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.