Ampco-Pittsburgh Corporation — FY2014 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, including unaudited fourth-quarter information. Ampco-Pittsburgh operates through two segments: Forged and Cast Engineered Products, which produces forged and cast steel rolls and non-roll forgings, and Air and Liquid Processing, which produces heat-exchange coils, air-handling systems and centrifugal pumps.
The financial statements were audited by Deloitte & Touche LLP, which issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $272.9 million | $281.1 million |
| Income from operations | $0.1 million | $29.0 million |
| Net income (loss) | $(1.2) million | $12.4 million |
| Basic and diluted EPS | $(0.11) | $1.20 |
| Operating cash flow | $20.0 million | $37.8 million |
| Capital expenditures | $13.3 million | $11.8 million |
| Cash and equivalents | $97.1 million | $97.9 million |
| Shareholders’ equity | $205.1 million | $235.0 million |
| Gross margin excluding depreciation | 19.9% | 22.7% |
- Forged and Cast Engineered Products sales were $179.4 million, down from $187.3 million; operating income declined to $4.4 million from $13.9 million.
- Air and Liquid Processing sales were $93.5 million, broadly flat with 2013; operating income was $4.2 million versus $24.9 million, including a 2014 asbestos charge and a 2013 asbestos-related insurance recovery credit.
- Fourth-quarter sales were $74.6 million and net loss was $2.0 million, or $(0.20) per diluted share. The quarter included a $2.9 million after-tax asbestos-related charge.
- Cash dividends remained $0.72 per share for the year.
- Industrial Revenue Bonds totaled $13.3 million. No short-term credit lines were drawn; approximately $9.2 million remained available.
- Contractual obligations totaled approximately $75.1 million, including $49.7 million of estimated pension and other postretirement contributions, $13.3 million of industrial revenue bonds, and $6.3 million of planned capital expenditures.
Material changes versus the prior comparable period
- Sales decreased approximately 2.9%, primarily because of lower shipment volumes and weaker pricing in the forged and cast roll business.
- Operating income fell sharply because of lower production volumes, pricing pressure and a $4.5 million pre-tax asbestos-related charge, compared with a $16.3 million pre-tax insurance recovery credit in 2013.
- Net income swung to a loss. The 2013 result benefited from a $10.6 million after-tax asbestos insurance recovery credit, partly offset by a $4.2 million after-tax impairment charge on the Chinese forged-roll joint venture.
- Operating cash flow declined by $17.8 million, principally because of higher receivables caused by customer mix, slower collections and longer payment terms.
- Year-end backlog declined to $167.9 million from $197.5 million. Approximately 15% was expected to be released after 2015.
- Employee benefit obligations increased materially, and accumulated other comprehensive loss widened to $68.8 million from $45.9 million, primarily reflecting lower discount rates, revised longevity assumptions and pension remeasurement effects.
Outlook, commentary, risks and unusual items
- Management expected weak roll demand and continuing pricing pressure in 2015 because global steelmakers were operating below capacity and Asian and Indian producers were competing aggressively.
- Non-roll products, including ingot and open-die forgings serving the oil and gas and extrusion industries, had exceeded expectations and were expected to become a more significant portion of Forged and Cast Engineered Products sales.
- The Chinese forged-roll joint venture remained loss-making, was relying increasingly on its 51% partner for financing and working capital, and was expected to incur additional losses in 2015. Its carrying value was $2.6 million at year-end.
- Management expected Air and Liquid Processing activity to benefit from industrial replacement and fossil-fuel power-generation spending, while new institutional construction remained weak.
- Asbestos liability reserves totaled $189.0 million for claims and defense costs projected through 2024, against an estimated insurance receivable of $140.7 million. Future adjustments could materially affect earnings, liquidity and financial position; no reserve was recorded for costs after 2024.
- There were 8,457 asbestos claims pending at year-end, and gross settlement and defense costs were $20.8 million during 2014. A related insurance-coverage lawsuit remained subject to final judgment and potential appeals.
- Commodity price exposure remained significant: management estimated that a 10% change in steel scrap, ferroalloy, energy and related commodity prices would have affected 2014 results by approximately $7.5 million.
- Approximately 53% of employees were covered by collective bargaining agreements, with agreements covering approximately 39% of union employees expiring in 2015.
- On March 12, 2015, the company announced that it would freeze the U.S. pension plan for current and future salary and non-union hourly participants effective July 1, 2015 and replace it with a defined contribution plan; the financial statement impact was still under evaluation.
- No quantified earnings or revenue guidance was provided. Management’s outlook was qualitative and emphasized weak roll demand, pricing pressure, cost controls and diversification.
Most important facts for investors to verify
- Whether weak global steel demand and roll pricing persisted and whether non-roll products offset the decline.
- The sustainability of the $97.1 million cash balance after dividends, capital spending, asbestos payments and pension obligations.
- The assumptions supporting the $189.0 million asbestos reserve and $140.7 million insurance receivable, including insurer solvency and potential erosion of coverage by Howden claims.
- The financial condition, funding dependence and potential impairment exposure of the Chinese joint venture.
- The timing and amount of the approximately $6.3 million planned 2015 capital expenditures and the company’s ability to maintain utilization and margins.
- The outcome of collective bargaining negotiations, the asbestos insurance litigation and the Indiana tax examination.