Ampco-Pittsburgh Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing (ALP). The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial performance and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total net sales | $104.8 million | $94.4 million | +$10.4 million |
| Income (loss) from operations | $2.0 million | $(0.5) million | +$2.4 million |
| Income (loss) before taxes | $1.3 million | $(0.03) million | +$1.3 million |
| Net income (loss) attributable to Ampco-Pittsburgh | $0.7 million | $(0.05) million | Improved |
| Diluted earnings per share | $0.03 | $0.00 | Improved |
| Operating cash flow | $(4.4) million | $(16.3) million | Use improved by $11.9 million |
Costs of products sold excluding depreciation and amortization were 82.4% of sales versus 85.3% in the prior-year quarter, implying an improvement in this cost-based gross margin from approximately 14.7% to 17.6%. Operating margin was approximately 1.9%, compared with negative 0.5% in Q1 2022. The prior-year period included a $1.431 million benefit from a change in employee benefit policy; excluding that item, Q1 2022 adjusted operating loss was $1.884 million.
- FCEP sales increased 2.7% to $76.8 million, led by higher forged and cast mill-roll sales, partly offset by an $9.0 million decline in FEP sales.
- FCEP operating income was $2.2 million versus a $0.4 million loss, benefiting from pricing and surcharges that exceeded cost inflation.
- ALP sales increased 42.4% to $28.0 million, with growth across heat exchange coils, air handling systems and centrifugal pumps.
- ALP operating income increased to $3.0 million from $2.7 million, although unfavorable product mix and higher selling and administrative costs limited the improvement.
- Interest expense increased to $2.1 million from $1.0 million due to higher borrowings, higher rates and financing transactions completed in 2022.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $6.1 million at March 31, 2023, down from $8.7 million at December 31, 2022.
- Inventories increased to $131.6 million from $121.7 million, while trade receivables increased to $86.8 million including related-party receivables.
- Total debt was $110.8 million, including $49.5 million under the revolving credit facility, $41.2 million of sale-and-leaseback financing, $9.2 million of industrial revenue bonds and $8.9 million under the equipment financing facility.
- Remaining availability under the revolving credit facility was approximately $31.0 million after standard reserves. The facility matures June 29, 2026, and the company was in compliance with applicable covenants at quarter-end.
- Operating activities used $4.4 million of cash; investing activities used $3.4 million, including $3.6 million of capital expenditures; financing activities provided $5.0 million.
- The company has a $27.0 million FCEP capital program expected to be completed by December 31, 2023. Future capital expenditure commitments were approximately $14.1 million at quarter-end, with approximately $13.6 million of combined availability under the equipment financing facility and Disbursement Agreement.
Material changes, outlook and unusual items
- Consolidated backlog increased to $380.6 million from $369.0 million at December 31, 2022. Approximately 23% is expected to ship after 2023; the comparable figures were approximately 14% for FCEP and 41% for ALP.
- Management reported improving North American forged-roll demand, but softer European cast-roll markets and weaker FEP demand due to distributor inventories and lower oil and gas prices.
- ALP demand and market share were described as steady or improving, but the segment continues to face higher production and transportation costs and supply-chain issues.
- The company implemented or announced price increases and surcharges to mitigate raw-material, energy and transportation inflation.
- The company expects to migrate LIBOR-based borrowings to SOFR-based borrowings during the second quarter of 2023.
- Effective January 1, 2023, the company adopted the CECL credit-loss standard, reducing opening retained deficit by $0.7 million, including allowances of $0.3 million for trade receivables and $0.5 million for asbestos insurance receivables.
- Asbestos liability was $149.3 million at March 31, 2023, partially offset by an asbestos insurance receivable of $102.8 million. There were 3,406 active claims at quarter-end.
- Management identified continuing material weaknesses in internal control over financial reporting related to asbestos-liability accounting and management review controls over tax accounting for a non-routine transaction. Remediation efforts were ongoing, but the weaknesses had not been remediated as of March 31, 2023.
Risks and contingencies
Key disclosed risks include cyclical steel demand, global economic uncertainty, inflation, energy and supply-chain disruptions, commodity and foreign-exchange volatility, higher variable-rate debt costs, liquidity and refinancing risk, and dependence on successful execution of the capital program. The company also highlighted potential pressure on short-term financing from stress in the banking system.
Asbestos claims and related insurance recoveries remain material and are subject to significant estimation uncertainty, including claim frequency and severity, insurer solvency, coverage erosion from claims involving Howden, settlement costs and defense costs. Future adjustments could be material to earnings, financial position and liquidity. Environmental remediation and compliance exposure was estimated at approximately $0.1 million.
Most important facts for investors to verify
- Whether operating-margin improvement is sustained after considering the nonrecurring $1.431 million employee-benefit credit in Q1 2022.
- Whether operating cash flow turns positive while inventories, receivables and capital spending remain elevated.
- Availability under the revolving credit facility, compliance with fixed-charge and other covenants, and the effect of higher interest rates and the SOFR transition.
- Progress, cost and completion timing for the $27.0 million FCEP capital program.
- FCEP demand trends, particularly forged and cast rolls versus weaker FEP markets, and ALP backlog conversion.
- Changes in asbestos claims, liability estimates, insurance recoverability and insurer credit quality.
- Remediation and independent testing of the two reported material weaknesses in internal control over financial reporting.