Ampco-Pittsburgh Corporation — Q3 2023 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2023. Ampco-Pittsburgh manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing (ALP). The company operates globally and reported 19,865,749 common shares outstanding as of November 9, 2023. Financial statements are unaudited and presented in thousands, except per-share amounts.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total net sales | $102.2 million | $99.6 million | $314.2 million | $296.7 million |
| Income from operations | $1.7 million | $0.2 million | $7.0 million | $1.8 million |
| Operating margin | 1.7% | 0.2% | 2.2% | 0.6% |
| Net income | $1.2 million | $1.4 million | $3.2 million | $4.3 million |
| Net income attributable to Ampco-Pittsburgh | $0.8 million | $1.1 million | $1.9 million | $3.9 million |
| Diluted earnings per share | $0.04 | $0.06 | $0.10 | $0.20 |
| Operating cash flow | Not separately provided | Not separately provided | $(10.3) million | $(20.4) million |
FCEP sales were $73.6 million in Q3 and $228.0 million for the nine months, compared with $75.5 million and $229.8 million in the prior-year periods. ALP sales were $28.6 million in Q3 and $86.2 million for the nine months, up from $24.1 million and $66.8 million, respectively.
At September 30, 2023, cash and cash equivalents were $6.1 million, compared with $8.7 million at December 31, 2022. Total debt was $127.8 million, including $59.6 million outstanding under the revolving credit facility, compared with total debt of $105.5 million at year-end 2022. Revolver availability was approximately $21.7 million, and equipment-financing availability was approximately $6.8 million. The company was in compliance with applicable bank covenants.
Total assets were $506.1 million and total shareholders’ equity was $114.3 million at September 30, 2023. Inventories increased to $130.7 million from $121.7 million at December 31, 2022. The company adopted the CECL standard on January 1, 2023, reducing opening retained deficit by $0.7 million.
Material changes versus the prior comparable period
- Revenue increased 2.6% in Q3 and 5.9% for the nine months, driven primarily by ALP growth. ALP backlog increased $25.9 million from year-end 2022 to $142.8 million.
- Operating income improved substantially, although Q3 and nine-month results included unusual credits. Adjusted operating income was $1.5 million in Q3 2023 versus $0.2 million in Q3 2022, and $4.9 million for the nine months versus $1.1 million.
- FCEP operating income increased to $1.4 million in Q3 and $7.6 million for the nine months, primarily due to improved pricing, partly offset by lower shipment volumes and periodic equipment idling.
- ALP operating income increased to $3.5 million in Q3 and $9.4 million for the nine months, supported by higher sales volumes but pressured by higher costs, unfavorable mix and increased selling and administrative expenses.
- Interest expense increased to $2.5 million in Q3 and $6.8 million for the nine months, reflecting higher rates, higher average revolver borrowings and additional sale-and-leaseback and equipment financing debt.
- Net cash used in operating activities improved by $10.1 million year over year, but remained negative. Capital expenditures were $14.1 million, and financing activities provided $21.3 million.
Guidance, outlook, risks and unusual items
No formal consolidated numerical earnings or revenue guidance was provided. Management expects FCEP forged-roll demand to be flat to declining during the first half of 2024, with a possible recovery in the second half. Cast-roll conditions are expected to remain soft through the remainder of 2023 and into 2024, while FEP demand remains challenged by imports and distributor inventories. ALP demand and market share are described as steady or improving, but the segment faces higher production and transportation costs and supply-chain issues.
- Q3 2023 operating income included a $0.2 million credit from proceeds received from an insolvent asbestos-related insurer. Nine-month operating income also included a $1.9 million reimbursement of prior energy costs by a foreign government.
- The asbestos liability was $137.4 million at September 30, 2023, partially offset by a $96.4 million insurance receivable. The company had 3,388 active asbestos claims at period-end. Actual costs and insurance recoveries could differ materially from current estimates.
- The company is completing a $26.0 million FCEP capital program, expected to be substantially complete by December 31, 2023. Remaining capital commitments were approximately $7.3 million.
- Approximately 69% of consolidated backlog of $403.2 million was expected to ship after 2023. Backlog is not necessarily a direct measure of future revenue.
- Material weaknesses in internal control over financial reporting continued to exist as of September 30, 2023, relating to asbestos-liability accounting and management review controls for tax accounting of a non-routine transaction. Disclosure controls and procedures were therefore deemed ineffective.
- Key risks include cyclical and insufficient demand, steel-industry excess capacity, foreign-exchange and commodity-price volatility, variable-rate debt, liquidity constraints, supply-chain disruption, geopolitical uncertainty, asbestos litigation, environmental matters, cybersecurity and the ability to scale manufacturing capacity.
Investor verification checklist
- Reconcile reported and adjusted operating income, particularly the $1.9 million Foreign Energy Credit and $0.2 million asbestos-related credit.
- Assess liquidity after planned capital expenditures, negative operating cash flow, debt maturities and higher variable interest rates.
- Review the asbestos liability, insurance recoverability, insurer solvency and potential reserve changes.
- Evaluate backlog conversion, cancellation or delay risk, and the proportion expected to ship after 2023.
- Monitor remediation of the two material weaknesses and any effect on future financial reporting.
- Track FCEP market conditions, ALP capacity expansion, pricing actions, input costs and the completion of the capital program.