Ampco-Pittsburgh Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2011, filed August 9, 2011. The company operates through Forged and Cast Rolls and Air and Liquid Processing segments. Results are unaudited and cover the three and six months ended June 30, 2011, compared with the same 2010 periods.
Financial performance and position
| Metric | Six months 2011 | Six months 2010 | Three months 2011 | Three months 2010 |
|---|---|---|---|---|
| Net sales | $184.0 million | $165.2 million | $95.0 million | $82.9 million |
| Operating income | $25.6 million | $26.4 million | $13.5 million | $14.8 million |
| Operating margin | 13.9% | 16.0% | 14.2% | 17.8% |
| Net income | $16.8 million | $17.6 million | $9.1 million | $9.4 million |
| Diluted EPS | $1.62 | $1.71 | $0.88 | $0.91 |
| Cash dividends per share | $0.36 | $0.36 | $0.18 | $0.18 |
- Operating costs increased faster than sales: product costs were 71.2% of sales in both 2011 periods versus 67.6% for the six-month 2010 period and 66.1% for the second quarter of 2010. Management attributed the pressure primarily to higher direct material and fixed costs, product mix, and lower pricing.
- Six-month operating cash flow was $14.4 million versus $15.1 million in 2010. Accounts receivable growth was the principal factor in the decline.
- Capital expenditures were $6.4 million versus $20.1 million in the prior-year period, reflecting substantial completion of the major Forged and Cast Rolls capital program.
- Cash and cash equivalents increased to $75.4 million at June 30, 2011, from $70.0 million at December 31, 2010. Available short-term lines of credit and overdraft facilities totaled approximately $9.4 million.
- The balance sheet reported $13.3 million of Industrial Revenue Bond debt. The filing does not identify additional funded debt. Total liabilities were $326.3 million and shareholders’ equity was $213.5 million.
- Asbestos liabilities totaled approximately $208.4 million, including $25.0 million current, partially offset by asbestos insurance receivables of approximately $134.2 million. Environmental liabilities were estimated at approximately $1.2 million.
Material changes versus the prior comparable period
- Sales increased 11.4% for the six months and 14.6% for the quarter. Forged and Cast Rolls sales rose to $132.8 million for the six months, while Air and Liquid Processing sales rose to $51.2 million.
- Despite higher sales, operating income declined 3.0% for the six months and 8.5% for the quarter. Net income declined 4.5% and 2.7%, respectively.
- Forged and Cast Rolls income before taxes declined to $25.7 million from $28.8 million for the six months, while Air and Liquid Processing increased to $5.3 million from $4.0 million.
- Backlog declined to $313.6 million at June 30, 2011, from $397.0 million at December 31, 2010 and $422.4 million at June 30, 2010. Forged and Cast Rolls backlog fell to $266.3 million, while Air and Liquid Processing backlog increased to $47.3 million.
- Selling and administrative expense decreased for the six months, primarily because stock-based compensation fell to $1.0 million from $2.3 million. Depreciation increased due to recently completed capital investments.
- Comprehensive income increased to $19.3 million from $16.0 million, mainly reflecting more favorable foreign-currency translation and employee-benefit adjustments.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that global steel activity was improving and expected worldwide steel usage to increase in 2011, but excess customer inventories and pricing pressure remained. The Air and Liquid Processing group continued to face weak institutional construction demand and increased competition in Buffalo Air Handling.
- Approximately $14.8 million of capital expenditures had been approved for the next 12–18 months. Management expected cash on hand, operating cash generation, and available credit facilities to fund operating and capital requirements.
- Approximately $150.4 million of Forged and Cast Rolls backlog was expected to ship after 2011. The segment also had approximately $40.0 million of customer commitments not yet included in backlog.
- Asbestos reserves cover projected claims and defense costs through 2020. Management stated that costs beyond 2020 cannot reasonably be estimated. Actual claims, defense costs, insurance recoveries, policy limitations, insurer solvency, and litigation outcomes could materially affect future earnings, liquidity, and financial position.
- There were approximately 8,491 open asbestos claims at June 30, 2011, and gross settlement and defense costs of approximately $12.5 million during the six months, most of which were reported and paid by insurers.
- Outstanding standby and commercial letters of credit totaled approximately $21.3 million, primarily collateralizing the Industrial Revenue Bond debt. A U.K. governmental grant of up to $1.3 million remains subject to employment conditions through 2017; management expects those conditions to be met.
- Foreign-currency sales of approximately $21.9 million and portions of anticipated copper and aluminum purchases were hedged. The company stated that it does not use derivatives for speculative trading.
- No material changes were reported in market-risk exposure or risk factors. Management concluded that disclosure controls were effective as of June 30, 2011, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether declining backlog, customer inventory reductions, pricing pressure, and higher material and fixed costs continue to compress Forged and Cast Rolls margins.
- The timing and amount of the planned $14.8 million capital expenditures and their effect on operating cash flow.
- The adequacy of the $208.2 million asbestos reserve and $133.9 million insurance receivable, including insurer credit quality, policy availability, and potential claims beyond 2020.
- Whether the company’s $75.4 million cash balance and approximately $9.4 million of available facilities remain sufficient relative to asbestos payments, capital spending, working-capital needs, and the $13.3 million Industrial Revenue Bond debt.
- Progress in recovering institutional construction demand and the effect of competition on Air and Liquid Processing margins.
- The filing’s statement that interim results are not necessarily indicative of full-year performance and that no formal earnings guidance was provided.