Ampco-Pittsburgh Corporation — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015, with unaudited fourth-quarter information. The filing was signed March 15, 2016. Ampco-Pittsburgh operates in two segments: Forged and Cast Engineered Products and Air and Liquid Processing.
Business Context and Reporting Period
- The Forged and Cast Engineered Products segment manufactures forged and cast steel rolls, specialty metals, and other forged products for global industrial, steel, aluminum, oil and gas, and extrusion markets.
- The Air and Liquid Processing segment manufactures heat-exchange coils, custom air-handling systems, and centrifugal pumps for power generation, industrial, commercial, refrigeration, and marine markets.
- In July 2015, the company acquired Alloys Unlimited & Processing for approximately $5 million in cash. The acquisition was included in the Forged and Cast Engineered Products segment.
- A subsequent March 3, 2016 acquisition of the Åkers Group for approximately $75 million was disclosed but was not included in 2015 operating results. The transaction was funded with approximately $29 million of cash, a $26 million three-year note, and $20 million of company shares.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $238.5 million | $272.9 million | Down 12.6% |
| Income from operations | $5.0 million | $0.1 million | Improved, principally due to asbestos-related proceeds |
| Net income (loss) | $1.4 million | $(1.2) million | Returned to profitability |
| Diluted EPS | $0.13 | $(0.11) | Improved |
| Operating cash flow | $20.5 million | $20.0 million | Up modestly |
| Gross margin excluding depreciation | 17.8% | 19.9% | Down 210 basis points |
| Cash and cash equivalents | $95.1 million | $97.1 million | Down $2.0 million |
| Total assets | $506.2 million | $536.4 million | Down $30.3 million |
| Shareholders’ equity | $211.4 million | $205.1 million | Up $6.3 million |
- Forged and Cast Engineered Products sales declined to $152.3 million from $179.4 million, and the segment moved to a $3.4 million operating loss from $4.4 million of operating income. Lower roll shipments, weaker pricing, reduced production, and under-absorption of costs were the principal drivers.
- Air and Liquid Processing sales declined to $86.2 million from $93.5 million. Reported operating income increased to $23.2 million from $4.2 million, largely because 2015 included $14.3 million of pre-tax asbestos-related insurance proceeds, while 2014 included a $4.5 million asbestos-related charge.
- Selling and administrative expense increased to $39.5 million, or 16.6% of sales, from $37.4 million, or 13.7% of sales. The increase included $3.4 million of acquisition-related costs and a $0.9 million pension curtailment charge.
- Interest expense was low at $0.2 million. The effective tax rate was 58.3%, affected by nondeductible acquisition costs, state taxes, and foreign losses.
- The company declared $0.72 per share of dividends in 2015 and has paid annual cash dividends since 1965.
Fourth-Quarter 2015
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Net sales | $55.3 million | $74.6 million |
| Gross profit excluding depreciation | $8.1 million | $14.7 million |
| Net income (loss) | $3.3 million | $(2.0) million |
| Diluted EPS | $0.32 | $(0.20) |
Fourth-quarter 2015 net income included an after-tax credit of approximately $6.1 million, or $0.59 per share, related to proceeds from an insurance carrier in rehabilitation, partially offset by acquisition-related costs.
Cash Flow, Debt, and Liquidity
- Operating cash flow was $20.5 million. Investing cash outflow was $14.3 million, including $9.4 million of capital expenditures and the $5.0 million AUP acquisition. Financing cash outflow was $7.5 million, primarily dividends.
- Cash ended the year at $95.1 million, including $10.8 million held by foreign operations. Management stated that cash on hand and future operating cash flows should fund operating and capital requirements.
- Short-term credit lines of approximately $8.1 million were available, with no amounts outstanding at year-end.
- Industrial Revenue Bonds totaled $13.3 million. The bonds bear floating rates, mature from 2020 through 2029, and were classified as current because they could be put back to the company if remarketing failed. The company was in compliance with applicable covenants.
- Outstanding standby and commercial letters of credit totaled approximately $19.7 million, primarily supporting the Industrial Revenue Bonds.
- Expected 2016 capital expenditures were approximately $9.3 million. Contractual obligations totaled approximately $81.0 million, including pension and postretirement obligations, debt, leases, capital expenditures, and purchase commitments.
Material Changes Versus Prior Comparable Period
- Consolidated sales decreased $34.4 million, primarily from lower volume and pricing in forged and cast products and lower heat-exchange shipments.
- Forged and Cast Engineered Products deteriorated from operating income of $4.4 million to an operating loss of $3.4 million. Its backlog declined from $131.1 million to $106.6 million.
- Air and Liquid Processing backlog declined from $36.8 million to $35.2 million, although pump and air-handling demand improved relative to weaker heat-exchange demand.
- Consolidated backlog fell from $167.9 million to $141.8 million; approximately 19% was expected to be released after 2016.
- Employee benefit obligations declined to $63.7 million from $81.2 million, partly due to pension plan changes and higher discount rates. The U.S. defined benefit plan was frozen for specified employee groups, with defined-contribution benefits replacing future accruals.
- Accumulated other comprehensive loss improved to $57.6 million from $68.8 million, mainly because of changes in pension-related amounts, partially offset by foreign currency translation losses.
Guidance, Outlook, Risks, and Unusual Items
- Management did not expect improvement in the steel market during 2016 but believed a slow turnaround could begin in 2017.
- The Forged and Cast Engineered Products segment operated substantially below capacity because of weak global steel demand, excess steelmaking capacity, oversupply of rolls, customer price pressure, and currency effects.
- The Chinese roll joint venture has reported losses since 2009, with losses expected to continue through 2016 and into 2017. Its carrying value was $1.8 million at year-end, and additional impairment remains possible.
- Two international customers represented approximately 33% of Forged and Cast Engineered Products sales in 2015, creating customer concentration risk.
- Key risks include cyclical industrial demand, global steel overcapacity, pricing pressure, foreign exchange movements, commodity and energy costs, labor disruptions, equipment outages, acquisition integration, cybersecurity, environmental liabilities, and asbestos litigation.
- Asbestos liability was reserved at approximately $169.8 million at year-end 2015, with related insurance receivables of approximately $125.4 million. The reserve covers estimated costs through 2024; no reserve was recorded for costs after 2024. Future charges or insurance recoveries could differ materially from current estimates.
- There were 6,212 asbestos claims pending at year-end 2015, compared with 8,457 at year-end 2014. Gross settlement and defense costs were approximately $19.2 million in 2015, with most costs paid or reimbursed by insurers.
- Environmental remediation liability was approximately $0.3 million and was considered adequately reserved by management.
- The company’s independent auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Åkers acquisition achieves the expected increase in Forged and Cast Engineered Products sales and whether its financing materially changes leverage and liquidity.
- Underlying operating performance excluding the $14.3 million pre-tax asbestos-related insurance proceeds and other unusual items.
- Recovery in global steel and roll demand, segment pricing, capacity utilization, and backlog conversion.
- Future asbestos claims, insurance recoveries, insurer solvency, pending appeals, and potential reserve revisions.
- The carrying value and funding dependence of the Chinese joint venture and the possibility of additional impairment charges.
- Execution of the company’s stated 2016 capital spending and cost-containment plans while maintaining the dividend.
- Exposure to foreign exchange and commodity prices; management estimated that a 10% commodity-price fluctuation would have affected 2015 results by approximately $6.5 million.