Ampco-Pittsburgh Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The financial statements are unaudited. The company operates through Forged and Cast Engineered Products and Air and Liquid Processing.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $60.0 million | $69.9 million | $125.1 million | $132.9 million |
| Operating income (loss) | $(0.8) million | $2.0 million | $(0.3) million | $2.8 million |
| Net income (loss) | $(0.5) million | $1.1 million | $(0.4) million | $1.2 million |
| Diluted EPS | $(0.05) | $0.11 | $(0.04) | $0.12 |
| Operating margin | (1.3%) | 2.9% | (0.2%) | 2.1% |
| Net margin | (0.9%) | 1.6% | (0.4%) | 0.9% |
| Cash dividends per share | $0.18 | $0.18 | $0.36 | $0.36 |
- Cash flow: Operating cash flow was $5.4 million for the first six months, versus $1.6 million in the prior-year period. Capital expenditures were $5.3 million, dividends paid were $3.8 million, and cash decreased by $4.0 million to $93.1 million.
- Liquidity: The company reported $93.1 million of cash, including approximately $11.0 million held by foreign operations, and approximately $9.2 million of available short-term credit and overdraft facilities.
- Debt: Current liabilities included $13.3 million of Industrial Revenue Bond debt. The filing does not disclose material long-term borrowings beyond this obligation.
- Balance sheet: Total assets were $523.8 million and shareholders’ equity was $208.5 million at June 30, 2015. Inventories increased to $64.9 million from $54.7 million at year-end 2014, while receivables declined to $45.6 million from $54.9 million.
- Backlog: Backlog was $150.7 million at June 30, 2015, down from $167.9 million at December 31, 2014 and $170.3 million at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 14% and six-month sales declined 6%. The Forged and Cast Engineered Products segment accounted for most of the deterioration, with second-quarter sales down 17% and six-month sales down 6%.
- Forged and Cast results were pressured by lower traditional roll volumes, weak global steel demand, excess industry capacity, aggressive Asian and Eastern European pricing, customer cost reductions, and unfavorable currency translation.
- Air and Liquid Processing sales declined 8% in the quarter and 6% year to date, but segment income increased due to product mix and cost containment. Pump sales improved, while heat exchange coil and air handling unit sales weakened.
- Costs of products sold increased as a percentage of sales to 80.4% from 79.2% in the quarter and to 80.2% from 79.4% year to date, reflecting lower production levels, fixed-cost underabsorption, and weaker margins.
- The company recognized a $1.2 million curtailment charge related to freezing a portion of its U.S. defined benefit pension plan effective July 1, 2015. The plan change reduced the pension liability by approximately $6.5 million on a net basis.
- Other expense, including corporate costs, increased to $2.9 million in the quarter and $6.5 million year to date, partly due to a $0.6 million quarterly and year-to-date allocation of back-office costs following an internal reorganization.
Outlook, Risks and Unusual Items
- Management expects roll demand to remain weak and pricing pressures to continue during 2015. The Forged and Cast segment is operating below capacity, and its backlog was $108.7 million at June 30, 2015, with approximately $29 million expected to ship after 2015.
- The Chinese joint venture continues to incur losses, and management expects losses to continue in 2015. The company is monitoring its $2.4 million carrying value for potential impairment.
- Air and Liquid’s backlog was $42.0 million, with approximately $8 million expected to ship after 2015. Utility-market weakness continues to affect heat exchange products.
- No formal earnings or revenue guidance was provided. Management stated that cash on hand, future operating cash flow, and available credit facilities are expected to fund operating and capital requirements. Approximately $11 million of future capital expenditures are expected over the next 12 to 18 months.
- Asbestos liabilities totaled $180.3 million at June 30, 2015, offset in part by $133.9 million of asbestos insurance receivables. Approximately 8,565 asbestos claims were pending at period-end. Coverage litigation appeals remained pending, and management cautioned that changes in claims, settlements, insurance recoveries, insurer solvency, or litigation outcomes could materially affect earnings, liquidity, and financial position.
- Outstanding standby and commercial letters of credit totaled approximately $18.8 million, primarily supporting the Industrial Revenue Bond debt. Environmental obligations were estimated at approximately $0.3 million.
- On July 29, 2015, after quarter-end, the company acquired Alloys Unlimited & Processing, Inc. for approximately $5.0 million.
- The company entered into hedges covering approximately $10.8 million of anticipated foreign-currency sales, 57% of anticipated copper purchases, 38% of anticipated aluminum purchases, and 31% of anticipated natural-gas usage.
Investor Verification Items
- Verify the sustainability of cash generation and dividend payments given the first-half net loss, declining backlog, and expected capital expenditures.
- Assess whether weak global steel demand, pricing pressure, currency movements, and below-capacity production will cause further margin deterioration.
- Review asbestos reserve adequacy, insurance recoverability, pending appeals, insurer solvency, and potential post-2024 exposures.
- Monitor the Chinese joint venture for further losses or impairment of the investment.
- Confirm the financial contribution, purchase accounting, and integration effects of the post-quarter-end Alloys Unlimited & Processing acquisition.
- Evaluate pension obligations and the financial impact of the U.S. defined benefit plan freeze and replacement contributions.