Business Context and Reporting Period
Ampco-Pittsburgh Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company operates in two segments: Forged and Cast Rolls, serving steel and aluminum producers, and Air and Liquid Processing, serving industrial, utility, institutional, and related markets.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net sales | $70.0 million | $95.0 million | $143.6 million | $184.0 million |
| Income from operations | $2.9 million | $13.5 million | $7.0 million | $25.6 million |
| Net income | $1.5 million | $9.1 million | $3.5 million | $16.8 million |
| Basic EPS | $0.15 | $0.88 | $0.34 | $1.63 |
| Operating margin | 4.2% | 14.2% | 4.9% | 13.9% |
- Costs of products sold were 77.6% of sales in Q2 and 77.0% for the six months, versus 71.2% in both prior-year periods.
- Six-month operating cash flow was $14.2 million, compared with $14.4 million in 2011. Capital expenditures were $5.7 million, and dividends paid were $3.7 million.
- Cash and cash equivalents increased to $75.1 million from $69.9 million at December 31, 2011; approximately $6.0 million was held by foreign operations.
- Available short-term credit lines and overdraft facilities totaled approximately $9.2 million at June 30, 2012.
- Industrial Revenue Bond debt was $13.3 million and classified as current. The filing does not identify additional funded debt.
- Total assets were $528.7 million and shareholders’ equity was $196.7 million at June 30, 2012.
Material Changes Versus Prior Comparable Period
- Quarterly sales declined 26.3%, while six-month sales declined 22.0%, primarily because of lower shipments in Forged and Cast Rolls.
- Forged and Cast Rolls revenue fell to $43.6 million in Q2 from $69.9 million, and six-month revenue fell to $87.5 million from $132.8 million. Lower volume, unfavorable mix, weak demand, competitive pricing, and margin erosion reduced profitability.
- Air and Liquid Processing revenue increased to $26.4 million in Q2 from $25.1 million and to $56.0 million for the six months from $51.2 million, supported by fossil-fueled utility activity and a medical-research order.
- Backlog declined to $245.8 million at June 30, 2012 from $313.6 million a year earlier and $260.0 million at December 31, 2011. Forged and Cast Rolls backlog was $195.6 million, including $77.4 million expected to ship after 2012; Air and Liquid Processing backlog was $50.1 million.
- Net income decreased 83.5% in Q2 and 79.1% for the six months. Management attributed the deterioration principally to lower volume, product mix, pricing pressure, and reduced Forged and Cast Rolls margins.
- Inventory increased to $77.6 million from $68.5 million at year-end, while receivables decreased to $49.8 million from $59.2 million.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected North American Forged and Cast Rolls activity to improve versus 2011, but described European and Pacific Rim demand as weak, particularly in China, where inventories were high and mill projects had been deferred.
- Pricing remained competitive. Institutional-market construction spending had not shown significant improvement, although utility-market activity was encouraging.
- Management stated that cash on hand, future operating cash flow, and existing credit facilities were expected to fund operating and capital requirements. Approved future capital expenditures were approximately $7.2 million over the next 12–18 months.
- Asbestos liability totaled approximately $188.0 million at June 30, 2012, with related insurance receivables of approximately $119.6 million. The reserve covers projected costs through 2020; no reserve was recorded for costs after 2020. Actual costs and recoveries could differ materially because of claim volumes, settlement costs, insurance coverage, insurer solvency, and litigation outcomes.
- There were approximately 7,973 open asbestos claims at June 30, 2012, and gross settlement and defense costs for the six months were approximately $9.6 million, most of which were paid by insurers.
- Environmental liabilities were estimated at approximately $1.2 million. Outstanding standby and commercial letters of credit approximated $19.5 million, primarily supporting Industrial Revenue Bond debt.
- The company hedged portions of anticipated foreign-currency sales and copper and aluminum purchases. Approximately $26.2 million of anticipated foreign-denominated sales, 54% of anticipated copper purchases, and 63% of anticipated aluminum purchases were hedged at period-end.
- The filing provides no formal earnings or revenue guidance. Results are not necessarily indicative of full-year performance, and management’s forward-looking statements remain subject to market, operating, foreign-exchange, commodity, litigation, environmental, and insurance risks.
Investor Verification Items
- Verify the sustainability of demand, pricing, margins, and backlog conversion in Forged and Cast Rolls.
- Monitor inventory growth relative to shipments and operating cash flow.
- Reconcile asbestos reserves and insurance receivables, including potential exposure after 2020 and insurer solvency or coverage disputes.
- Assess liquidity after dividends, approved capital expenditures, Industrial Revenue Bond obligations, and standby letters of credit.
- Review foreign-exchange and commodity hedge settlements and their potential effect on future earnings.
- Confirm whether Air and Liquid Processing’s recent utility-related improvement is recurring or dependent on specific orders.