Ampco-Pittsburgh Corporation: FY2013 Form 10-K Summary
Business context and reporting period
Ampco-Pittsburgh Corporation reported for the fiscal year ended December 31, 2013. The company operates through 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-exchange coils, air-handling systems and centrifugal pumps.
The company had 1,109 active employees at year-end. International sales represented approximately 52% of consolidated sales, and two customers accounted for approximately 26% of Forged and Cast Rolls sales.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $281.1 million | $292.9 million | Down 4.0% |
| Income from operations | $29.0 million | $16.3 million | Up 77.8% |
| Net income | $12.4 million | $8.4 million | Up 48.8% |
| Diluted earnings per share | $1.20 | $0.80 | Up $0.40 |
| Operating margin | 10.3% | 5.6% | Improved |
| Gross margin excluding depreciation | 22.7% | 22.9% | Down 0.2 points |
| Operating cash flow | $37.8 million | $25.4 million | Up $12.3 million |
| Capital expenditures | $11.8 million | $9.7 million | Up $2.1 million |
| Cash and cash equivalents | $97.9 million | $78.9 million | Up $19.0 million |
| Shareholders’ equity | $235.0 million | $192.1 million | Up $42.9 million |
Forged and Cast Rolls sales were $187.3 million, down from $189.5 million, while operating income declined to $13.9 million from $18.4 million. Air and Liquid Processing sales declined to $93.8 million from $103.4 million, but reported operating income increased to $24.9 million from $7.3 million.
2013 operating income and net income benefited from a $16.3 million pre-tax, $10.6 million after-tax credit for estimated additional asbestos insurance recoveries. This benefit was partly offset by a $6.4 million impairment charge on the Chinese forged-roll joint venture, or $4.2 million after tax. Excluding these two items, reported profitability was materially lower than the headline figures suggest.
Liquidity, debt and obligations
- Operating cash flow of $37.8 million exceeded capital expenditures of $11.8 million and dividends paid of $7.5 million.
- The company ended the year with $97.9 million of cash, including approximately $8.1 million held by foreign operations.
- Industrial Revenue Bonds totaled $13.3 million. No amounts were outstanding under approximately $9.5 million of short-term credit lines.
- The bonds are classified as current liabilities because they could be put back to the company if they cannot be remarketed, although principal maturities begin in 2020.
- Contractual obligations totaled approximately $71.3 million, including $43.1 million of estimated pension and other postretirement contributions, $8.1 million of planned capital expenditures and $4.9 million of purchase obligations.
- Management stated that cash on hand, future operating cash flow and available credit facilities should be sufficient to fund operating and capital requirements.
Material changes versus the prior comparable period
- Sales declined primarily because of weaker institutional construction demand in Air and Liquid Processing and continued pricing pressure in Forged and Cast Rolls.
- Forged and Cast Rolls margins were compressed by global excess capacity, low-priced Asian competitors and discounting to preserve market share. Lower prices reduced operating income by approximately $12.5 million, partly offset by higher shipment volumes.
- Air and Liquid Processing benefited from the $16.3 million asbestos insurance credit. Underlying demand was weaker, particularly for custom air-handling equipment sold to universities and research facilities.
- Backlog was broadly stable at $197.5 million versus $195.8 million at year-end 2012. Approximately 13% was expected to be released after 2014.
- The Chinese forged-roll joint venture continued to incur losses and required increasing reliance on its 51% partner for financing and working capital. Ampco recorded a $6.4 million other-than-temporary impairment and expects additional losses in 2014.
- Asbestos liability reserves declined to $158.3 million from $181.0 million, while the related insurance receivable declined to $110.7 million from $118.1 million after payments and updated coverage estimates.
- Defined benefit plan funded deficits improved substantially, but the U.S., foreign and postretirement plans remained underfunded by approximately $17.5 million, $12.3 million and $20.1 million, respectively.
Fourth-quarter results, outlook and risks
Fourth-quarter 2013 sales were $77.1 million, compared with $77.2 million in the prior-year quarter. The company reported a fourth-quarter net loss of $1.5 million, or $0.14 per diluted share, versus net income of $3.3 million, or $0.32 per diluted share, in the fourth quarter of 2012. The fourth quarter included the $4.2 million after-tax impairment of the Chinese joint venture.
Management expected a modest increase in roll demand during 2014 but expected margins to remain depressed. The company planned to pursue non-roll products and services to use available Forged and Cast Rolls capacity, while Air and Liquid Processing focused on new product lines and stronger sales distribution. Management also expected approximately $8.1 million of future capital expenditures, primarily in 2014.
- Key risks include cyclical global steel demand, customer consolidation and pricing pressure.
- Commodity costs, including steel scrap, ferroalloys, electricity and natural gas, could compress margins, particularly on fixed-price contracts.
- Foreign exchange movements, export restrictions, tariffs and political or economic instability could affect international sales.
- Approximately 55% of employees were covered by collective bargaining agreements; agreements representing approximately 62% of covered employees were scheduled to be negotiated in 2014.
- Failure of critical equipment, including an electric arc furnace or spin-cast work-roll machine, could materially disrupt production.
- Asbestos claims totaled approximately 8,319 pending claims at year-end. Actual claims, defense costs, insurance recoveries, insurer solvency and litigation outcomes could differ materially from estimates, potentially affecting earnings, liquidity and financial condition.
- Environmental remediation liabilities were accrued at approximately $823, but management noted that environmental exposures are difficult to estimate.
Most important facts for investors to verify
- Reconcile reported 2013 earnings with and without the $10.6 million after-tax asbestos insurance credit and the $4.2 million after-tax joint-venture impairment.
- Assess whether Forged and Cast Rolls pricing pressure and depressed margins persisted beyond 2013.
- Review the assumptions supporting the $158.3 million asbestos reserve and $110.7 million insurance receivable, including coverage erosion from Howden-related claims.
- Monitor the financial condition, funding reliance and potential additional impairment exposure of the Chinese forged-roll joint venture.
- Confirm the remarketing and liquidity arrangements supporting the $13.3 million Industrial Revenue Bonds, which are classified as current liabilities.
- Evaluate pension funding requirements, collective bargaining negotiations and commodity-price exposure in relation to future cash flow.