Ampco-Pittsburgh Corporation — 2016 First-Quarter Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company manufactures specialty metal products and customized equipment through its Forged and Cast Engineered Products and Air and Liquid Processing segments.
On March 3, 2016, the company acquired Åkers AB and affiliates, including a 60% interest in a Chinese joint venture. The acquired operations contributed approximately $12.6 million of March 2016 sales and were included in the Forged and Cast Engineered Products segment.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $63.6 million | $65.1 million |
| Operating income (loss) | $(5.0) million | $0.5 million |
| Operating margin | (7.8%) | 0.8% |
| Net income (loss) | $(3.0) million | $0.1 million |
| Net income (loss) attributable to shareholders | $(2.9) million | $0.1 million |
| EPS attributable to shareholders | $(0.26) | $0.01 |
| Operating cash flow | $(5.0) million | $2.1 million |
| Cash and cash equivalents at period-end | $60.1 million | $94.0 million |
Costs of products sold, excluding depreciation and amortization, were 80.4% of sales versus 80.0% in the prior-year quarter. Selling and administrative expense increased to $13.5 million, or 21.2% of sales, from $9.4 million, or 14.4%.
Total debt was $47.6 million at March 31, 2016, consisting of $19.4 million current and $28.2 million noncurrent debt. Current assets were $251.2 million and current liabilities were $144.8 million. Available short-term lines of credit and overdraft facilities totaled approximately $8.0 million. Management stated that cash on hand and future operating cash flows were expected to fund operating and capital requirements.
Material changes versus the prior comparable period
- Sales declined 2.3%, while operating results moved from $0.5 million of income to a $5.0 million loss.
- Forged and Cast Engineered Products sales were $41.5 million versus $42.8 million; segment loss before taxes was $2.5 million versus income of $1.6 million.
- Air and Liquid Processing sales were $22.1 million versus $22.3 million; segment income before taxes increased to $2.6 million from $2.1 million.
- 2016 selling and administrative expense included approximately $2.2 million of Åkers costs and $1.8 million of acquisition-related transaction costs.
- The acquisition was funded with approximately $29.4 million of cash, a $25.7 million three-year note bearing 6.5% interest, and $22.1 million of newly issued common stock.
- Cash decreased $35.0 million during the quarter, primarily due to the Åkers acquisition, negative operating cash flow, dividends, and foreign exchange effects.
- Backlog increased to $279.6 million from $141.8 million at December 31, 2015 and $159.2 million at March 31, 2015, principally because of Åkers.
- The quarterly dividend was reduced to $0.09 per share from $0.18 per share.
Guidance, outlook, risks, contingencies, and unusual items
Management does not anticipate major improvement in the steel market during 2016, although it believes a slow turnaround could begin by 2017. Roll demand remains weak, global steelmaking capacity is underutilized, pricing is pressured, and margins have declined. The Chinese joint venture is expected to continue incurring losses through 2016 and into 2017.
The company reported approximately 6,439 pending asbestos claims at March 31, 2016. The recorded asbestos liability was $165.8 million, compared with asbestos insurance receivables of $122.7 million. Management stated that actual costs and recoveries could differ materially from recorded amounts because of claim volumes, settlement costs, insurance coverage, insurer solvency, litigation outcomes, and other assumptions. The related coverage litigation remained subject to pending appeals and mediation.
Other material exposures include approximately $22.1 million of standby and commercial letters of credit, $4.2 million of surety bond guarantees related to Åkers pension obligations, unfunded acquired pension and postretirement plans, foreign exchange and commodity price exposure, and approximately $9.3 million of planned capital expenditures over the following 12 to 18 months.
Foreign exchange gains contributed approximately $1.2 million to other income in 2016, compared with a $0.4 million loss in 2015. The company stated that there were no material changes in market-risk exposure from December 31, 2015. Internal controls were reported effective, although Åkers was still being integrated into the company’s control framework.
Most important facts for investors to verify
- Whether Åkers can achieve expected operational benefits and improve the Forged and Cast Engineered Products segment despite weak global steel and roll markets.
- The final purchase-price allocation for Åkers, including provisional intangible asset, pension, warranty, deferred-tax, and goodwill amounts.
- Cash generation, inventory levels, acquisition-related debt service, and compliance with available liquidity facilities.
- The sensitivity of asbestos liabilities and insurance receivables to claim trends, coverage litigation, insurer solvency, and assumptions beyond 2024.
- The carrying value and future funding needs of the Chinese joint venture and acquired pension plans.
- Whether the substantial backlog converts into revenue and cash on the expected timing, particularly the portion scheduled to ship after 2016.