Business Context and Reporting Period
Ampco-Pittsburgh Corporation filed an unaudited Form 10-Q for the quarter ended March 31, 2013. The company operates through two segments: Forged and Cast Rolls, serving steel and aluminum producers, and Air and Liquid Processing, serving industrial, utility, commercial, and marine markets.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $69.624 million | $73.605 million | Down 5.4% |
| Income from operations | $1.711 million | $4.117 million | Down 58.4% |
| Operating margin | 2.5% | 5.6% | Down 3.1 percentage points |
| Net income | $0.126 million | $2.000 million | Down 93.7% |
| Diluted earnings per share | $0.01 | $0.19 | Down $0.18 |
| Operating cash flow | $10.092 million | $11.859 million | Down 14.9% |
| Capital expenditures | $4.562 million | $2.733 million | Up 66.9% |
| Cash dividends paid | $1.862 million | $1.858 million | Comparable |
Costs of products sold were 79.1% of sales, compared with 76.4% in the prior-year quarter. Other expense increased to $0.643 million from $0.277 million, primarily because of foreign-exchange fluctuations. The effective tax rate declined because of a higher proportion of beneficial permanent differences.
Cash and cash equivalents were $82.165 million at March 31, 2013, compared with $78.889 million at December 31, 2012. Total current assets were $235.313 million and total current liabilities were $86.337 million. Industrial Revenue Bond debt was $13.311 million; the filing does not identify other material borrowings. Available short-term lines of credit and overdraft facilities totaled approximately $9.1 million.
Total assets were $520.798 million and total shareholders’ equity was $189.151 million at March 31, 2013. Asbestos liabilities totaled $174.464 million, including $26.000 million classified as current, and related insurance receivables totaled $109.683 million.
Material Changes Versus the Prior Comparable Period
- Sales declined $3.981 million, while operating income declined $2.406 million and net income declined $1.874 million.
- Forged and Cast Rolls sales increased modestly to $45.113 million from $43.948 million, but segment income before taxes fell to $2.063 million from $4.140 million. Higher volume contributed approximately $2.2 million, but lower margins reduced results by approximately $4.9 million.
- Air and Liquid Processing sales declined to $24.511 million from $29.657 million, with lower shipment volumes and less favorable product mix.
- Backlog declined to $194.448 million from $261.043 million at March 31, 2012. Forged and Cast Rolls backlog was $152.642 million versus $215.608 million, while Air and Liquid Processing backlog was $41.806 million versus $45.435 million.
- Operating cash flow decreased by $1.767 million, while capital expenditures increased by $1.829 million.
- Other comprehensive income changed from income of $3.445 million to a loss of $1.452 million, principally because of a $2.898 million foreign-currency translation loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects only modest recovery in rolling-mill-roll demand during 2013. North American demand may improve slightly, while Europe is expected to remain weak and global pricing pressure is expected to continue.
- The Chinese forged-roll joint venture is expected to continue generating losses. Management notes that future impairment charges could adversely affect earnings if conditions deteriorate or other impairment indicators arise.
- Management expects institutional new-construction spending to remain slow, but views continued fossil-fueled utility-plant upgrades as encouraging for Air and Liquid Processing.
- Approved capital expenditures of approximately $11 million are expected over the next 12 to 18 months. Management expects cash on hand, future operating cash flow, and available credit facilities to fund operating and capital requirements.
- Asbestos claims pending increased to approximately 8,227 from 8,018 at March 31, 2012. Gross settlement and defense costs were $6.087 million in the quarter, with the substantial majority paid by insurers.
- The company recorded a December 31, 2012 asbestos reserve of $181.022 million for claims and defense costs through 2022 and related probable insurance recoveries of $118.115 million. Management states that additional charges could be material, but cannot reasonably estimate costs beyond 2022.
- Environmental liabilities were estimated at approximately $1.1 million and considered adequate by management based on information available at March 31, 2013.
- Approximately $19.143 million of anticipated foreign-denominated sales was hedged. The company also hedged approximately 57% of anticipated copper purchases and 57% of anticipated aluminum purchases and had natural-gas purchase commitments covering 46% of anticipated usage through 2015 at one subsidiary.
- Management reported effective disclosure controls as of March 31, 2013, with no material changes to internal control over financial reporting and no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile the cash balance: the financial statements report $82.165 million at March 31, 2013, while the MD&A text states $82.615 million.
- Assess the sustainability of Forged and Cast Rolls margins, backlog profitability, and exposure to excess Asian inventory and global pricing competition.
- Review asbestos reserve assumptions, insurance coverage limits, insurer solvency, claims trends, and potential exposure beyond 2022.
- Evaluate the expected $11 million capital-expenditure program against projected operating cash flow and available liquidity.
- Monitor the Chinese joint venture for continued losses and possible impairment indicators.
- Consider foreign-exchange, commodity-price, pension, warranty, environmental, and customer-demand risks when assessing future earnings and cash flow.