AMPCO-PITTSBURGH CORP: 10-Q Summary (Period Ended Sep 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AMPCO-PITTSBURGH CORPORATION for the period ended September 30, 2009. The company operates in two primary segments: Forged and Cast Rolls (serving steel and aluminum industries) and Air and Liquid Processing (serving energy, utility, and industrial sectors). The reporting period covers the nine months ended September 30, 2009, compared to the same period in 2008.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Net Sales | $232,695,000 | $306,425,000 | $71,961,000 | $105,906,000 |
| Net Income | $23,827,000 | $33,726,000 | $8,715,000 | $11,974,000 |
| Earnings Per Share (Diluted) | $2.34 | $3.31 | $0.85 | $1.18 |
| Operating Cash Flow | $44,249,000 | $34,404,000 | N/A | N/A |
| Cash and Equivalents (End of Period) | $82,990,000 | $26,615,000 | $82,990,000 | $26,615,000 |
| Total Debt (Current Portion) | $13,311,000 | $13,311,000 | $13,311,000 | $13,311,000 |
| Backlog (Sep 30, 2009) | $538,073,000 | $831,116,000 (Sep 30, 2008) | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 24% year-over-year for the nine-month period, driven primarily by a 34% drop in the Forged and Cast Rolls segment due to the global recession and reduced steel/aluminum production. The Air and Liquid Processing segment saw a slight increase (2.3%) due to strong energy sector demand.
- Profitability: Net income decreased 29% for the nine-month period. However, operating margins improved as a percentage of sales due to lower material costs, reduced labor costs, and surcharge revenues in the Rolls segment.
- Cash Position: Operating cash flow increased by $9.8 million compared to the prior year, despite lower earnings, largely due to a reduction in accounts receivable. Cash and cash equivalents increased significantly from the prior year-end due to a shift away from investing in short-term marketable securities.
- Backlog: Total backlog decreased to $538 million from $831 million at the same time last year, reflecting lower order intake and shipments.
Guidance, Outlook, and Risks
- Outlook: Management anticipates recovery in the steel and aluminum industries, particularly in China and Asia, which should improve demand for rolling mill rolls in 2010. The Air and Liquid Processing segment's performance remains contingent on new order volumes.
- Capital Expenditures: Future capital expenditures of approximately $32.6 million have been approved for the next 12-18 months to maximize capacity.
- Asbestos Litigation: The company faces significant asbestos-related liabilities. As of September 30, 2009, the reserve for asbestos liability was $183.4 million, with an associated insurance receivable of $119.7 million. There are approximately 8,870 open claims. The company notes that actual costs could vary materially based on litigation outcomes and insurance carrier solvency.
- Environmental Matters: Potential liability for environmental proceedings is estimated at $850,000, which management considers adequate.
- Foreign Exchange: The company hedges foreign currency exposure. The weakening of the British pound negatively impacted the Forged and Cast Rolls segment (Davy Roll), while the strengthening of the pound against the dollar positively impacted cash equivalents.
Investor Verification Checklist
- Asbestos Reserve Adequacy: Verify the assumptions used by HR&A and The Claro Group regarding future claim volumes, settlement costs, and insurance recoveries, given the materiality of the $183 million liability.
- Backlog Conversion: Monitor the conversion rate of the $538 million backlog into revenue, noting that approximately $222 million is not expected to ship until after 2010.
- Segment Performance Divergence: Track the recovery of the Forged and Cast Rolls segment versus the sustained performance of the Air and Liquid Processing segment to assess overall revenue stability.
- Capital Expenditure Execution: Confirm the timing and return on the approved $32.6 million capital investment program.
- Insurance Solvency: Review the creditworthiness of the "Paying Insurers" covering the asbestos liability, as insolvencies could materially impact the net liability.