Ampco-Pittsburgh Corporation 2019 Q2 Form 10-Q Summary
Business context and reporting period
Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. The unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Amounts are in thousands except per-share data.
ASW Steel Inc., the company’s Canadian specialty steel operation, is classified as a discontinued operation and is expected to be sold in 2019. Continuing operations therefore exclude ASW.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $102,519 | $118,371 | $210,013 | $224,786 |
| Loss from continuing operations | $(653) | $(189) | $(12,612) | $(1,966) |
| Net loss | $(3,612) | $(2,700) | $(18,405) | $(1,311) |
| Net loss attributable to Ampco-Pittsburgh | $(3,858) | $(2,994) | $(19,006) | $(2,053) |
| Continuing operations loss per share | $(0.02) | $(0.08) | $(1.02) | $0.04 |
| Net loss per share | $(0.31) | $(0.24) | $(1.52) | $(0.17) |
- Sales declined approximately 13% in Q2 and 7% year to date. The six-month operating loss margin was approximately 6.0%, compared with approximately 0.9% in the prior-year period; Q2 operating loss margin was approximately 0.6% versus approximately 0.2%.
- Q2 loss from discontinued operations was $3,391, compared with $1,709 in Q2 2018. The six-month discontinued-operation loss was $5,633, compared with $1,778.
- Forged and Cast Engineered Products sales decreased 16% in Q2 and 9% year to date. Air and Liquid Processing sales were broadly comparable with the prior-year periods.
- Q2 segment income before taxes was $2,948 for Air and Liquid Processing and a $170 loss for Forged and Cast Engineered Products. Six-month segment results were $5,091 and a $10,203 loss, respectively.
- Backlog was $355,485 at June 30, 2019, versus $343,079 at December 31, 2018, and $334,413 at June 30, 2018. Approximately $146,000 of backlog was expected to ship after 2019.
Cash flow, liquidity and debt
- Cash flow from continuing operating activities was $(8,165) for the first six months of 2019, compared with $(5,206) in 2018, primarily reflecting increased investment in trade working capital.
- Continuing-operations investing cash flow was $(3,639), including $3,761 of capital expenditures. Future capital expenditure commitments were approximately $2,968 over the next 12 to 18 months.
- Financing cash flow from continuing operations was $(1,245). The company borrowed $32,956 under its revolving facility and repaid $27,627 of debt, including the March 2019 repayment of promissory notes and accrued interest.
- Continuing-operations cash was $6,456 at June 30, 2019, compared with $19,713 at December 31, 2018. Total cash, including discontinued operations, was $7,404 at period end.
- Total borrowings were $78,143, consisting primarily of $41,276 under the revolving facility, $18,716 of sale-and-leaseback financing, $13,311 of industrial revenue bonds, $3,480 of a minority shareholder loan and $1,360 of finance lease liabilities. Current debt was $21,337 and long-term debt was $56,806.
- The revolving credit facility has a $100,000 initial borrowing capacity, an expiration in May 2021 and approximately $33,000 of remaining availability at June 30, 2019. The company was in compliance with applicable bank covenants.
- Management stated that cash on hand, future operating cash flow and revolver availability are expected to be sufficient for operating and capital expenditure requirements. Most cash was held by foreign operations, while domestic cash was minimized through a voluntary springing lock-box arrangement.
Material changes and unusual items
- The company recorded a $10,082 impairment charge in the first quarter related to assets of the Avonmore, Pennsylvania cast roll facility, which is subject to a definitive sale agreement expected to close around September 30, 2019.
- Six-month results included $1,092 of restructuring-related costs, including professional fees and employee severance, and $1,366 of bad debt expense related to a British cast roll customer’s bankruptcy.
- Management’s non-GAAP adjusted income from continuing operations was $2,569 in Q2 and $3,815 year to date, excluding the impairment, restructuring costs, estimated excess Avonmore costs and bad debt expense. These figures are not GAAP measures.
- A $1,400 dividend from a Chinese cast roll joint venture increased investment-related income in 2019. The comparable 2018 period benefited from a $2,425 favorable contractual settlement.
- The company adopted the new lease standard on January 1, 2019, recording an operating lease right-of-use asset and liability of approximately $5,893 without an impact on operating results or liquidity.
Outlook, management commentary and risks
- Management reported continued benefits from trade protection in U.S. and European roll markets, improved mill-roll pricing and manufacturing efficiencies. These benefits were offset by weaker oil and gas demand, lower forged engineered product volumes and product-mix pressure in Air and Liquid Processing.
- Air and Liquid Processing faced weaker fossil-fueled power-generation demand and competitive pricing pressure in custom air handling, partly offset by marine defense and commercial heat-exchanger activity. Management’s stated focus is revenue growth, margin improvement, stronger engineering and manufacturing capabilities and improved distribution.
- The ASW sale represents a strategic shift, including exit from the Canadian market and discontinuation of primary specialty steel production for certain non-roll markets. The company expects to enter into a long-term steel-ingot supply agreement after the sale.
- Material risks include cyclical demand, global steel overcapacity, commodity-price increases or shortages, labor disruptions, currency fluctuations, limited capital availability, execution of divestitures and restructuring, and weakness in key end markets.
- Asbestos liabilities totaled $218,345 at June 30, 2019, against an asbestos insurance receivable of $144,934. Approximately 7,096 asbestos claims were pending at period end. Actual settlement costs, defense costs and insurance recoveries may differ materially from estimates because of claim volumes, settlement values, insurance coverage, insurer solvency and litigation developments.
- The filing identifies approximately $18,766 of letters of credit and $4,000 of surety bonds. Environmental compliance liabilities were estimated at approximately $316.
- No material changes were reported to the risk factors in the 2018 Form 10-K. Management concluded that disclosure controls were effective as of June 30, 2019, and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Completion, proceeds and final accounting for the ASW and Avonmore asset sales.
- Whether the $33,000 of revolver availability and operating cash flow remain adequate as cash balances decline and debt remains elevated.
- Progress in improving Forged and Cast Engineered Products profitability after the impairment, bad debt charge and weaker oil and gas demand.
- Actual results compared with management’s non-GAAP adjusted performance, including the persistence of estimated excess Avonmore costs.
- Changes in asbestos claims, reserve estimates, insurance recoveries and insurer credit quality.
- Execution of the restructuring plan, capital expenditure commitments and the company’s ability to convert its $355,485 backlog into profitable revenue.