Ampco-Pittsburgh Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and six months ended June 30, 2023, filed August 9, 2023. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing (ALP).
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total net sales | $107.2 million | $102.6 million | $212.0 million | $197.0 million |
| Income from operations | $3.3 million | $2.1 million | $5.3 million | $1.6 million |
| Operating margin | 3.1% | 2.0% | 2.5% | 0.8% |
| Net income attributable to Ampco-Pittsburgh | $0.4 million | $2.8 million | $1.1 million | $2.8 million |
| Diluted earnings per share | $0.02 | $0.14 | $0.06 | $0.14 |
| Net cash used in operating activities | Not separately reported | Not separately reported | $(7.1) million | $(23.0) million |
Q2 sales increased 4.5% year over year, while six-month sales increased 7.6%. FCEP sales were $77.6 million in Q2, down 2.5%, and $154.4 million for six months, essentially flat. ALP sales increased 28.8% in Q2 to $29.6 million and 35.1% for six months to $57.6 million.
Reported Q2 net income attributable to Ampco-Pittsburgh declined despite higher operating income, primarily because interest expense increased to $2.2 million from $1.2 million and other income declined to $0.1 million from $2.4 million. Six-month interest expense increased to $4.3 million from $2.2 million.
Costs of products sold, excluding depreciation and amortization, were 79.7% of sales in Q2 and 81.1% for six months, compared with 82.9% and 84.1%, respectively, in the prior-year periods. Selling and administrative expense increased 28.4% in Q2 and 26.0% for six months, reflecting higher employee-related and inflationary costs.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $9.5 million at June 30, 2023, compared with $8.7 million at December 31, 2022.
- Total debt was $123.4 million, including $15.1 million classified as current, compared with $105.5 million at year-end 2022.
- Debt consisted primarily of $58.1 million under the revolving credit facility, $44.0 million of sale-and-leaseback financing, $10.6 million under the equipment financing facility, $9.2 million of industrial revenue bonds and $1.6 million of finance lease liabilities.
- Remaining availability under the revolving credit facility was approximately $22.4 million, and availability under the equipment financing facility was approximately $9.4 million.
- The company was in compliance with applicable bank covenants at June 30, 2023. The revolving credit facility matures June 29, 2026.
- Operating cash use improved to $7.1 million from $23.0 million in the prior-year six-month period, primarily due to lower working-capital investment. Capital expenditures were $10.0 million, compared with $6.9 million in the prior year.
- Financing activities provided $17.4 million, including $20.2 million of revolving-facility borrowings, $4.2 million of equipment-financing proceeds and $2.5 million under a sale-and-leaseback disbursement agreement.
Material changes versus the prior comparable period
- Operating income improved by $1.2 million in Q2 and $3.7 million for six months, but reported net income attributable to Ampco-Pittsburgh fell by $2.4 million and $1.7 million, respectively.
- Results included a $1.9 million favorable Foreign Energy Credit for reimbursement of past energy costs at a foreign operation. Management does not currently expect additional reimbursements.
- Q2 2022 included a $0.7 million charge for repayment of excess COVID-19 subsidies. Six months ended June 30, 2022 included a $1.4 million benefit from a change in employee benefit policy.
- Excluding these unusual items, adjusted operating income was $1.4 million in Q2 2023 versus $2.7 million in Q2 2022, and $3.4 million for six months versus $0.9 million in the prior-year period.
- Consolidated backlog was $368.9 million, essentially unchanged from $369.0 million at December 31, 2022. FCEP backlog declined $16.7 million to $235.4 million, while ALP backlog increased $16.7 million to $133.5 million.
- Approximately 40% of consolidated backlog, 30% of FCEP backlog and 58% of ALP backlog were expected to ship after 2023.
Outlook, risks and unusual items
Management reported normal operating levels but continued challenges from supply-chain disruptions, inflation, depressed European activity, global economic uncertainty and effects of the Russia-Ukraine conflict. FCEP demand was improving in North American forged rolls, while FEP demand remained pressured by distributor inventories, lower oil and gas prices and increased imports. ALP benefited from steady demand and market-share gains but faced higher production and transportation costs.
The company is pursuing price increases, operational-efficiency initiatives and a $27.0 million FCEP capital program intended to reduce operating costs, improve reliability and expand capacity. The program was expected to be substantially complete by December 31, 2023; remaining capital commitments were approximately $13.6 million.
Material risks include cyclical and insufficient demand, steel-industry overcapacity, foreign-exchange and commodity-price volatility, higher interest rates, liquidity and financing access, equipment reliability, labor actions, cybersecurity, and asbestos litigation. Commodity hedges covered approximately 50% of anticipated copper purchases and 61% of anticipated aluminum purchases at June 30, 2023.
Asbestos liability was $142.8 million, with a related insurance receivable of $99.2 million. Active asbestos claims totaled 3,432 at June 30, 2023. Management cautioned that changes in claim trends, settlement costs, defense costs, insurance coverage or insurer solvency could materially affect results, financial position and liquidity.
The company adopted the current expected credit loss standard on January 1, 2023, recording a $0.7 million reduction to opening retained deficit, including $0.5 million related to the asbestos insurance receivable.
Management concluded that disclosure controls and procedures were not effective as of June 30, 2023 because previously reported material weaknesses remained outstanding. The weaknesses relate to accounting controls for asbestos liabilities and management review controls over tax accounting for a non-routine transaction. Remediation efforts were in progress.
Important facts for investors to verify
- Whether operating improvements persist after excluding the $1.9 million Foreign Energy Credit.
- Progress toward positive operating cash flow and funding of the remaining $13.6 million capital commitments.
- Revolving-credit availability, borrowing costs and compliance with fixed-charge and other covenant requirements.
- FCEP backlog conversion, FEP demand trends and the sustainability of ALP growth and margins.
- Changes in asbestos claims, insurance recoveries, reserve assumptions and insurer creditworthiness.
- Remediation and eventual resolution of the two disclosed material weaknesses in internal control over financial reporting.