AMPCO PITTSBURGH CORP annual report, FY2016

Ampco-Pittsburgh Corporation — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016; filed March 16, 2017. The filing includes fourth-quarter results and full-year results. Ampco operates in two segments: Forged and Cast Engineered Products and Air and Liquid Processing.

Business context and reporting period

In March 2016, Ampco acquired Åkers, adding roll-production facilities and operations in Sweden, the United States, Slovenia, China and other locations.
In November 2016, Ampco acquired ASW Steel, a Canadian specialty steel producer, to expand its open-die forging capabilities.
2016 results include Åkers and ASW only from their respective acquisition dates and therefore are not fully comparable with prior periods.
Year-end backlog increased to $233.6 million from $141.8 million, including $196.5 million in Forged and Cast Engineered Products and $37.1 million in Air and Liquid Processing.

Financial metrics

Metric	2016	2015	Change or note
Net sales	$331.9 million	$238.5 million	Up 39.2%, primarily from acquisitions
Gross margin excluding depreciation and amortization	16.7%	17.8%	Declined, principally from Åkers and purchase-accounting effects
Operating income (loss)	$(54.5) million	$5.0 million	Impacted by impairment and asbestos items
Net income (loss) attributable to Ampco	$(79.8) million	$1.4 million	$(6.68) per diluted share versus $0.13
Cash flow from operations	$(5.6) million	$20.5 million	Lower operating cash generation
Cash and cash equivalents	$38.6 million	$95.1 million	Decrease of $56.5 million
Total debt outstanding	$52.2 million	$13.3 million	Increased primarily from acquisitions and new financing
Shareholders’ equity	$149.8 million	$211.4 million	Reduced by the net loss and other comprehensive loss

Forged and Cast Engineered Products: Sales were $247.7 million versus $152.3 million; operating loss was $42.9 million versus a $3.4 million loss. Åkers and ASW contributed approximately $128.6 million of sales and an operating loss of approximately $37.2 million, including impairment and purchase-accounting effects.
Air and Liquid Processing: Sales were $84.2 million versus $86.2 million; operating income was $5.1 million versus $23.2 million. The prior-year result benefited from $14.3 million of asbestos-related insurance proceeds.
Unusual charges: 2016 included a $26.7 million impairment charge, principally the full write-off of Forged and Cast Engineered Products goodwill; a $30.4 million deferred-tax valuation allowance; and a $4.6 million net asbestos-related charge.
Selling and administrative expense increased to $58.2 million from $39.5 million, reflecting acquired operations, higher corporate costs, acquisition expenses and a $1.5 million customer bankruptcy reserve.
Capital expenditures were $10.6 million, with approximately $4.0 million of additional expenditures expected over the following 12 months.

Liquidity, debt and obligations

Ampco had approximately $54 million of remaining availability under its five-year senior secured asset-based revolving credit facility at December 31, 2016; the facility was undrawn at the parent level except for related borrowing activity disclosed in the filing. The company was in compliance with applicable covenants.
Debt included $13.3 million of industrial revenue bonds, $23.8 million of Åkers promissory notes, $5.0 million of a minority shareholder loan, $7.1 million under ASW’s credit facility, $0.8 million of ASW term debt and $2.2 million of capital leases.
ASW’s credit facility and term loan matured in June 2017. On March 2, 2017, Ampco paid $7.6 million to retire those ASW balances, including interest, fees and early termination costs.
Contractual obligations totaled approximately $142.1 million, including $74.4 million of estimated pension and other postretirement contributions and $50.1 million of debt principal.
2017 expected cash uses included approximately $5 million of asbestos-related payments and approximately $4 million of capital expenditures.

Material changes versus the prior comparable period

Revenue increased substantially due to the Åkers and ASW acquisitions, but the acquired businesses generated losses and reduced consolidated margins.
Forged and Cast Engineered Products remained below capacity because of excess global steelmaking and roll-production capacity, weak customer demand, pricing pressure and foreign-exchange headwinds.
Air and Liquid Processing operating income declined sharply because 2015 included significant asbestos-related insurance proceeds and because heat-exchange demand weakened.
Cash declined materially because operating cash flow was negative and investing cash flow included acquisition payments of approximately $30.3 million, in addition to capital expenditures.
Dividends declared fell to $0.36 per share from $0.72 per share.
Fourth-quarter 2016 included a net loss attributable to Ampco of $43.1 million, or $3.51 per share, largely due to the goodwill impairment, tax valuation allowance and asbestos-related charge.

Guidance, outlook, management commentary and risks

Management reported that roll demand and pricing began improving late in 2016, and that customer results and higher fourth-quarter order intake could support further improvement. No formal earnings or revenue guidance was provided.
Management intends to diversify Forged and Cast Engineered Products through open-die forging and to improve revenue, margins, engineering, manufacturing capabilities and distribution in Air and Liquid Processing.
Principal risks include cyclical steel and industrial demand, excess global steel capacity, customer concentration, commodity and energy costs, foreign-exchange volatility, tariffs and trade restrictions, Brexit-related uncertainty, labor disruptions, equipment failures, acquisition integration and cybersecurity.
Two international customers represented approximately 24% of Forged and Cast Engineered Products sales, and one customer represented approximately 10% of Air and Liquid Processing sales in 2016. One customer represented approximately 11% of consolidated sales.
Asbestos exposure: The company recorded a reserve of approximately $171.2 million for pending and projected claims through 2026 and an insurance receivable of approximately $115.9 million. The company acknowledges that actual claims, insurance recoveries, insurer solvency and legal developments could produce materially different results.
Approximately 6,618 asbestos claims were pending at year-end 2016, compared with 6,212 at year-end 2015. Gross settlement and defense costs were $18.0 million in 2016, with a substantial majority paid or covered by insurers.
Environmental compliance liabilities accrued at year-end were approximately $2.5 million; expected 2017 environmental-control expenditures were approximately $2 million.
A February 2017 retiree medical-benefits class action was described as without merit; management does not expect the final resolution to materially affect results, liquidity or capital resources.

Most important facts for an investor to verify

Whether improved late-2016 roll demand and pricing continued and translated into sustainable segment profitability.
The standalone and pro forma performance of Åkers and ASW, including integration costs, purchase-accounting effects and any further impairment risk.
Cash generation, revolver availability, covenant headroom and the company’s ability to meet debt, pension, asbestos and capital-expenditure obligations.
The assumptions supporting the $171.2 million asbestos reserve and $115.9 million insurance receivable, including future claims, coverage limits and insurer solvency.
Customer concentration, backlog conversion and the timing of the approximately $233.6 million year-end backlog.
The effect of foreign exchange, steel and energy prices, tariffs, Brexit-related trade changes and global steel-industry capacity on margins.
Internal-control coverage for Åkers and ASW: management and the auditor excluded those newly acquired businesses from the 2016 internal-control assessment.