $2.0 million of additional capital commitments expected over the next 12 to 18 months. Cash and cash equivalents were $14.8 million at September 30, 2018, versus $20.7 million at December 31, 2017.
Total debt was $78.1 million at September 30, 2018, including $46.2 million classified as current and $31.9 million long term. The revolving credit facility had $13.8 million outstanding and approximately $45.0 million of remaining availability, net of a reserve. The company was in compliance with applicable bank covenants.
Material changes versus the prior comparable period
- Sales increased, but operating losses widened because of unabsorbed costs, higher operating costs, equipment maintenance issues, tariffs affecting Canadian operations, a lost customer following a plant closure, and unfavorable product mix.
- Forged and Cast Engineered Products sales increased 7.8% in Q3 and 13.2% year to date, but segment profitability declined. Mill roll demand and pricing improved, while oil and gas-related forged product demand was affected by inventory adjustments.
- Air and Liquid Processing sales and operating income improved, supported by higher air-handling shipments, improved order intake, and favorable product mix. Heat exchange coil sales remained pressured by lower nuclear and fossil-fuel power-generation demand.
- Other income improved by approximately $1.4 million in Q3 and $5.1 million year to date. Drivers included higher pension and postretirement benefit income, a $2.4 million favorable contractual settlement year to date, and foreign-exchange fluctuations.
- Interest expense increased due to higher revolving-credit borrowings. The company completed a $19.0 million sale-and-leaseback financing transaction, recorded as debt because of its repurchase option; initial annual payments are approximately $1.6 million.
- Dividends were suspended in June 2017; 2018 cash dividends of $35 thousand primarily related to restricted shares that vested during the period.
- Backlog increased to approximately $355.9 million at September 30, 2018, from $331.6 million at September 30, 2017 and $326.4 million at December 31, 2017. Approximately $218.1 million was expected to ship after 2018.
Outlook, risks, contingencies, and unusual items
Management did not provide formal earnings or revenue guidance. It stated that funds on hand, expected operating cash flow, and revolving-credit availability should be sufficient for operations, capital expenditures, and financial obligations. Approximately $25.9 million of promissory notes and interest was due in March 2019, with the credit-facility availability reserve intended to support settlement.
Key operating risks include Canadian steel tariffs, lower production utilization, competitive pricing, weaker fossil-fuel power-generation activity, oil and gas inventory corrections, foreign-exchange exposure, commodity-price volatility, and customer concentration or loss. The company uses foreign-currency, copper, aluminum, and natural-gas contracts to manage portions of these exposures.
Asbestos remains a significant contingency. The recorded asbestos liability was approximately $131.2 million and related insurance receivables were approximately $87.3 million at September 30, 2018. Approximately 6,543 asbestos claims were pending, and gross settlement and defense costs were $18.5 million for the first nine months. Management stated that future charges or insurance recoveries could differ materially from recorded estimates and that the next valuation was expected later in 2018.
The company was also involved in litigation concerning retiree medical benefits; management believed the ultimate resolution would not materially affect results, financial position, liquidity, or capital resources. Environmental liabilities were estimated at approximately $330 thousand.
On October 31, 2018, the company sold the Vertical Seal division for approximately net book value. The assets and liabilities had been classified as held for sale at September 30, 2018; the transaction was not treated as a discontinued operation.
The company adopted revenue recognition guidance using the modified retrospective method without a retained-earnings adjustment. It also adopted financial-instrument guidance, resulting in a $632 thousand cumulative increase to retained earnings at January 1, 2018. The filing states that the 2019 lease standard and other pending accounting guidance were still under evaluation.
Important facts for investors to verify
- Whether Canadian tariffs, plant utilization, maintenance issues, and product mix continue to pressure Forged and Cast Engineered Products margins.
- The timing and amount of cash required for promissory notes and interest due in March 2019, and the company’s available borrowing capacity.
- The results of the late-2018 asbestos valuation, including changes to the $131.2 million liability and $87.3 million insurance receivable.
- Whether backlog converts into revenue and cash at expected margins, particularly the portion scheduled to ship after 2018.
- The sustainability of Air and Liquid Processing improvement amid continued weakness in fossil-fuel power markets and competitive pricing.
- The effect of the Vertical Seal divestiture and the sale-and-leaseback obligations on future revenue, operating costs, and leverage.
- Potential changes from the Tax Cuts and Jobs Act measurement process, including the approximately $2.4 million deemed-repatriation tax charge and related refunds or tax attributes.