Ampco-Pittsburgh Corporation — Q3 2013 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2013. The company operates in Forged and Cast Rolls and Air and Liquid Processing. Forged and Cast Rolls faced weak global demand, excess Asian inventory, indigenous Chinese supply, and significant pricing pressure. Air and Liquid Processing benefited from continued utility-plant upgrade spending, while institutional construction remained slow.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $64.4 million | $72.2 million | $204.0 million | $215.8 million |
| Income from operations | $20.8 million | $3.7 million | $24.9 million | $10.8 million |
| Net income | $12.7 million | $1.5 million | $13.9 million | $5.0 million |
| Diluted EPS | $1.22 | $0.15 | $1.34 | $0.48 |
| Operating margin | 32.2% | 5.2% | 12.2% | 5.0% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.0 million | $14.5 million |
Reported operating results include a $16.3 million credit for estimated additional asbestos insurance recoveries. Excluding this unusual credit, Q3 operating income was approximately $4.4 million and the nine-month amount was approximately $8.5 million, based on the filing’s reported figures. Q3 costs of products sold excluding depreciation were 74.8% of sales versus 77.7% in the prior-year quarter; the nine-month ratio was 77.7% versus 77.2%.
Cash and cash equivalents were $92.3 million at September 30, 2013, compared with $78.9 million at December 31, 2012. Current assets were $235.2 million and current liabilities were $81.8 million. Industrial Revenue Bond debt was $13.3 million, with no other material debt balance identified in the provided filing text. Available short-term credit and overdraft facilities totaled approximately $9.4 million.
Capital expenditures were $10.3 million for the first nine months, versus $7.8 million in the comparable period. Approved future capital expenditures were approximately $8.5 million over the next 12 to 15 months. Dividends paid were $5.6 million, or $0.54 per share for the nine-month period.
Material changes versus the prior comparable period
- Sales declined 10.7% in Q3 and 5.5% for the first nine months, primarily reflecting lower selling prices and weaker Air and Liquid Processing sales.
- Net income increased substantially, but the improvement was primarily driven by the $16.3 million asbestos insurance recovery credit.
- Operating cash flow more than doubled to $29.0 million, aided by lower receivables, reduced inventory investment, and higher accounts payable. The filing states that the asbestos credit did not generate equivalent current-period cash.
- Forged and Cast Rolls sales declined to $41.8 million in Q3 and $132.3 million for nine months. Lower pricing reduced operating income by approximately $2.9 million and $9.2 million, respectively, partly offset by higher shipment volume, a $1.5 million Hurricane Sandy insurance recovery, and lower warranty provisions.
- Air and Liquid Processing sales declined to $22.6 million in Q3 and $71.7 million for nine months, while reported income before taxes improved primarily because of the asbestos insurance credit.
- Backlog was $200.1 million at September 30, 2013, versus $195.8 million at December 31, 2012 and $216.9 million at September 30, 2012.
Outlook, risks, contingencies, and unusual items
- Management expects continued losses from its 49%-owned Chinese forged-roll joint venture; an impairment charge could arise if conditions deteriorate or other impairment indicators develop.
- Management expects funds on hand and future operating cash flow to be sufficient for operating and capital requirements.
- Asbestos liability was $165.0 million at September 30, 2013, with related insurance receivables of $116.9 million. The company states that additional charges or insurance recovery adjustments could be material because of claim volume, settlement costs, insurer solvency, coverage disputes, and other uncertainties.
- Approximately 8,524 asbestos claims were pending at September 30, 2013. Gross settlement and defense costs were $16.0 million for the first nine months, substantially the majority of which was paid by insurers.
- The company remained in litigation with two insurer defendants following a September 27, 2013 court ruling; various counterclaims and related claims remained pending.
- Environmental liabilities were estimated at approximately $1.0 million. Standby and commercial letters of credit totaled approximately $18.1 million, mostly supporting Industrial Revenue Bond debt.
- Foreign exchange and commodity risks are hedged. Approximately 57% of anticipated copper purchases and 56% of anticipated aluminum purchases were hedged at September 30, 2013. The company also had natural-gas purchase commitments covering 45% of anticipated usage through 2015 at one subsidiary.
- The filing provides no specific quantitative full-year earnings or revenue guidance. Management cautions that quarterly and year-to-date results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Separate recurring operating performance from the $16.3 million asbestos insurance credit and the $1.5 million Hurricane Sandy insurance recovery.
- Assess whether pricing pressure, weak European demand, Chinese competition, and customer production levels will continue to affect Forged and Cast Rolls margins.
- Monitor asbestos claims, reserve adequacy through 2022, insurance recoveries, insurer solvency, and the outcome of remaining coverage litigation.
- Verify the sustainability of improved operating cash flow given the contribution from working-capital movements and the noncash nature of the asbestos credit.
- Review the Chinese joint venture’s losses and potential impairment exposure.
- Track backlog conversion, particularly the approximately $124.8 million expected to ship after 2013, and the company’s planned $8.5 million of capital expenditures.