Business Context and Reporting Period
Ampco-Pittsburgh Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company operates through two segments: Forged and Cast Rolls, serving global steel and aluminum producers, and Air and Liquid Processing, serving industrial, utility, power-generation, shipbuilding, and related markets.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $74.3 million | $79.5 million | $258.3 million | $244.7 million |
| Operating income | $3.8 million | $10.7 million | $29.5 million | $37.1 million |
| Net income | $2.8 million | $7.5 million | $19.6 million | $25.1 million |
| Diluted EPS | $0.26 | $0.73 | $1.88 | $2.44 |
| Operating margin | 5.2% | 13.4% | 11.4% | 15.2% |
| Net margin | 3.7% | 9.5% | 7.6% | 10.3% |
- Q3 sales declined 6.6%, while nine-month sales increased 5.6% year over year.
- Costs of products sold rose to 78.2% of sales in Q3 from 71.0% and to 73.2% for nine months from 69.0%, primarily reflecting higher direct material and fixed costs in Forged and Cast Rolls.
- Air and Liquid Processing sales increased to $25.0 million in Q3 and $76.2 million for nine months, compared with $20.0 million and $63.4 million, respectively. Forged and Cast Rolls sales declined to $49.3 million in Q3 but were broadly unchanged for nine months.
- Cash flow from operations was $27.5 million for nine months, versus $27.0 million in the prior year. Capital expenditures were $11.7 million, down from $27.7 million.
- Cash and cash equivalents increased to $80.9 million at September 30, 2011, from $70.0 million at December 31, 2010. Available short-term credit and overdraft facilities totaled approximately $9.2 million.
- Current Industrial Revenue Bond debt was $13.3 million. The filing does not identify additional funded debt.
- Total assets were $532.0 million and shareholders’ equity was $213.3 million at September 30, 2011.
- Quarterly and year-to-date dividends remained $0.18 and $0.54 per share, respectively.
Material Changes Versus Prior Comparable Period
- Profitability weakened materially despite higher nine-month revenue. Q3 operating income fell 64.2% and net income fell 63.4%; nine-month operating income fell 20.6% and net income fell 22.1%.
- Forged and Cast Rolls experienced lower shipment volume, weaker pricing, unfavorable product mix, and higher material and fixed costs. Its nine-month segment income before taxes declined to $30.3 million from $40.6 million.
- Air and Liquid Processing improved, with nine-month income before taxes rising to $7.1 million from $5.3 million.
- Investment-related income declined because the prior-year period included an approximately $1.1 million dividend from the Chinese joint venture.
- Backlog fell to $298.8 million at September 30, 2011, from $397.0 million at December 31, 2010 and $398.2 million at September 30, 2010. Forged and Cast Rolls accounted for most of the decline.
- Inventory increased to $75.7 million from $68.8 million at year-end, while property, plant and equipment increased modestly to $148.9 million.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected global steel usage to improve in 2011, but cited unbalanced regional production, excess roll inventories, and continued customer pricing pressure. U.S. and U.K. operations benefited from relatively weak currencies.
- Institutional construction spending remained weak, although Air and Liquid Processing benefited from utility, power-generation, Navy, fossil-fuel, and medical-research orders.
- Approximately $12.3 million of capital expenditures had been approved for the following 12 to 18 months. Management expected cash on hand and future operating cash flow to fund operations and capital requirements.
- Asbestos liabilities were $202.8 million at September 30, 2011, with related insurance receivables of $130.0 million. The reserve covers projected claims and defense costs through 2020; the company cannot reasonably estimate costs beyond that period.
- The company reported approximately 8,156 open asbestos claims and $16.9 million of gross settlement and defense costs for the nine months. Actual costs and insurance recoveries could differ materially because of claim volumes, settlement costs, coverage disputes, insurer solvency, and litigation developments.
- Environmental liabilities were estimated at approximately $1.1 million. Outstanding standby and commercial letters of credit totaled approximately $21.6 million, a major portion supporting Industrial Revenue Bond debt.
- Foreign currency, copper, aluminum, and natural gas exposures were hedged. Approximately 66% of anticipated copper purchases and 63% of anticipated aluminum purchases were hedged at September 30, 2011.
- Management reported no material changes in market-risk exposure or risk factors from the 2010 Form 10-K. Disclosure controls were effective, and there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Forged and Cast Rolls backlog and margins recover as customer inventories decline and pricing pressure persists.
- The assumptions supporting the $202.8 million asbestos reserve and $130.0 million insurance receivable, including insurer solvency and the pending coverage litigation.
- The timing and funding of the approved $12.3 million capital-expenditure program.
- Whether higher material, fixed, and pension-related costs continue to pressure operating margins.
- Future cash requirements for asbestos claims, environmental remediation, pension obligations, letters of credit, and dividends.
- The conversion of backlog into shipments, particularly the approximately $172.3 million of Forged and Cast Rolls backlog and $17.6 million of Air and Liquid Processing backlog expected to ship after 2011.