Ampco-Pittsburgh Corporation: 2013 Q2 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013, filed August 9, 2013. The company operates through Forged and Cast Rolls and Air and Liquid Processing. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $69.9 million | $70.0 million | $139.6 million | $143.6 million |
| Income from operations | $2.4 million | $2.9 million | $4.1 million | $7.0 million |
| Net income | $1.1 million | $1.5 million | $1.2 million | $3.5 million |
| Diluted EPS | $0.11 | $0.15 | $0.12 | $0.34 |
| Operating margin | 3.4% | 4.2% | 2.9% | 4.9% |
| Net margin | 1.6% | 2.2% | 0.9% | 2.4% |
Six-month operating cash flow was $22.0 million, compared with $14.2 million in the prior-year period. Capital expenditures were $6.7 million, dividends paid were $3.7 million, and cash increased by $11.2 million to $90.1 million at June 30, 2013. Approximately $7.6 million of cash was held by foreign operations.
Current assets were $234.1 million and current liabilities were $80.9 million, implying a current ratio of approximately 2.9x. Industrial Revenue Bond debt was $13.3 million, classified as current. The filing does not identify material long-term borrowings. Available short-term lines of credit and overdraft facilities totaled approximately $9.1 million.
Total assets were $518.2 million, total liabilities were $328.1 million, and shareholders’ equity was $190.1 million. Asbestos insurance receivables totaled $105.4 million, against recorded asbestos liabilities of $170.6 million.
Material changes versus the prior comparable period
- Second-quarter sales were essentially flat year over year, while six-month sales declined 2.8%.
- Operating income declined 18.3% in the quarter and 41.8% for the six months. Costs of products sold increased to 79.1% of sales from 77.6% in the quarter and 77.0% for the six months in 2012.
- Forged and Cast Rolls sales increased, but lower margins reduced segment income by approximately $1.4 million in the quarter and $6.3 million for the six months. Air and Liquid Processing sales and operating results declined for both periods.
- Six-month net income fell 64.9%, primarily reflecting lower operating income, higher other expense, and continuing losses in the Chinese joint venture.
- Operating cash flow improved by $7.8 million, primarily because prior-year cash flow was reduced by inventory growth and 2013 net asbestos-related spending was lower.
- Backlog declined to $182.1 million at June 30, 2013, from $195.8 million at December 31, 2012 and $245.8 million at June 30, 2012.
- Accumulated other comprehensive loss was $82.5 million, compared with $82.4 million at December 31, 2012; foreign currency translation losses increased during the first six months.
Guidance, outlook, risks, contingencies, and unusual items
- Management reported modest recovery in rolling-mill-roll demand in 2013, including North American demand, but continued weak European demand, excess Asian inventories, excess industry capacity, and severe global pricing pressure.
- Management expects continued losses from the 49%-owned Chinese forged-roll joint venture. Future impairment charges could arise if conditions deteriorate or other impairment indicators occur.
- Institutional construction spending remains slow in Air and Liquid Processing, although spending to upgrade fossil-fueled utility plants remains encouraging.
- Approved capital expenditures of approximately $11.0 million are expected over the next 12–18 months. Management expects cash on hand and future operating cash flow to fund operating and capital requirements.
- Asbestos litigation remains a significant contingency. Claims pending increased to approximately 8,348 at June 30, 2013, from 7,973 a year earlier. Gross settlement and defense costs for the first six months were $10.7 million, most of which was paid by insurers.
- The asbestos reserve covers projected claims and defense costs through 2022; management states that additional charges beyond recorded amounts are reasonably possible but cannot currently be estimated. Insurance recoveries depend on policy limits, litigation outcomes, insurer solvency, and other assumptions.
- Environmental liabilities were estimated at approximately $1.1 million. Outstanding standby and commercial letters of credit approximated $18.3 million, primarily supporting Industrial Revenue Bond debt.
- Foreign exchange and commodity risks are managed with hedges. Approximately $15.8 million of anticipated foreign-denominated sales, 57% of anticipated copper purchases, and 56% of anticipated aluminum purchases were hedged at June 30, 2013.
- The company reported no material changes in market-risk exposure or risk factors from its 2012 Form 10-K. Disclosure controls were evaluated as effective.
Most important facts for investors to verify
- Whether sustained pricing pressure and weak global steel and aluminum demand further reduce Forged and Cast Rolls margins.
- The size, timing, and profitability of new orders relative to the declining backlog.
- Future losses or impairment risk associated with the Chinese joint venture.
- The adequacy of the $170.6 million asbestos reserve and $105.4 million insurance receivable, including insurer solvency and coverage erosion from related claims.
- Whether operating cash flow remains sufficient to fund the planned $11.0 million capital program and $0.18-per-share quarterly dividend.
- Potential effects of foreign exchange, copper and aluminum prices, and natural-gas purchase commitments on future margins and liquidity.