Ampco-Pittsburgh Corporation — 2018 Q2 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. The financial statements are unaudited. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through its Forged and Cast Engineered Products and Air and Liquid Processing segments.
Financial Results and Position
| Metric | Three Months 2018 | Three Months 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $127.4 million | $110.6 million | $242.5 million | $214.1 million |
| Loss from operations | $(1.6) million | $(2.2) million | $(2.7) million | $(4.8) million |
| Net loss attributable to shareholders | $(3.0) million | $(1.9) million | $(2.1) million | $(6.7) million |
| Loss per diluted share | $(0.24) | $(0.16) | $(0.17) | $(0.54) |
| Operating margin | (1.3%) | (2.0%) | (1.1%) | (2.2%) |
- Second-quarter sales increased approximately 15.3%; first-half sales increased approximately 13.3% year over year.
- Higher volume and pricing improved operating results, but higher raw-material and operating costs, unabsorbed foundry costs, tariffs affecting the Canadian subsidiary, and the loss of a key customer continued to pressure margins.
- Air and Liquid Processing generated income before taxes of $3.7 million in the quarter and $6.0 million year to date. Forged and Cast Engineered Products reported a quarterly pretax loss of $1.5 million and a first-half pretax loss of $0.6 million.
- Six-month operating cash flow was negative $11.4 million, compared with negative $10.6 million in 2017, primarily because of increased investment in working capital.
- Capital expenditures were $5.9 million in the first half, with approximately $3.0 million of additional commitments expected over the next 12–18 months.
- Cash and cash equivalents were $22.1 million at June 30, 2018, compared with $20.7 million at December 31, 2017. Approximately $12.0 million was held by foreign operations.
- Total debt was $86.3 million, including $45.1 million classified as current and $41.2 million as long term. Revolving-credit borrowings increased to $40.3 million from $20.3 million at year-end.
- Remaining availability under the revolving credit facility was approximately $37.0 million. The facility expires in May 2021, and the company was in compliance with applicable covenants.
- No cash dividends were declared in 2018; dividends were suspended in June 2017.
Material Changes Versus Prior Comparable Period
- Sales growth was led by higher mill-roll and forged engineered-product sales, as well as increased custom air-handler and heat-exchange-coil sales. Centrifugal-pump sales declined.
- Backlog increased to approximately $337.8 million at June 30, 2018, from $326.4 million at December 31, 2017 and $301.0 million at June 30, 2017. Approximately $108.7 million of Forged and Cast backlog was expected to ship after 2018.
- Operating losses narrowed despite increased cost pressure. The prior-year periods included a $1.3 million recovery of a trade receivable from a bankrupt customer.
- First-half other income improved by approximately $3.7 million, primarily due to a $2.4 million favorable contractual settlement and approximately $2.3 million of higher pension and postretirement benefit income, partly offset by foreign-exchange fluctuations.
- The company adopted revenue-recognition guidance under Topic 606 with no retained-earnings adjustment because revenue timing did not change. It also adopted ASU 2016-01, which increased beginning retained earnings by $0.6 million and reduced accumulated other comprehensive income by the same amount.
- Employee participation in a domestic defined-benefit pension plan was frozen effective June 1, 2018 and replaced with defined-contribution contributions. The freeze reduced the pension liability by approximately $1.7 million.
- Accumulated other comprehensive loss increased to approximately $49.2 million, primarily due to foreign-currency translation losses.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that tariffs and reduced Chinese output appeared to benefit North American and European roll markets, while tariffs on steel and aluminum from Canada adversely affected Canadian operations. The company was seeking relief through available channels.
- Oil and gas demand remained supported by elevated oil and gas prices, but order intake slowed because of supply-chain inventory adjustments.
- Air and Liquid Processing faced weakness in fossil-fuel power-generation pumps, partially offset by marine-defense demand and early improvement in OEM and industrial heat-exchanger markets. Custom air-handling demand remained steady, with competitive pricing pressure.
- Management expects cash on hand, future operating cash flow, and revolving-credit availability to fund operating and capital requirements; however, first-half operating cash flow remained negative and borrowings increased materially.
- Asbestos liabilities totaled $137.3 million at June 30, 2018, against asbestos insurance receivables of $91.3 million. Approximately 7,146 asbestos claims were pending at period-end. Management expects another valuation in the latter part of 2018 and warned that future adjustments could materially affect earnings, liquidity, and financial position.
- Insurance recoveries depend on settlement agreements, policy limits, coverage issues, insurer solvency, and potential erosion of coverage by claims involving Howden. No reserve was recorded for asbestos costs expected after 2026.
- The company reported approximately $21.3 million of letters of credit, $4.0 million of surety bonds, and approximately $0.5 million of environmental liabilities.
- A class action concerning retiree medical benefits remained subject to an appeal regarding arbitration. Management believed the ultimate resolution would not materially affect results, financial position, liquidity, or capital resources.
- Foreign-exchange and commodity risks were hedged, including approximately $20.5 million of anticipated foreign-currency sales and portions of anticipated copper and aluminum purchases. No material change in market-risk exposure from December 31, 2017 was reported.
- The filing provides no formal quantitative earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of full-year performance.
Investor Verification Checklist
- Verify whether higher sales and backlog convert into sustained positive operating margins, particularly in Forged and Cast Engineered Products.
- Monitor working-capital requirements, operating cash flow, revolving-credit borrowings, facility availability, and covenant headroom.
- Assess the effect of tariffs, raw-material inflation, customer concentration and the loss of the key customer on future profitability.
- Review the late-2018 asbestos valuation, claim trends, insurance recoverability, insurer solvency and potential liability beyond 2026.
- Confirm the timing and funding of approximately $3.0 million of committed capital expenditures and the company’s continued suspension of dividends.
- Evaluate the effects of foreign-exchange movements, pension obligations, commodity costs and the pending lease-accounting adoption.