Ampco-Pittsburgh Corporation: Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014. Ampco-Pittsburgh operates through two segments: Forged and Cast Engineered Products and Air and Liquid Processing. The company had 10.426 million common shares outstanding as of May 1, 2015.
Financial results and liquidity
- Net sales: $65.1 million, up 3.5% from $62.9 million.
- Operating income: $0.5 million, down from $0.8 million. Operating margin was approximately 0.8%, compared with 1.2%.
- Net income: $72,000, compared with $78,000; basic and diluted earnings were $0.01 per share in both periods.
- Costs and margins: Costs of products sold were 80.0% of sales versus 79.6%; selling and administrative expenses were 14.4% versus 14.3%.
- Cash flow: Operating activities provided $2.1 million, compared with $0.7 million used in the prior-year quarter. Capital expenditures were $2.5 million, and dividends paid were $1.9 million.
- Cash: Cash and equivalents were $94.0 million at March 31, 2015, down from $97.1 million at December 31, 2014. Approximately $11.3 million was held by foreign operations.
- Debt and liquidity: Industrial Revenue Bond debt was $13.3 million. Available short-term lines of credit and overdraft facilities totaled approximately $8.9 million. Management expects cash on hand and future operating cash flow to fund operating and capital needs.
- Balance sheet: Total assets were $527.6 million and total liabilities were $320.4 million. Current assets were $233.0 million versus current liabilities of $83.3 million.
- Capital commitments: Future capital expenditures were approximately $6.5 million, expected over the next 12 to 18 months.
Material changes versus the prior comparable period
- Forged and Cast Engineered Products sales increased 8% to $42.8 million, primarily from higher shipments of other forging products, partly offset by lower traditional roll shipments and foreign-exchange translation.
- Air and Liquid Processing sales declined 4% to $22.3 million. Heat-exchange coil sales fell approximately 12%, while pump sales increased approximately 2%; segment operating income was comparable with the prior year.
- Backlog declined to $159.2 million from $180.5 million at March 31, 2014 and $167.9 million at December 31, 2014. Forged and Cast backlog was $123.1 million, while Air and Liquid backlog was $36.1 million.
- Operating income declined despite higher sales, reflecting higher product costs, a $1.217 million pension curtailment charge, and other corporate expenses.
- Foreign-exchange results shifted from a $0.2 million gain in the prior-year quarter to a $0.4 million loss, principally due to the weaker euro.
- Operating cash flow improved by $2.8 million, primarily because of working-capital changes, including lower receivables.
- Other comprehensive income increased to $3.6 million from $1.2 million, mainly because of changes in employee benefit obligations, partly offset by foreign-currency translation losses.
Guidance, outlook, risks and unusual items
- Management expects demand for rolls to remain weak during 2015, with continuing pricing pressure caused by excess global capacity, aggressive overseas competition and customer cost reductions.
- Other forging products are expanding but remain a minor portion of the Forged and Cast segment and only partially offset weakness in the roll market.
- The Chinese joint venture is expected to continue incurring losses. Its carrying value was $2.459 million at March 31, 2015, and management stated that future impairment charges may be necessary.
- The U.S. defined benefit pension plan was partially frozen effective July 1, 2015 and replaced in part with a defined contribution plan. The related remeasurement reduced the liability by approximately $9.3 million, but generated a $1.217 million curtailment charge; the discount-rate change increased the liability by approximately $2.8 million.
- Asbestos liabilities totaled $183.9 million on the balance sheet, including $21.0 million current, while asbestos insurance receivables totaled $136.8 million. The company had approximately 8,398 asbestos claims pending at March 31, 2015.
- Asbestos estimates depend on claim volumes, settlement costs, defense costs, insurance recoveries, insurer solvency and ongoing litigation. Future adjustments could materially affect earnings, liquidity and financial position.
- Standby and commercial letters of credit totaled approximately $19.2 million, most of which supported Industrial Revenue Bond debt. Environmental liabilities were estimated at approximately $0.25 million.
- Approximately 57% of anticipated copper purchases and 38% of anticipated aluminum purchases were hedged. Approximately $14.9 million of foreign-denominated sales was hedged.
- Management reported no material changes in market-risk exposure or risk factors from the 2014 Form 10-K. Disclosure controls were considered effective as of March 31, 2015.
Most important facts for investors to verify
- Whether weak global roll demand, pricing pressure and declining backlog continue to reduce Forged and Cast profitability.
- The sustainability of the company’s dividend, which was $0.18 per share despite quarterly net income of only $72,000.
- The adequacy and timing of asbestos insurance recoveries, including the impact of remaining coverage litigation and potential insurer insolvencies.
- Whether the Chinese joint venture requires an impairment charge or additional financial support.
- The cash-flow impact of pension contributions, the partial plan freeze and the planned $6.5 million of capital expenditures.
- Whether the improvement in operating cash flow reflects sustainable operating performance or primarily temporary working-capital movements.