Ampco-Pittsburgh Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2017, filed November 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.
The Forged and Cast segment serves steel, aluminum, oil and gas, and extrusion markets. Air and Liquid Processing produces heat-exchange coils, air-handling systems, and centrifugal pumps. Results include the acquired Åkers and ASW businesses.
Financial Highlights
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $103.9 million | $82.9 million | $318.0 million | $239.7 million |
| Operating loss | $(3.2) million | $(4.9) million | $(7.6) million | $(14.8) million |
| Net loss attributable to Ampco-Pittsburgh | $(2.2) million | $(27.4) million | $(8.9) million | $(36.8) million |
| Loss per share | $(0.18) | $(2.23) | $(0.72) | $(3.10) |
| Operating margin | Approximately (3.1)% | Approximately (6.0)% | Approximately (2.4)% | Approximately (6.2)% |
| Operating cash flow | Not separately provided | Not separately provided | $(15.9) million | $(13.2) million |
Net sales increased approximately 25% in the quarter and 33% year to date. The reported improvement in net loss was substantially affected by the prior-year recognition of deferred tax valuation allowances totaling approximately $26.9 million in the quarter and $28.3 million year to date. The 2017 tax benefit included a release of valuation allowances related to net operating losses carried back to earlier years.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $25.4 million at September 30, 2017, down from $38.6 million at December 31, 2016; approximately $12.8 million was held by foreign operations.
- Total debt was $66.3 million, compared with $52.2 million at year-end 2016. Long-term debt increased to $46.9 million from $25.4 million.
- The company had approximately $50 million of remaining availability under its $100 million senior secured asset-based revolving credit facility. Outstanding revolver borrowings were $20.3 million at September 30, 2017, at an average interest rate of 2.68%.
- The company was in compliance with applicable bank covenants. Substantially all assets other than real property secure the revolving facility.
- Capital expenditures were $9.7 million through nine months, with approximately $5.0 million of additional commitments expected over the following 12 to 18 months.
- Quarterly cash dividends were suspended beginning with the second quarter of 2017. Dividends paid in the first nine months were $2.2 million, or $0.18 per share, versus $4.1 million, or $0.36 per share, in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Forged and Cast Engineered Products sales increased $18.8 million in the quarter and $75.7 million year to date, aided by ASW, stronger oil and gas activity, and improved forged mill-roll demand.
- Forged and Cast remained loss-making, with results pressured by higher operating and raw-material costs and lower absorption following the temporary idling of part of a cast-roll plant in April 2017.
- Air and Liquid Processing sales and operating income improved on higher shipments, including stronger custom air-handler sales and year-to-date shipments to U.S. Navy shipbuilders.
- Costs of products sold as a percentage of sales increased to approximately 84.0% from 81.2% in the quarter and 83.0% from 81.7% year to date, principally because ASW has a higher relative production cost.
- Interest expense increased to $2.7 million year to date from $1.5 million, reflecting the revolving facility, Åkers-related promissory notes, the noncontrolling shareholder loan, and $0.4 million of ASW debt termination costs.
- Operating cash flow remained negative as higher receivables and inventories absorbed cash in anticipation of increased production.
- Backlog increased to $331.6 million at September 30, 2017, from $233.6 million at December 31, 2016 and $260.4 million at September 30, 2016. Approximately $203.1 million of backlog was expected to ship after 2017.
Guidance, Outlook, Risks, and Unusual Items
No formal quantitative earnings or revenue guidance is provided. Management reported continued improvement in demand and pricing prospects, with protectionist measures appearing to benefit the two largest markets, North America and Europe. Market conditions were still expected to remain difficult, although backlog had improved approximately 45% from year-end and oil and gas activity remained strong.
- Forged and Cast operations were below capacity, and the temporary foundry idling reduced absorption. Management expected improved demand and pricing but did not provide a timetable for sustainable profitability.
- The company stated that cash on hand, future operating cash flow, and revolver availability were expected to fund operating and capital requirements.
- Asbestos liabilities totaled $154.7 million at September 30, 2017, compared with $171.2 million at year-end 2016. Related insurance receivables totaled $103.9 million. The company cautioned that future claims, insurance recoveries, insurer solvency, coverage erosion from Howden claims, and other assumptions could materially affect results, liquidity, and financial position.
- There were 6,745 asbestos claims pending at September 30, 2017, and gross settlement and defense costs were $16.5 million for the first nine months.
- A retiree medical-benefits class action was compelled to arbitration; arbitration was stayed pending appeal. Management believed the ultimate resolution would not materially affect results, liquidity, or capital resources, but provided no assurance.
- Environmental compliance liabilities were estimated at approximately $1.0 million.
- The company hedged foreign-currency sales and portions of anticipated copper and aluminum purchases. It reported no material hedge ineffectiveness and no material change in market-risk exposure from year-end.
- Management was evaluating new accounting standards, including revenue recognition, leases, derivatives and hedging, pension-cost presentation, and cash-flow classification. The filing did not identify a material liquidity impact from these standards.
Important Facts for Investors to Verify
- Whether higher backlog converts into profitable shipments and improved capacity utilization, particularly in the Forged and Cast segment.
- The sustainability of the 2017 tax benefit and the remaining deferred-tax valuation allowances.
- Operating cash-flow performance, working-capital requirements, and continued reliance on secured revolver borrowings.
- Debt maturities and the March 2019 maturity of the Åkers promissory notes, including accrued interest.
- Future asbestos claims, reserve adequacy, insurance recoverability, insurer solvency, and potential coverage erosion.
- The financial impact of the suspended dividend and the company’s ability to resume distributions.
- Progress and costs associated with the temporary cast-roll plant idling, ASW integration, and other operational improvement initiatives.