AMPCO-PITTSBURGH CORP: 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AMPCO-PITTSBURGH CORP for the period ended June 30, 2009. The company operates in two primary segments: Forged and Cast Rolls (serving steel and aluminum producers) and Air and Liquid Processing. The reporting period reflects the impact of a global recession, which has led to reduced production levels and deferred orders in the steel and aluminum sectors, particularly affecting the Forged and Cast Rolls segment.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Sales | $160.73 million | $200.52 million | $74.98 million | $102.69 million |
| Income from Operations | $26.30 million | $33.57 million | $12.75 million | $17.75 million |
| Net Income | $15.11 million | $21.75 million | $7.79 million | $11.61 million |
| Earnings Per Share (Diluted) | $1.48 | $2.14 | $0.77 | $1.14 |
| Operating Cash Flow | $21.71 million | $14.19 million | N/A | |
| Cash and Equivalents (End of Period) | $79.08 million | $19.14 million (2008) | ||
| Total Debt (Current Portion) | $13.31 million (IRB) | $13.31 million | N/A | |
| Asbestos Liability (Total) | $191.36 million | $207.01 million |
Margins: Cost of products sold (excluding depreciation) as a percentage of net sales decreased to 68.4% for the six months ended June 30, 2009, compared to 71.0% in the prior year, driven by lower material costs and higher variable-index surcharge revenues.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by approximately 20% for the six-month period and 27% for the three-month period compared to 2008. This is primarily due to the global recession forcing customers to cut production and defer orders, particularly in the Forged and Cast Rolls segment.
- Backlog Reduction: Total backlog decreased to approximately $567.3 million from $841.9 million in the prior year. The Forged and Cast Rolls backlog dropped to $524.2 million from $794.0 million, while Air and Liquid Processing backlog declined slightly to $43.1 million.
- Profitability: Despite lower sales, operating margins improved due to lower material costs (scrap and alloys) and higher surcharge revenues. Net income decreased by 30% year-over-year for the six-month period.
- Cash Flow: Operating cash flow increased significantly to $21.71 million from $14.19 million, attributed to improvements in working capital management despite lower earnings.
- Asbestos Liability: The total asbestos liability reserve decreased to $191.36 million from $207.01 million, while the corresponding insurance receivable decreased to $125.15 million from $136.18 million.
Guidance, Outlook, and Risks
Management Commentary: Management notes that while the Forged and Cast Rolls segment is heavily impacted by the economic downturn, the worldwide shortage of capacity for forged hardened steel rolls remains a significant factor. The company is working with customers to reschedule deliveries. The Air and Liquid Processing segment has been less affected but remains contingent on new order volumes.
Capital Expenditures: Future capital expenditures totaling approximately $43.15 million have been approved for the next two years to maximize capacity and productivity.
Risks and Contingencies:
- Asbestos Litigation: The company faces significant asbestos-related litigation. While a substantial majority of costs are covered by insurance, there is uncertainty regarding future claims, insurance carrier solvency, and the resolution of coverage issues. Adjustments to reserves could be material.
- Foreign Exchange: The company is exposed to exchange rate fluctuations, particularly the British pound sterling. Foreign exchange losses increased in the six-month period.
- Environmental Matters: The company is performing remedial actions at former sites and has been named a Potentially Responsible Party at third-party landfill sites. Management believes the current reserve of approximately $905,000 is adequate.
Key Facts for Investor Verification
- Backlog Deferrals: Verify the extent to which the $567 million backlog represents orders that will ship in 2009 versus those deferred to 2010 or later, as management estimates over $400 million may ship beyond 2009.
- Asbestos Insurance Recovery: Confirm the solvency of the insurance carriers covering the asbestos liability and the likelihood of full recovery on the $125 million receivable.
- Joint Venture Commitment: Monitor the remaining $4.41 million contribution required for the Chinese joint venture, expected by the end of 2009.
- Dividend Sustainability: Assess the ability to maintain the current dividend rate ($0.18 per quarter) given the decline in net income and cash flow volatility.
- Order Intake Trends: Track new order intake in the second half of 2009 to gauge the recovery of the Forged and Cast Rolls segment.