AMPCO PITTSBURGH CORP quarterly report, Q1 FY2012

Business Context and Reporting Period

Ampco-Pittsburgh Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2012. The company operates through Forged and Cast Rolls and Air and Liquid Processing. The filing was signed May 10, 2012; approximately 10.3 million common shares were outstanding.

Key Financial Metrics

Costs of products sold, excluding depreciation, were 76.4% of sales versus 71.2% in the prior-year quarter. Net margin was approximately 2.7% versus 8.6%. The company declared a $0.18 per-share dividend, consistent with the prior-year quarter.

At March 31, 2012, total assets were $531.0 million and total liabilities were $334.1 million. Current liabilities included $13.3 million of Industrial Revenue Bond debt and a $25.0 million current asbestos liability. The filing does not provide a clear total-debt figure beyond the disclosed Industrial Revenue Bond balance. Available short-term lines of credit and overdraft facilities totaled approximately $9.3 million, and management stated that cash and expected operating cash flow should fund operating and capital requirements.

Material Changes Versus the Prior Comparable Period

• Sales declined 17.4%, primarily reflecting lower Forged and Cast Rolls shipments, weaker demand, product-mix changes and competitive pricing.
• Operating income declined 66.1%, while net income declined 74.0% and EPS fell from $0.74 to $0.19.
• Forged and Cast Rolls sales fell to $43.9 million from $62.9 million; segment income before taxes fell to $4.1 million from $11.6 million.
• Air and Liquid Processing sales increased to $29.7 million from $26.2 million, although segment income before taxes declined to $2.5 million from $3.0 million.
• Operating cash flow increased substantially because lower sales reduced accounts receivable. Cash increased $7.8 million during the quarter after capital expenditures of $2.7 million and dividend payments of $1.9 million.
• Backlog was $261.0 million, broadly flat with December 31, 2011 but down from $357.3 million at March 31, 2011. Forged and Cast Rolls backlog was $215.6 million versus $308.2 million a year earlier.

Guidance, Outlook, Risks and Unusual Items

No formal earnings guidance was provided. Management reported slight improvement in North American Forged and Cast Rolls activity, but continued weak European and Pacific Rim demand, particularly in China, where high inventories and deferred mill projects affected orders. Pricing remained competitive. In Air and Liquid Processing, fossil-fueled utility activity was encouraging, while institutional construction remained weak.

• Asbestos liability was $192.8 million at March 31, 2012, with related insurance receivables of $122.8 million. The reserve covers projected costs through 2020; no reserve was recorded for costs beyond 2020. Management warned that changes in claim activity, settlement costs, insurance coverage, insurer solvency or litigation outcomes could materially affect results, liquidity and financial position.
• There were 8,018 open asbestos claims at quarter end, and gross settlement and defense costs for the quarter were approximately $4.9 million, substantially paid by insurers.
• Environmental liabilities were estimated at approximately $1.3 million.
• Outstanding standby and commercial letters of credit totaled approximately $21.2 million, largely supporting the Industrial Revenue Bond debt.
• Approved future capital expenditures approximated $7.5 million over the next 12 to 18 months.
• Foreign currency and commodity hedges covered portions of anticipated foreign-currency sales, copper purchases and aluminum purchases. The company stated that it does not hold derivatives for trading purposes.
• Natural-gas purchase commitments covered approximately $10.0 million of anticipated usage over roughly four years.
• Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting or risk factors from the 2011 Form 10-K.

Important Facts for Investors to Verify

1. Whether Forged and Cast Rolls demand, pricing and backlog profitability recover, particularly in Europe, China and the broader Pacific Rim.
2. The sustainability of the improved operating cash flow, given that the increase was primarily associated with lower accounts receivable from reduced sales.
3. Future asbestos claim costs, insurance recoveries, coverage litigation and potential insurer insolvencies.
4. The company’s complete debt, borrowing-base and liquidity position, including the Industrial Revenue Bond terms and standby letters of credit.
5. Execution of the $7.5 million capital program and the effect of commodity, foreign-exchange and energy-price commitments on margins.
6. Whether the quarter’s results are representative, since management stated that first-quarter results are not necessarily indicative of full-year performance.