Ampco-Pittsburgh Corporation: Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2015, compared with the same periods in 2014. Ampco-Pittsburgh operates through Forged and Cast Engineered Products, including Union Electric Steel, and Air and Liquid Processing, including Aerofin, Buffalo Air Handling and Buffalo Pumps.
The company acquired Alloys Unlimited & Processing, Inc. on July 29, 2015, for approximately $5.0 million. The acquisition supplies specialty tool, alloy and carbon steel round bar and is intended to diversify the Forged and Cast Engineered Products segment.
Financial Performance and Liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $58.1 million | $65.4 million | $183.2 million | $198.3 million |
| Operating income (loss) | $(2.4) million | $0.0 million | $(2.7) million | $2.8 million |
| Net income (loss) | $(1.5) million | $(0.3) million | $(2.0) million | $0.9 million |
| Diluted EPS | $(0.14) | $(0.03) | $(0.19) | $0.08 |
| Operating cash flow | Not separately provided | Not separately provided | $8.5 million | $9.7 million |
Revenue declined 11.2% in the quarter and 7.6% year to date. The operating margin was approximately negative 4.1% in Q3 and negative 1.5% year to date, compared with approximately 0.1% and 1.4%, respectively, in the prior-year periods. Product costs were 83.8% of sales in Q3 and 81.3% year to date, versus 81.4% and 80.0% in the comparable 2014 periods.
Cash and cash equivalents were $87.4 million at September 30, 2015, down from $97.1 million at December 31, 2014. Nine-month cash uses included $7.2 million of capital expenditures, the $5.0 million AUP acquisition and $5.6 million of dividends. Future capital expenditure commitments were approximately $9.0 million over the next 12 to 18 months.
Current Industrial Revenue Bond debt was $13.3 million. The filing does not report other significant funded debt. Availability under short-term lines of credit and an overdraft facility was approximately $9.0 million. Management stated that cash on hand and future operating cash flows are expected to fund operating and capital requirements.
Total assets were $513.1 million and shareholders’ equity was $204.7 million at September 30, 2015. Current asbestos insurance receivables were $17.0 million, with $113.0 million classified as noncurrent. Total asbestos liabilities were $175.0 million.
Material Changes Versus the Prior Comparable Period
- Forged and Cast Engineered Products sales decreased 14% in Q3 and 8% year to date, primarily because of lower traditional roll shipments, weak global steel demand, pricing pressure and unfavorable currency translation.
- Forged and Cast Engineered Products reported a pretax loss of $1.7 million in Q3 and $0.7 million year to date, compared with a $0.1 million loss and $2.8 million of income in the prior-year periods.
- Air and Liquid Processing sales declined 5% in Q3 and 6% year to date, but pretax income improved to $2.4 million and $7.4 million, respectively, due primarily to product mix and cost containment.
- Backlog declined to $143.1 million from $167.9 million at December 31, 2014 and $173.5 million at September 30, 2014. Forged and Cast backlog was $101.2 million; Air and Liquid backlog was $41.9 million.
- The U.S. defined benefit pension plan was partially frozen effective July 1, 2015. The change reduced the plan liability by approximately $6.5 million net and generated a $1.2 million curtailment charge.
- Employee benefit obligations decreased $8.0 million from year-end, while inventories increased approximately $7.6 million, reflecting higher raw-material levels and delayed roll deliveries.
Outlook, Risks, Contingencies and Unusual Items
Management expects weak roll demand and continued pricing pressure through the remainder of 2015 and into 2016. The Forged and Cast business is operating significantly below capacity, with global steel overcapacity, weak customer demand and currency movements affecting volumes and margins. Management expects losses at the Chinese joint venture to continue in 2015 and 2016 and is monitoring its $2.2 million carrying value.
Air and Liquid Processing continues to benefit from strength in specialty centrifugal pumps, while heat-exchange activity remains pressured by weakness in fossil-fueled utility and industrial markets.
Asbestos litigation remains a major contingency. Approximately 6,097 claims were pending at September 30, 2015, and gross settlement and defense costs for the first nine months were $14.0 million, most of which was paid by insurers. The company’s recorded asbestos reserve at December 31, 2014 was $189.0 million for claims projected through 2024, against estimated insurance recoveries of $140.7 million at year-end and $130.0 million at September 30, 2015. Appeals in the insurance coverage litigation remain pending.
Management cautioned that asbestos costs and insurance recoveries could differ materially from estimates because of claim volumes, settlement costs, defense costs, insurance coverage, carrier solvency and litigation outcomes. Environmental liabilities were estimated at approximately $0.3 million.
Other notable items include the AUP acquisition, the pension curtailment charge, foreign-exchange effects, and approximately $0.6 million of quarterly and $1.0 million of year-to-date corporate costs related to an internal back-office reorganization. A new collective bargaining agreement subsequently froze the pension plan for certain Carnegie employees effective January 1, 2016; the financial statement impact was still under evaluation.
The filing provides no formal earnings or revenue guidance. Management states that results for the nine months are not necessarily indicative of full-year performance. Disclosure controls were effective, and management reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether weak global roll demand, backlog deterioration and pricing pressure continue into 2016.
- Whether Forged and Cast Engineered Products can restore capacity utilization and margins.
- The adequacy of asbestos reserves and insurance receivables, including the outcome of pending appeals and insurer solvency risks.
- Cash generation after dividends, capital expenditures, acquisition spending and required asbestos payments.
- The carrying value and future funding requirements of the Chinese joint venture.
- The financial impact of the Carnegie pension freeze and other postretirement-plan changes.
- Integration results and strategic benefits from the AUP acquisition.