Ampco-Pittsburgh Corporation: FY2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, with comparative data for 2010 and 2009. Ampco-Pittsburgh operates through two segments: Forged and Cast Rolls, which supplies steel rolls to global steel and aluminum producers, and Air and Liquid Processing, which manufactures heat-exchange coils, air-handling systems and centrifugal pumps.
The company had 1,240 active employees at year-end. Approximately 72% of 2011 sales came from Forged and Cast Rolls and 28% from Air and Liquid Processing. Foreign sales were approximately $196.2 million, or 57% of consolidated sales.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $344.8 million | $326.9 million | Up 5.5% |
| Income from operations | $36.5 million | $24.7 million | Up 47.5% |
| Net income | $21.3 million | $15.5 million | Up 37.9% |
| Diluted EPS | $2.05 | $1.50 | Up 36.7% |
| Operating margin | 10.6% | 7.6% | Improved |
| Net margin | 6.2% | 4.7% | Improved |
| Gross margin excluding depreciation | 25.7% | 29.8% | Down 4.1 points |
| Cash flow from operations | $22.3 million | $43.0 million | Down 48.1% |
| Capital expenditures | $15.8 million | $35.0 million | Down 54.9% |
Forged and Cast Rolls sales increased to $248.4 million from $240.3 million, but operating income declined to $38.8 million from $48.7 million. Air and Liquid Processing sales increased to $96.4 million from $86.5 million, while operating income improved to $8.2 million from a $12.6 million loss. The 2010 segment loss included a $20.0 million asbestos-related provision.
Year-end cash and cash equivalents were $69.9 million, compared with $70.0 million in 2010. Accounts receivable increased to $59.2 million from $46.7 million, primarily due to higher fourth-quarter sales. Total assets were $531.6 million and shareholders’ equity was $192.9 million.
Industrial Revenue Bond debt totaled $13.3 million and was classified as current because the bonds could potentially be put back to the company if they cannot be remarketed. No amounts were outstanding under approximately $9.2 million of short-term credit lines. The company reported compliance with applicable bank covenants and stated that cash on hand and expected operating cash flows should fund operating and capital requirements.
The company declared and paid quarterly dividends of $0.18 per share, or $0.72 per share for the year. Capital expenditures were expected to approximate $8.3 million in 2012. Estimated 2012 minimum pension and other postretirement contributions were approximately $5.1 million, excluding potential voluntary contributions.
Material changes versus prior comparable period
- Sales increased 5.5%, but gross margin excluding depreciation contracted because of higher raw material, utility and employee-related costs.
- Operating income and net income improved substantially because 2010 included a $20.0 million pre-tax asbestos charge, while no comparable charge was recorded in 2011.
- Forged and Cast Rolls experienced lower utilization, weaker global demand and increased pricing competition, causing operating income to fall despite higher sales.
- Air and Liquid Processing returned to profitability as shipment volumes improved across its divisions and a large medical-research order contributed to results.
- Operating cash flow declined materially, partly reflecting increased receivables and lower working-capital benefits compared with 2010.
- Backlog fell to $260.0 million from $397.0 million, primarily because Forged and Cast Rolls shipments exceeded new orders. Approximately $73 million was expected to be released after 2012, and additional long-term supply commitments totaled approximately $19 million through 2014.
- Accumulated other comprehensive loss increased to $79.3 million from $59.5 million, principally reflecting deterioration in pension-related amounts and other comprehensive items.
Guidance, outlook, risks and unusual items
Management expected Forged and Cast Rolls demand to improve in North America and Asia in 2012 as excess inventories declined, while European demand was expected to remain weak. Competitive pricing was expected to continue, and further weakening of the euro could reduce export volumes and margins. Air and Liquid Processing began 2012 with an order backlog approximately comparable to the prior year; most of its year-end backlog was scheduled to ship during 2012.
- Asbestos litigation: The year-end asbestos liability reserve was $197.6 million, compared with $218.3 million in 2010, and the related insurance receivable was $126.2 million. The estimates extend through 2020 and exclude costs after 2020. The company stated that actual claims, defense costs, insurance recoveries, insurer solvency and coverage litigation could differ materially from estimates.
- Customer concentration: Two international Forged and Cast Rolls customers represented approximately 22% of that segment’s 2011 sales. Losing both could materially affect results.
- Cyclicality and pricing: Demand depends heavily on global steel production and industrial and construction capital spending. Downturns may reduce volumes, utilization and pricing.
- Commodity exposure: Steel scrap, ferroalloys, energy, copper and aluminum costs may reduce margins. Management estimated that a 10% commodity-price fluctuation would affect results by approximately $9.5 million in 2011, although surcharges and hedging provide partial protection.
- Foreign exchange: Export sales are significant, and currency movements, particularly involving the U.S. dollar, euro and British pound, may affect sales and margins.
- Pension obligations: U.S., foreign and other postretirement plans were underfunded by approximately $41.4 million, $14.3 million and $22.3 million, respectively, at year-end.
- Environmental matters: Environmental liabilities accrued at year-end were approximately $1.3 million, which management considered adequate based on information available.
- Other contingencies: Approximately $91.3 million of contractual obligations were disclosed, including $52.0 million of estimated benefit-plan contributions, $14.5 million of purchase obligations, $13.3 million of IRB debt and $8.3 million of planned capital expenditures.
- Unusual accounting items: 2011 results benefited from approximately $0.7 million of after-tax income, or $0.07 per share, from LIFO liquidation. The company also recognized $1.6 million of stock-based compensation expense.
Most important facts for investors to verify
- Whether the sharp decline in Forged and Cast Rolls backlog leads to lower 2012 shipments, utilization and margins.
- Whether projected asbestos liabilities and insurance recoveries remain reasonable, including the effect of insurer insolvencies and the Howden coverage dispute.
- Whether operating cash flow recovers from the 2011 decline while the company funds pension obligations, dividends and capital expenditures.
- The extent to which commodity inflation and foreign-exchange movements are passed through to customers.
- The funding status and future contribution requirements of the U.S. and U.K. pension plans.
- The potential liquidity effect if the Industrial Revenue Bonds cannot be remarketed and become payable under the standby arrangements.
- Reliance on major Forged and Cast Rolls customers and the sustainability of Air and Liquid Processing’s return to profitability.