Ampco-Pittsburgh Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Ampco-Pittsburgh manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing (ALP).
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total net sales | $102.6 million | $92.4 million | $197.0 million | $179.2 million |
| Operating income (loss) | $(0.3) million | $0.5 million | $0.9 million | $1.4 million |
| Net income attributable to Ampco-Pittsburgh | $0.4 million | $1.1 million | $2.0 million | $1.2 million |
| Diluted earnings per share | $0.02 | $0.05 | $0.11 | $0.06 |
| Operating margin | (0.3%) | 0.5% | 0.5% | 0.8% |
Q2 sales increased 11.0% year over year, while six-month sales increased 9.9%. Costs of products sold rose to 85.3% of sales in Q2 from 81.6% and to 84.4% for the six months from 80.9%, primarily because of higher raw materials, energy, transportation and other operating costs.
- FCEP sales increased 12.0% in Q2 and 14.8% year to date, led by forged engineered products and pricing or variable-index surcharges. FCEP operating income declined to a $0.1 million loss in Q2 and $1.2 million for the six months.
- ALP sales increased 7.5% in Q2 but declined 4.9% year to date. ALP operating income increased to $2.6 million in Q2 and $5.3 million year to date.
- Backlog increased to $348.8 million at June 30, 2022, from $292.6 million at December 31, 2021; approximately 40% was expected to ship after 2022.
- Cash and cash equivalents were $7.4 million at June 30, 2022, versus $10.3 million at year-end 2021.
- Debt outstanding was $89.8 million, including $57.7 million under the revolving credit facility, compared with $60.9 million at December 31, 2021. Remaining revolver availability was approximately $24.4 million, and the company was in compliance with applicable covenants.
- Six-month operating cash flow was $(23.0) million versus $(2.8) million in the prior-year period, primarily reflecting investment in receivables and inventories amid increased activity, inflation and supply-chain disruption.
- Capital expenditures were $6.9 million. The company expects an approximately $27.0 million FCEP equipment-upgrade program over roughly 15 months; commitments for future capital expenditures were approximately $23.0 million.
Material changes versus the prior comparable period
- Revenue growth was offset by cost inflation and delayed recovery through customer surcharges, reducing operating profitability.
- Q2 operating results included a $0.7 million charge for repayment of excess COVID-19 subsidies. Six-month results included a $1.4 million benefit from a change in employee benefit policy.
- On a non-GAAP basis, adjusted operating income was $0.3 million in Q2 2022 versus $0.5 million in Q2 2021, and $0.2 million for the first six months versus $1.4 million.
- Interest expense increased by $0.3 million in Q2 and $0.4 million year to date because of higher average revolver borrowings and interest rates.
- Other income benefited from foreign-exchange gains but was affected by unrealized losses on Rabbi trust investments. Investment-related income fell substantially because a Chinese joint-venture dividend received in Q2 2021 was not repeated in 2022.
- Accumulated other comprehensive loss attributable to Ampco-Pittsburgh increased to $65.4 million from $55.1 million, primarily from foreign-currency translation and hedge losses.
Outlook, risks, contingencies and unusual items
Management provided no formal earnings or revenue guidance. It expects available cash, future operating cash flow and revolver availability to fund continuing operations, while exploring longer-term financing for the planned capital program.
- Management reported recovering FCEP roll-market conditions, stronger forged engineered product demand and record-level ALP order intake. Price increases and surcharges are intended to offset inflation, but recovery occurs with a lag and is incomplete.
- COVID-19 aftereffects, the Russia-Ukraine conflict, supply-chain disruptions, transportation delays, inflation, energy and raw-material costs, foreign-exchange movements and cyclical steel demand remain significant risks.
- Asbestos liability was $171.7 million at June 30, 2022, against an asbestos insurance receivable of $116.7 million. Active asbestos claims totaled 3,486, and management stated that future reserve or insurance-recovery adjustments could be material.
- Insurance recoveries depend on policy limits, settlement agreements, insurer solvency, claim trends and potential erosion of coverage by claims involving Howden.
- Letters of credit totaled approximately $19.4 million, primarily supporting industrial revenue bond debt; surety bonds totaled approximately $3.0 million.
- Environmental remediation and compliance exposure was estimated at approximately $0.1 million.
- The company stated that disclosure controls were effective as of June 30, 2022, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and surcharge mechanisms catch up with inflationary costs and restore FCEP margins.
- Liquidity after the planned approximately $27.0 million capital program, including the availability and terms of any longer-term financing.
- Revolver availability, borrowing rates, covenant compliance and the company’s ability to manage negative operating cash flow.
- Actual asbestos claims, settlement costs, insurance recoveries and potential changes to the $171.7 million liability estimate.
- Conversion of the $348.8 million backlog into revenue, including shipment timing, customer cancellations, pricing updates and supply-chain constraints.
- The sustainability of reported earnings given the COVID-19 subsidy repayment, employee-benefit-policy benefit, foreign-exchange gains and variable investment income.