Ampco-Pittsburgh Corporation: Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2014, filed August 8, 2014. The company operates through Forged and Cast Rolls and Air and Liquid Processing segments.
- Forged and Cast Rolls produces forged-hardened steel rolls and cast iron and steel rolls for steel and aluminum manufacturers.
- Air and Liquid Processing produces pumps, air-handling systems, heat-exchange coils and related products.
- There were 10.424 million common shares outstanding on August 1, 2014.
Financial Performance and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $69.949 million | $69.938 million | $132.862 million | $139.562 million |
| Income from operations | $2.018 million | $2.391 million | $2.795 million | $4.102 million |
| Operating margin | 2.9% | 3.4% | 2.1% | 2.9% |
| Net income | $1.121 million | $1.106 million | $1.199 million | $1.232 million |
| Net margin | 1.6% | 1.6% | 0.9% | 0.9% |
| Diluted earnings per share | $0.11 | $0.11 | $0.12 | $0.12 |
| Dividends declared per share | $0.18 | $0.18 | $0.36 | $0.36 |
Six-month operating cash flow was $1.597 million, compared with $21.971 million in the prior-year period. Capital expenditures were $6.131 million, dividends paid were $3.737 million, and cash decreased by $7.779 million to $90.131 million.
- June 30, 2014 total assets were $488.977 million and total liabilities were $247.355 million.
- Cash and cash equivalents were $90.131 million, including approximately $5.1 million held by foreign operations.
- Industrial Revenue Bond debt was $13.311 million. The filing reports no material change in market-risk exposure.
- Available short-term lines of credit and overdraft facilities totaled approximately $9.7 million at June 30, 2014.
- Approved future capital expenditures were approximately $7.440 million over the following 12 to 18 months.
- Backlog was $170.322 million at June 30, 2014, down from $197.461 million at December 31, 2013.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales were essentially flat, but six-month sales declined 4.8% year over year.
- Six-month operating income declined 31.9%, primarily reflecting lower sales volumes and selling prices, especially in Forged and Cast Rolls.
- Six-month net income decreased modestly by $33,000; lower pension and postretirement benefit costs and reduced equity losses in the Chinese joint venture partly offset weaker operating results.
- Operating cash flow declined substantially because of working-capital changes, principally higher receivables, and lower asbestos-related insurance recoveries compared with the first quarter of 2013.
- Forged and Cast Rolls six-month sales declined to $85.032 million from $90.499 million, and segment income before taxes declined to $2.902 million from $4.674 million.
- Air and Liquid Processing six-month sales declined to $47.830 million from $49.063 million, while segment income before taxes increased to $4.809 million from $4.288 million.
- Accumulated other comprehensive loss improved to $37.774 million at June 30, 2014 from $45.865 million at year-end 2013, principally due to employee-benefit and foreign-currency adjustments.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects traditional roll-product demand to remain weak, with depressed margins, because of underutilized steel-industry capacity, excess global supply and low-priced competition from China and Korea.
- Non-roll products and services are expected to increase, and losses from the 49%-owned Chinese forged-roll joint venture are expected to continue. The company will monitor the investment for possible future impairment.
- Air and Liquid Processing faces slow institutional construction spending, although fossil-fuel power-generation activity, U.S. Navy shipbuilder shipments and certain product mixes remain supportive.
- During the quarter, changes to certain postretirement healthcare benefits reduced the related liability by approximately $9.5 million; a discount-rate change increased it by approximately $2.0 million.
- Asbestos liability was $146.645 million at June 30, 2014, with related insurance receivables of $101.046 million. Approximately 8,574 asbestos claims were pending at period-end.
- Management states that additional asbestos charges are reasonably possible but cannot currently be estimated. Estimates depend on claim frequency, settlement costs, insurance recoveries, litigation outcomes and insurer solvency.
- Outstanding standby and commercial letters of credit totaled approximately $18.655 million, primarily collateralizing Industrial Revenue Bond debt.
- Environmental liabilities were estimated at approximately $226,000. A government grant of up to $1.325 million remains subject to employment conditions through 2017; management recorded no repayment liability because employment currently exceeds the target.
- Foreign-currency sales and commodity-price exposures are hedged. Approximately $11.056 million of anticipated foreign-denominated sales, 57% of anticipated copper purchases and 38% of anticipated aluminum purchases were hedged at June 30, 2014.
- The company granted 176,000 stock options during the quarter, producing approximately $1.2 million of compensation expense to be recognized over three years.
- The recently issued revenue-recognition standard, effective January 1, 2017, was under evaluation and its impact was not yet determined.
Investor Verification Points
- Verify the sustainability of cash generation given the sharp year-over-year decline in operating cash flow and planned capital expenditures.
- Review Forged and Cast Rolls pricing, backlog conversion and exposure to global steel-industry capacity and low-cost competitors.
- Assess the adequacy and recoverability of asbestos reserves and insurance receivables, including insurer solvency and remaining litigation.
- Monitor the Chinese joint venture for continued losses or additional impairment charges.
- Confirm liquidity headroom after dividends, capital spending, pension contributions and potential asbestos-related cash requirements.
- Review the effect of postretirement-plan changes and foreign exchange, commodity costs and hedging activity on future margins.