AMPCO PITTSBURGH CORP quarterly report, Q3 FY2022

Business Context and Reporting Period

Ampco-Pittsburgh Corporation manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing (ALP). This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.

Financial Performance and Position

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Total net sales	$99.6 million	$81.2 million	$296.7 million	$260.4 million
Income (loss) from operations	$(0.1) million	$(2.4) million	$0.8 million	$(1.0) million
Net income (loss) attributable to Ampco-Pittsburgh	$0.8 million	$(1.6) million	$2.9 million	$(0.4) million
Diluted earnings (loss) per share	$0.04	$(0.08)	$0.15	$(0.02)
Operating margin	(0.1%)	(2.9%)	0.3%	(0.4%)

Segment sales: FCEP sales increased 23.4% in Q3 and 17.5% year to date; ALP sales increased 20.6% in Q3 and 3.0% year to date.
Segment operating results: FCEP reported a Q3 operating loss of $0.1 million versus a $2.8 million loss in the prior year, while ALP operating income was $2.9 million, essentially flat year over year. For the nine months, FCEP operating income was $1.1 million and ALP operating income was $8.2 million.
Gross-cost pressure: Costs of products sold were 84.7% of sales in Q3 and 84.5% year to date, compared with 83.7% and 81.8%, respectively, in 2021.
Cash flow: Operating cash flow was $(20.4) million for the first nine months, compared with $(4.4) million in 2021. Investing cash flow was $(12.5) million, including $13.0 million of capital expenditures.
Liquidity: Cash was $12.2 million at September 30, 2022, compared with $10.3 million at December 31, 2021. Revolving-credit availability was approximately $35.6 million.
Debt: Total borrowings were $98.3 million, including $45.5 million outstanding under the revolving facility, versus $60.9 million at December 31, 2021. The revolving facility matures June 29, 2026, and the company was in compliance with its covenants.
Capital structure: Total shareholders’ equity was $78.0 million, down from $91.8 million at year-end, primarily reflecting foreign-currency translation losses and other comprehensive losses.
Backlog: Consolidated backlog increased to $333.7 million from $292.6 million at December 31, 2021; approximately 60% was expected to ship after 2022.

Material Changes Versus the Prior Comparable Period

Revenue growth was driven by higher pricing and surcharges, increased mill-roll shipments, stronger FEP demand, and higher heat-exchange-coil and air-handling-system sales.
FCEP margins improved sequentially and year over year in Q3, but year-to-date profitability remained pressured by higher raw-material, energy, transportation, and labor costs. Surcharges recover a significant portion of these increases with a timing lag.
ALP sales increased, but Q3 operating income was constrained by unfavorable product mix and supply-chain delays affecting centrifugal pumps.
Interest expense increased to $3.7 million year to date from $2.7 million, reflecting higher average borrowings and interest rates.
Year-to-date operating results included a $0.7 million charge for the return of excess COVID-19 subsidies and a $1.4 million benefit from a change in employee benefit policy. Management reported adjusted year-to-date operating income of $0.1 million versus a $1.0 million loss in the prior year.
Other comprehensive loss attributable to Ampco-Pittsburgh was $14.3 million year to date, primarily due to $19.8 million of foreign-currency translation losses.

Outlook, Commentary, Risks and Unusual Items

Management stated that FCEP roll-market conditions had recovered to pre-pandemic levels and that FEP demand had strengthened, particularly in steel distribution and oil and gas markets.
Management expects continued benefits from pricing actions and commodity surcharges but noted that cost recovery may lag cost inflation. Approximately 75% of customer orders include a commodity surcharge.
ALP demand was described as increasing, with continued price increases intended to offset production and transportation inflation. Supply-chain constraints remain a risk.
The company is undertaking a $27.0 million FCEP capital program, expected to be completed by December 31, 2023. Future capital-expenditure commitments were approximately $19.3 million at September 30, 2022.
In August 2022, the company completed a $15.5 million sale-and-leaseback financing transaction. It also obtained $4.0 million under an equipment-financing facility. A further $4.5 million sale-and-leaseback financing transaction was completed on October 14, 2022.
Asbestos liability was $165.6 million at September 30, 2022, partially offset by a related insurance receivable of $113.5 million. The company reported 3,659 active asbestos claims at period-end and warned that changes in claim activity, settlement costs, insurance coverage, or insurer solvency could materially affect results and liquidity.
COVID-19 aftereffects, the Russia-Ukraine conflict, inflation, transportation shortages, foreign-exchange movements, commodity prices, cyclical demand, customer and supplier conditions, capital availability, and liquidity are identified risks.
No formal quantitative revenue or earnings guidance was provided. Management stated that available cash, future operating cash flow, and revolving-credit availability are expected to fund operating requirements and debt service.
Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material change in internal control over financial reporting.

Investor Verification Items

Verify whether operating cash flow improves from the $20.4 million year-to-date use and whether working-capital investment normalizes.
Assess the company’s ability to fund the remaining FCEP capital program while managing $98.3 million of debt and higher interest costs.
Monitor FCEP surcharge timing and whether pricing actions fully offset inflation in materials, energy, transportation, and labor.
Reconcile backlog conversion, particularly the timing of the 60% expected to ship after 2022, and assess execution of the large ALP healthcare order.
Review changes in asbestos claims, reserves, insurance recoveries, policy coverage, and insurer solvency.
Evaluate the sustainability of reported earnings after excluding the $1.4 million employee-benefit-policy benefit and including the $0.7 million COVID-19 subsidy repayment.
Track foreign-currency effects, commodity-hedging coverage, covenant compliance, and remaining revolving-credit availability.