Ampco-Pittsburgh Corporation 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2017, filed August 9, 2017. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products and Air and Liquid Processing.
- Forged and Cast products include forged and cast steel rolls, ingot and open-die forged products, and related engineered products. The segment includes the 2016 acquisitions of Åkers and ASW.
- Air and Liquid Processing includes heat-transfer products, custom air-handling systems, and centrifugal pumps.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $110.6 million | $93.3 million | $214.1 million | $156.9 million |
| Loss from operations | $(2.0) million | $(4.9) million | $(4.4) million | $(9.8) million |
| Net loss attributable to shareholders | $(1.9) million | $(6.5) million | $(6.7) million | $(9.4) million |
| Loss per diluted share | $(0.16) | $(0.53) | $(0.54) | $(0.81) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(10.6) million | $(14.5) million |
- Sales increased approximately 18.5% in the quarter and 36.5% year to date. The year-to-date increase primarily reflects ASW and higher mill-roll and forged-product sales.
- Operating margins improved to approximately negative 1.8% in Q2 2017 from negative 5.2% in Q2 2016, and to negative 2.0% year to date from negative 6.3%.
- Cost of products sold was 83.2% of sales in Q2 and 82.5% year to date, compared with 83.0% and 81.9%, respectively, in the prior-year periods. Higher costs reflected ASW’s relatively higher production costs, raw-material and operating costs, and lower absorption from a temporarily idled foundry.
- Air and Liquid Processing generated pretax income of $2.7 million in Q2 and $5.4 million year to date. Forged and Cast Engineered Products reported a pretax loss of $0.3 million in Q2 and $0.9 million year to date.
- Cash and cash equivalents were $21.5 million at June 30, 2017, down from $38.6 million at December 31, 2016. Approximately $14.5 million was held by foreign operations.
- Capital expenditures were $6.2 million year to date, with approximately $4.2 million of additional commitments expected over the next 12 to 18 months.
- Total debt was $53.4 million at June 30, 2017, including $8.3 million outstanding under the revolving credit facility. Remaining availability was approximately $53.0 million, and the company reported compliance with applicable covenants.
- Shareholders’ equity was $151.5 million at June 30, 2017, compared with $149.8 million at December 31, 2016.
Material changes versus the prior comparable period
- Results improved substantially year over year, but the company remained unprofitable. The improvement reflected higher sales, lower acquisition-related costs, recovery of approximately $1.3 million of previously reserved receivables, and unfavorable Åkers purchase-accounting effects in the prior year.
- Interest expense increased to $1.9 million year to date from $0.8 million, reflecting full-period revolving-facility costs, Åkers-related promissory notes, the Chinese joint-venture shareholder loan, and ASW debt extinguishment costs.
- Cash used in operating activities improved by approximately $3.9 million year over year, while cash used in investing activities declined primarily because 2016 included the Åkers acquisition.
- The company suspended quarterly cash dividends beginning with the second quarter of 2017. Dividends paid were $0.18 per share in the first six months of 2017 versus $0.27 per share in the prior-year period.
- Backlog increased to approximately $301.0 million at June 30, 2017, from $233.6 million at December 31, 2016. Forged and Cast backlog was $249.1 million and Air and Liquid backlog was $51.9 million.
Guidance, outlook, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management expects difficult market conditions to continue but cited improving demand, tariffs benefiting North American and European markets, higher customer financial results, and increased oil and gas activity.
- Union Electric Steel announced a global price increase for forged and cast engineered products in July 2017. Management indicated that improved order intake and pricing could support future demand and margins, but the filing does not quantify the expected impact.
- The Forged and Cast segment operated significantly below capacity, and a portion of a cast-roll plant was temporarily idled in April 2017.
- Asbestos liabilities were $158.9 million at June 30, 2017, with related insurance receivables of $106.9 million. The company recorded reserves for projected claims and defense costs through 2026 but did not reserve for costs after 2026 because of uncertainty.
- Asbestos estimates depend on claim volumes, settlement costs, defense costs, insurance coverage, insurer solvency, litigation outcomes, and potential coverage erosion from Howden claims. Future adjustments could materially affect earnings, liquidity, and financial position.
- Approximately 6,966 asbestos claims were pending at June 30, 2017, and gross settlement and defense costs for the first six months were $12.3 million, most of which was paid by insurers.
- A retiree medical-benefits class action involving the former Åkers National Roll workforce was compelled to arbitration; the company appealed and stated that it did not expect a material adverse effect, while acknowledging that the outcome was uncertain.
- Environmental compliance liabilities were estimated at approximately $1.6 million.
- Foreign-exchange and commodity-price risks are hedged, including approximately $21.2 million of anticipated foreign-currency sales and portions of anticipated copper and aluminum purchases.
Most important facts for an investor to verify
- Whether improving backlog, customer demand, tariffs, and announced price increases translate into sustained positive operating margins.
- The company’s ability to fund operations while generating negative operating cash flow and holding only $21.5 million of cash.
- Revolving-facility availability, covenant compliance, debt maturities, and the March 2019 maturity of Åkers promissory notes.
- The adequacy of asbestos reserves and insurance receivables, including insurer solvency and potential coverage erosion from other claimants.
- The effect of the suspended dividend on capital allocation and shareholder returns.
- Progress integrating Åkers and ASW, including their effect on production costs, capacity utilization, and margins.
- Potential changes from the pending revenue-recognition, pension-cost presentation, cash-flow classification, and lease accounting standards; the filing does not provide a clear quantified impact.