Ampco-Pittsburgh Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2014. Ampco-Pittsburgh operates through two segments: Forged and Cast Rolls, serving steel and aluminum producers, and Air and Liquid Processing, serving marine defense, refrigeration, power generation, HVAC, and related markets. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $65.4 million | $64.4 million | $198.3 million | $204.0 million |
| Income from operations | $0.04 million | $20.8 million | $2.8 million | $24.9 million |
| Net income (loss) | $(0.3) million | $12.7 million | $0.9 million | $13.9 million |
| Basic EPS | $(0.03) | $1.23 | $0.08 | $1.35 |
| Operating margin | 0.1% | 32.3% | 1.4% | 12.2% |
| Cash flow from operations | Not separately provided | Not separately provided | $9.7 million | $29.0 million |
Costs of products sold, excluding depreciation, increased to 81.4% of sales in the quarter and 80.0% year to date, compared with 74.8% and 77.7%, respectively, in the prior-year periods. Dividends declared were $0.18 per share for the quarter and $0.54 per share year to date.
Cash and cash equivalents were $92.0 million at September 30, 2014, down from $97.9 million at December 31, 2013. Available short-term credit lines and overdraft facilities totaled approximately $9.4 million. Industrial Revenue Bond debt was $13.3 million. Total liabilities were $244.4 million and shareholders’ equity was $237.5 million.
Material changes versus the prior comparable period
- Third-quarter sales increased 1.5%, but nine-month sales declined 2.8%.
- Operating income declined sharply because of weaker margins, lower shipments, and the absence of the prior-year asbestos insurance recovery credit.
- Third-quarter 2013 and nine-month 2013 results included a $16.3 million asbestos litigation credit, producing an after-tax benefit of approximately $10.6 million, or $1.03 per share.
- Forged and Cast Rolls sales increased slightly in the quarter but declined year to date. Depressed pricing, excess global capacity, and lower shipments reduced segment earnings.
- Air and Liquid Processing sales were slightly higher in the quarter and lower year to date. Results benefited from stronger U.S. Navy-related shipments and improved manufacturing efficiencies in certain businesses, but were below the prior year because of the prior-year asbestos credit.
- Backlog decreased to $173.5 million at September 30, 2014 from $200.1 million at September 30, 2013 and $197.5 million at December 31, 2013. Forged and Cast Rolls backlog was $131.3 million; Air and Liquid Processing backlog was $42.3 million.
- Operating cash flow fell by $19.3 million year over year, primarily because of working-capital changes, higher accounts receivable, and lower asbestos-related insurance recoveries.
Cash flow, capital spending, and liquidity
- Year-to-date investing cash outflow was $10.1 million, including $10.2 million of capital expenditures.
- Year-to-date financing cash outflow was $5.0 million, principally $5.6 million of dividends.
- Approved future capital expenditures totaled approximately $4.4 million for the next 12 to 18 months.
- Management stated that cash on hand and expected future operating cash flow should be sufficient for operating and capital requirements.
- Approximately $8.4 million of cash was held by foreign operations; repatriation could create additional income tax.
Outlook, risks, contingencies, and unusual items
Management expected traditional roll-product demand to remain weak with depressed margins through the remainder of 2014. The steel industry was operating below capacity, global roll supply remained excessive, and low-priced competition from China and Korea continued to pressure international sales. Non-roll products and services were expected to increase.
The company reported no formal quantitative earnings guidance. It expected continued losses from its 49%-owned Chinese forged-roll joint venture and planned to monitor the investment for potential future impairment.
Asbestos liability was $141.7 million at September 30, 2014, including $23.0 million classified as current. Related insurance receivables totaled $97.5 million. The company had 8,844 asbestos claims pending at period end and stated that actual future costs and insurance recoveries could differ materially from recorded amounts. No reserve was recorded for costs after 2022 because they could not be reasonably estimated.
Gross asbestos settlement and defense costs were $16.6 million for the first nine months of 2014, with a substantial majority paid by insurers. Remaining insurance litigation and potential insurer insolvency, coverage limitations, claim volumes, settlement costs, and defense costs remain material uncertainties.
Environmental liabilities were estimated at approximately $0.3 million. Standby and commercial letters of credit totaled approximately $18.0 million, primarily supporting Industrial Revenue Bond debt. The company also had natural-gas purchase commitments through 2017 and hedged portions of anticipated foreign-currency sales and copper and aluminum purchases.
The company adopted ASU 2013-11 without a material effect. It was evaluating the impact of the new revenue-recognition standard, effective January 1, 2017. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether weak roll-market demand, pricing pressure, and declining backlog persist and further reduce margins.
- The adequacy of the $141.7 million asbestos reserve and the collectability of the $97.5 million insurance receivable.
- Developments in the remaining asbestos insurance litigation and the financial condition of relevant insurers.
- Future operating cash flow relative to dividends, capital expenditures, pension obligations, debt service, and asbestos payments.
- Whether the Chinese joint venture requires additional impairment charges.
- The timing and profitability of the $173.5 million backlog, particularly the portion expected to ship after 2014.