Ampco-Pittsburgh Corporation 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. The company had 1,943 active employees at year-end and operates in the United States, Europe, Canada, China and other international markets.
Results include the acquired Åkers businesses for the full year and ASW Steel for the full year; therefore, 2017 and 2016 are not fully comparable with earlier periods. The company temporarily idled part of a cast-roll plant in April 2017.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $432.4 million | $331.9 million | Up 30.3% |
| Gross margin, excluding depreciation and amortization | 17.3% | 16.7% | Up 0.6 percentage points |
| Operating loss | $9.4 million | $54.5 million | Improved by $45.2 million |
| Net loss attributable to Ampco-Pittsburgh | $12.1 million | $79.8 million | Improved by $67.7 million |
| Loss per diluted share | $0.98 | $6.68 | Improved by $5.70 |
| Cash flow from operations | $(15.8) million | $(5.6) million | Higher use of cash |
| Cash and cash equivalents | $20.7 million | $38.6 million | Down $17.9 million |
| Total debt outstanding | $66.2 million | $52.2 million | Up $13.9 million |
| Total assets | $565.6 million | $565.9 million | Essentially unchanged |
| Ampco-Pittsburgh shareholders’ equity | $158.9 million | $147.9 million | Up $11.0 million |
The approximate operating margin was negative 2.2% and the net margin was negative 2.8%. Capital expenditures were $14.9 million, and expected capital expenditures over the following 12–18 months were approximately $4.0 million.
Segment performance
- Forged and Cast Engineered Products: Sales increased to $344.5 million from $247.7 million. The operating loss narrowed to $1.8 million from $42.9 million, which included the 2016 goodwill impairment charge. Higher shipments, stronger oil and gas activity, improved pricing and the full-year contribution from ASW helped results, but unfavorable capacity absorption, higher operating and raw-material costs, freight and commissions constrained margins.
- Air and Liquid Processing: Sales increased to $87.9 million from $84.2 million, while operating income rose to $10.4 million from $5.1 million. Results benefited from product mix and cost containment. Pump demand remained pressured by lower fossil-fuel power-generation activity, partly offset by marine defense demand.
- Backlog: Consolidated backlog increased to $326.4 million from $233.6 million. Approximately 88% related to Forged and Cast Engineered Products. About 6% of total backlog, or approximately $20.3 million, was expected to be released after 2018.
Liquidity, debt and cash flow
- Operating cash flow was negative $15.8 million, primarily because of investment in receivables and inventories to support business growth. Inventories increased to $107.6 million from $83.6 million, and receivables increased to $86.6 million from $72.2 million.
- Cash ended the year at $20.7 million. Management stated that cash on hand, future operating cash flow and the revolving facility were expected to fund operating and capital requirements.
- The senior secured asset-based revolving facility had $20.3 million outstanding and approximately $56.0 million of remaining availability at year-end. The facility has an initial capacity of $100 million, with a potential $50 million increase subject to bank approval. The company was in compliance with applicable covenants.
- Total contractual obligations were $132.9 million, including $61.6 million of debt principal, $53.8 million of pension and other postretirement obligations, and $3.9 million of planned capital expenditures.
- Quarterly cash dividends were suspended beginning in the second quarter of 2017. Dividends declared were $0.09 per share in 2017 versus $0.36 in 2016.
Material changes versus the prior comparable period
- Revenue grew substantially, led by higher forged engineered-product and mill-roll shipments, improved oil and gas demand, and the full-year effect of the Åkers and ASW acquisitions.
- Operating and net losses improved materially because 2016 included a $26.7 million goodwill impairment charge, a $4.6 million net asbestos-related charge and a $30.4 million deferred-tax valuation allowance charge.
- 2017 still produced a net loss and negative operating cash flow despite improved segment results. Working-capital investment and higher debt-related costs remained significant pressures.
- The company received $1.5 million from the sale of part of its interest in the MG Chinese joint venture and changed its accounting for that investment to the cost method.
- Asbestos reserves declined to approximately $149.8 million from $171.2 million, while the related insurance receivable declined to $100.3 million from $115.9 million.
Outlook, unusual items and risks
- Management reported improving demand and pricing in the North American and European mill-roll markets, with protectionist measures and reduced Chinese output viewed as supportive. Oil and gas activity was described as strong, and forged-engineered-product backlog nearly tripled year over year.
- Management expected early growth in heat exchangers, continued improvement in custom air-handling demand and ongoing marine-defense support for pumps. No specific quantitative earnings or revenue guidance was provided.
- The Tax Cuts and Jobs Act reduced 2017 income tax benefit by approximately $1.6 million, primarily from the transition tax, partly offset by bonus-depreciation benefits. The accounting remained provisional at year-end.
- Major risks include cyclical steel and industrial demand, excess global steel capacity, customer concentration and pricing pressure, commodity and energy costs, graphite-electrode availability, foreign-exchange movements, tariffs and Brexit-related trade restrictions, labor negotiations, acquisition integration, cybersecurity, environmental obligations and access to liquidity.
- Asbestos litigation remains a significant contingency. Approximately 6,907 claims were pending at year-end, gross settlement and defense costs were $21.4 million in 2017, and insurance recoveries may be reduced by policy limits, insurer insolvencies, coverage disputes and claims involving Howden. Costs beyond 2026 were not reserved.
- Approximately 39% of employees were covered by collective bargaining agreements. One agreement expired in 2017 and several agreements representing approximately 54% of covered employees were scheduled to expire in 2018.
- The company disclosed an ongoing retiree-benefits class action proceeding that had been stayed pending appeal; management did not expect the matter to have a material adverse effect, although the outcome was uncertain.
Facts investors should verify
- Whether backlog converts into shipments and cash flow at expected margins, particularly for mill rolls and forged engineered products.
- Whether operating cash flow returns to positive levels as working-capital investment moderates.
- Revolving-credit availability, borrowing-base changes and compliance with minimum-availability and fixed-charge coverage covenants.
- The final accounting impact of the Tax Cuts and Jobs Act and the realization of deferred-tax assets, including the $38.1 million valuation allowance.
- Future asbestos claims, settlement costs, insurance recoveries and potential coverage erosion involving Howden or insurer insolvencies.
- Exposure to steel, scrap, energy and graphite-electrode costs, including the effectiveness of surcharges and hedging programs.
- Progress on labor negotiations, plant utilization and the financial effects of the temporarily idled cast-roll capacity.
- Succession planning following the CEO’s announced intention to retire in or around mid-2018.