Ampco-Pittsburgh Corporation 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. Ampco-Pittsburgh operates in two segments: Forged and Cast Rolls, which supplies rolls to global steel, aluminum and other metal producers, and Air and Liquid Processing, which produces heat-transfer coils, air-handling systems and centrifugal pumps.
Consolidated sales were geographically diversified, with $143.6 million from the United States and $149.3 million from foreign markets. The company had 1,178 employees at year-end. Two international customers represented approximately 23% of Forged and Cast Rolls sales.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $292.9 million | $344.8 million | Down 15.1% |
| Income from operations | $16.3 million | $36.5 million | Down 55.3% |
| Net income | $8.4 million | $21.3 million | Down 60.8% |
| Diluted EPS | $0.80 | $2.05 | Down 61.0% |
| Operating margin | 5.6% | 10.6% | Down 5.0 points |
| Gross margin excluding depreciation | 22.9% | 25.7% | Down 2.8 points |
| Operating cash flow | $25.4 million | $22.3 million | Up $3.2 million |
| Capital expenditures | $9.7 million | $15.8 million | Down $6.1 million |
Fourth-quarter 2012 sales were $77.2 million, compared with $86.5 million in the prior-year quarter. Fourth-quarter net income was $3.3 million, or $0.32 diluted EPS, compared with $1.8 million, or $0.17 diluted EPS, in fourth-quarter 2011. Fourth-quarter gross profit excluding depreciation was $17.9 million versus $19.5 million.
- Forged and Cast Rolls: Sales declined to $189.5 million from $248.4 million, and operating income declined to $18.4 million from $38.8 million. The year-end backlog fell to $154.5 million from $214.4 million.
- Air and Liquid Processing: Sales increased to $103.4 million from $96.4 million, while operating income declined modestly to $7.3 million from $8.2 million. Backlog declined to $41.3 million from $45.6 million.
- Cash and liquidity: Cash and cash equivalents increased to $78.9 million from $69.9 million, including approximately $8.6 million held by foreign operations. Available short-term lines of credit totaled approximately $9.4 million, with no amounts outstanding.
- Debt: Industrial Revenue Bonds totaled $13.3 million and carried floating rates averaging less than 1%. Although principal maturities begin in 2020, the bonds were classified as current because they could be put back to the company if not remarketed. The company was in compliance with applicable covenants.
- Shareholders’ equity: Year-end equity was $192.1 million versus $192.9 million in 2011. The company declared $0.72 per share in dividends, continuing its history of annual cash dividends since 1965.
Material changes versus the prior comparable period
- Forged and Cast Rolls performance deteriorated substantially because of weaker global demand, lower customer production in Europe, excess roll inventories in Asia, increased Chinese, South Korean and Indian competition, and price discounting.
- Consolidated backlog declined $64.2 million, or approximately 24.7%, to $195.8 million. Approximately 20% of year-end backlog was expected to be released after 2013.
- Gross margin excluding depreciation declined due to competitive price reductions, higher raw-material costs and increased employee-benefit expenses.
- Air and Liquid Processing benefited from stronger first-half orders and improved sales in each division, but second-half orders slowed because of reduced institutional spending and fewer U.S. Navy ship orders.
- The Chinese forged-roll joint venture generated a $1.6 million equity loss for Ampco-Pittsburgh in 2012, compared with a $0.5 million loss in 2011. Management expected another operating loss in 2013, primarily from non-cash expenses.
- Operating cash flow improved despite lower earnings, supported in part by working-capital changes and non-cash pension and asbestos-related items. Pension and other postretirement benefit expense in excess of contributions was $10.1 million.
Outlook, risks, contingencies and unusual items
Management expected modest recovery in rolling-mill-roll demand in 2013, with slight improvement in North America and partial offset from new Asian mill projects. European demand was expected to remain weak, while competitive pricing pressures and foreign-exchange movements could continue to reduce volumes and margins. Management also expected continuing losses at the Chinese forged-roll joint venture.
The company expected approximately $8.8 million of future capital expenditures, principally in 2013. No minimum U.S. defined-benefit pension contribution was expected for 2013 under MAP-21, although voluntary contributions could be made. Estimated 2013 asbestos-related payments were approximately $5.1 million.
- Asbestos: The company recorded an asbestos liability reserve of approximately $181.0 million for claims and defense costs through 2022 and an insurance receivable of approximately $118.1 million. The net recorded exposure was approximately $62.9 million. Actual costs and recoveries could differ materially, and no reserve was recorded for costs after 2022.
- Asbestos claims: Claims pending at year-end declined to approximately 8,007 from 8,145. Gross settlement and defense costs increased to $23.6 million from $22.8 million, although insurers paid a substantial majority.
- Pension and postretirement obligations: Reported employee benefit obligations totaled $96.1 million. U.S. pension, foreign pension and other postretirement plans remained underfunded by approximately $56.8 million, $17.3 million and $22.8 million, respectively.
- Environmental matters: Accrued environmental liabilities were approximately $1.2 million for remedial actions related to previously owned real estate.
- Commodity and currency risk: A 10% change in commodity prices was estimated to affect annual results by approximately $9.5 million. The company used foreign-currency and commodity hedges and had contracts covering portions of anticipated copper, aluminum and natural-gas requirements.
- Operating risks: Key risks include cyclical steel demand, customer concentration, export and foreign-exchange exposure, commodity-price volatility, labor negotiations, dependence on specialized equipment, environmental matters and asbestos litigation.
Important facts for investors to verify
- Whether rolling-mill-roll demand and pricing recovered as projected in 2013 and whether the $154.5 million rolls backlog converted to sales at expected margins.
- The sustainability of the $78.9 million cash balance, including the amount held overseas and any tax cost of repatriation.
- The classification and refinancing or remarketing risk associated with the $13.3 million Industrial Revenue Bonds.
- Changes in asbestos claims, insurance recoveries, insurer solvency and the adequacy of the $181.0 million reserve through 2022.
- The effect of pension underfunding, declining discount rates and future required or voluntary contributions on cash flow.
- Whether the Chinese forged-roll joint venture incurs further losses or triggers an impairment charge.
- The extent to which commodity inflation, foreign-exchange movements and customer concentration affect future margins and sales.
Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2012.