Ampco Pittsburgh Corp: Form 10-Q for the period ended Mar 31, 2024

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in thousands, except per share amounts)

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by us or on behalf of Ampco-Pittsburgh Corporation and its subsidiaries (collectively, “we,” “us,” “our,” or the “Corporation”). Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q, as well as the condensed consolidated financial statements and notes hereto, may include, but are not limited to, statements about operating performance, trends and events we expect or anticipate will occur in the future, statements about sales and production levels, restructurings, the impact from pandemics and geopolitical conflicts, profitability and anticipated expenses, inflation, the global supply chain, future proceeds from the exercise of outstanding warrants, and cash outflows. All statements in this document other than statements of historical fact are statements that are, or could be, deemed “forward-looking statements” within the meaning of the Act and words such as “may,” “will,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “target,” “goal,” “forecast” and other terms of similar meaning that indicate future events and trends are also generally intended to identify forward-looking statements. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations, and involve risks and uncertainties. For us, these risks and uncertainties include, but are not limited to:

• economic downturns, cyclical demand for our products and insufficient demand for our products;
• excess global capacity in the steel industry;
• limitations in availability of capital to fund our strategic plan;
• inability to maintain adequate liquidity to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations;
• fluctuations in the value of the U.S. dollar relative to other currencies;
• increases in commodity prices or insufficient hedging against increases in commodity prices, reductions in electricity and natural gas supply or shortages of key production materials for us or our customers;
• inability to obtain necessary capital or financing on satisfactory terms to acquire capital expenditures that may be necessary to support our growth strategy;
• inoperability of certain equipment on which we rely;
• inability to execute our capital expenditure plan;
• liability of our subsidiaries for claims alleging personal injury from exposure to asbestos-containing components historically used in certain products of our subsidiaries;
• changes in the existing regulatory environment;
• inability to successfully restructure our operations and/or invest in operations that will yield the best long-term value to our shareholders;
• consequences of pandemics and geopolitical conflicts;
• work stoppage or another industrial action on the part of any of our unions;
• inability to satisfy the continued listing requirements of the New York Stock Exchange or the NYSE American Exchange;
• potential attacks on information technology infrastructure and other cyber-based business disruptions;
• failure to maintain an effective system of internal control; and
• those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by us, particularly in Item 1A, Risk Factors, in Part I of our latest Annual Report on Form 10-K for the year ended December 31, 2023.

We cannot guarantee any future results, levels of activity, performance or achievements. In addition, there may be events in the future that we are not able to predict accurately or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. Except as required by applicable law, we assume no obligation, and disclaim any obligation, to update forward-looking statements whether as a result of new information, events or otherwise.

The Business

The Corporation manufactures and sells highly engineered, high-performance specialty metal products and customized equipment utilized by industry throughout the world. It operates in two business segments – the *Forged and Cast Engineered Products (“*FCEP”) segment and the *Air and Liquid Processing (“*ALP”) segment. This segment presentation is consistent with how the Corporation’s chief operating decision-maker evaluates financial performance and makes resource allocation and strategic decisions about the business.

The FCEP segment produces forged hardened steel rolls, cast rolls and forged engineered products (“FEP”). Forged hardened steel rolls are used primarily in cold rolling mills by producers of steel, aluminum and other metals. Cast rolls, which are produced in a variety of iron and steel qualities, are used mainly in hot and cold strip mills, medium/heavy section mills and plate mills. FEP principally are sold to customers in the steel distribution market, oil and gas industry and the aluminum and plastic extrusion industries. The segment has operations in the United States, England, Sweden, and Slovenia, and an equity interest in three joint venture companies in China. Collectively, the segment primarily competes with European, Asian and North and South American companies in both domestic and foreign markets and distributes a significant portion of its products through sales offices located throughout the world.

The ALP segment includes Aerofin, Buffalo Air Handling and Buffalo Pumps, all divisions of Air & Liquid Systems Corporation (“Air & Liquid”), a wholly owned subsidiary of the Corporation. Aerofin produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including original equipment manufacturers and commercial, nuclear power generation and industrial manufacturing. Buffalo Air Handling produces large custom-designed air handling systems for institutional (e.g., hospital, university), pharmaceutical and general industrial building markets. Buffalo Pumps manufactures centrifugal pumps for the fossil-fueled power generation, marine defense and industrial refrigeration industries. The segment has operations in Virginia and New York with headquarters in Carnegie, Pennsylvania. The segment utilizes an independent group of sales offices located throughout the United States and Canada.

Executive Overview

For the FCEP segment, the forged roll market in North America has been flat as a result of end customer demand; however, order intake is expected to improve in the second half of the year, for delivery in 2025. Higher pricing and increased market share, when compared to a year ago, is expected to help minimize the effect of the expected decline in the overall volume of shipments for 2024. The cast roll market remains weak as Europe continues to experience economic uncertainty and due to the entry of low-priced product from China. The FEP market remains challenged by increased imports and high inventory levels at bar distributors. The primary focus for this segment is to maintain a strong position in the roll market and, with the completion of the previously announced capital program, to improve operational efficiencies and reliability at its domestic forge facilities and increase capacity for the manufacturing of its FEP.

For the ALP segment, businesses are benefiting from steady demand and increased market share but are facing increasing production costs and supply chain issues as a result of the lingering effects from a post-pandemic environment. The segment has been implementing price increases for certain of its products to help mitigate these inflationary effects. The focus for this segment is to grow revenues, strengthen engineering and manufacturing capabilities to keep pace with growth opportunities and continue to improve its sales distribution network.

The Corporation is actively monitoring, and will continue to actively monitor, the lingering effects from a post-pandemic environment, geopolitical and economic conditions and other developments relevant to its business including the potential impact on its operations, financial condition, liquidity, suppliers, industry, and workforce.

Selected Financial Information

Net sales approximated $110,215 and $104,803 for the three months ended March 31, 2024 and 2023, respectively. The increase is attributable to higher sales for the ALP segment. A discussion of net sales for the Corporation’s two segments is included below.

Income from operations approximated $82 and $1,993 for the three months ended March 31, 2024 and 2023, respectively. A discussion of income from operations for the Corporation’s two segments is included below.

Backlog equaled $348,824 as of March 31, 2024 versus $378,912 as of December 31, 2023. Backlog represents the accumulation of firm orders on hand which: (i) are supported by evidence of a contractual arrangement, (ii) include a fixed and determinable sales price, (iii) have reasonably assured collectability, and (iv) generally are expected to ship within two years from the backlog reporting date. Backlog at a certain date may not be a direct measure of future revenue for a particular order because price increases, negotiated subsequently to the original order, are not included in backlog until the updated contract is received from the customer and certain surcharges are not determinable until the order is complete and ready for shipment to the customer. Approximately 18% of the backlog is expected to be released after 2024. A discussion of backlog by segment is included below.

Costs of products sold, excluding depreciation and amortization, as a percentage of net sales, for the three months ended March 31, 2024 and 2023 approximated 83.9% and 82.4%, respectively. Costs of products sold, excluding depreciation and amortization, for the ALP segment increased primarily due to an unfavorable product mix. Costs of products sold, excluding depreciation and amortization, for the FCEP segment were comparable between the first quarter of 2024 and the first quarter of 2023.

Selling and administrative expenses approximated $12,973 and $12,187 for the three months ended March 31, 2024 and 2023, respectively, or an increase of $786. The increase is due primarily to higher employee-related costs and inflationary increases in expenses.

Interest expense approximated $2,757 and $2,071 for the three months ended March 31, 2024 and 2023, respectively, or an increase of $686. The increase is principally due to:

• Higher average borrowings outstanding under the revolving credit facility in 2024 versus 2023, which increased interest expense by approximately $300;
• Higher average interest rates for 2024 versus 2023, which increased interest expense by approximately $180;
• Higher interest on the sale and leaseback financing transactions, including interest on the proceeds received from the Disbursement Agreement in June 2023, of approximately $110; and,
• Higher interest on the equipment financing facility, net of capitalized interest, of approximately $70.

Other income – net is comprised of the following:

Other income – net fluctuated period over period principally due to changes in foreign exchange gains and losses.

Income tax provision for each of the periods includes income taxes associated with the Corporation’s profitable operations. An income tax benefit is not able to be recognized on losses of certain of the Corporation’s entities since it is “more likely than not” the asset will not be realized. Accordingly, changes in the income tax provision for each of the periods include the effects of changes in the pre-tax income of the Corporation’s profitable operations in each jurisdiction and changes in expectations as to whether an income tax benefit will be able to be realized for the deferred income tax assets recognized.

Valuation allowances are recorded against the majority of the Corporation's deferred income tax assets. The Corporation will maintain the valuation allowances until there is sufficient evidence to support the reversal of all or some portion of the allowances. Given the Corporation's current earnings and anticipated future earnings in Sweden, the Corporation believes there is a reasonable possibility within the next 12 months, sufficient positive evidence may become available to allow the Corporation to conclude some portion of the valuation allowance will no longer be needed. Release of any portion of the valuation allowance would result in the recognition of deferred income tax assets on the Corporation's condensed consolidated balance sheet and a decrease to the Corporation's income tax expense in the period the release is recorded. The exact timing and the amount of the valuation allowance released are subject to, among many items, the level of profitability achieved. Once the valuation allowance is completely reversed, a tax provision would be recognized on future earnings.

Net (loss) income attributable to Ampco-Pittsburgh and net (loss) income per common share attributable to Ampco-Pittsburgh equaled $(2,717) and $(0.14) per common share and $676 and $0.03 per common share for the three months ended March 31, 2024 and 2023, respectively.

Net Sales and Operating Results by Segment

Forged and Cast Engineered Products

Net sales for the three months ended March 31, 2024 increased when compared to the three months ended March 31, 2023 primarily due to the following:

• Higher volume of forged roll sales, which increased sales by approximately $3,000 for the three months ended March 31, 2024; offset by
• Lower variable-index surcharges passed through to customers as a result of fluctuation in the price of raw material, energy and transportation, net of improved pricing, which decreased net sales by approximately $1,900 for the three months ended March 31, 2024; and
• Lower volume of cast roll shipments, which decreased net sales by approximately $800 for the three months ended March 31, 2024.

Net sales of FEP were relatively comparable quarter to quarter. Changes in exchange rates did not have a significant impact on net sales for the three months ended March 31, 2024, when compared to the three months ended March 31, 2023.

Income from operations for the three months ended March 31, 2024 decreased when compared to the same period of the prior year primarily due to:

• Recognition of repairs and maintenance expenses and unabsorbed costs of $900 in the first quarter of 2024 associated with a fire at one of the Corporation's cast roll facilities;
• Lower variable-index surcharges and fluctuations in manufacturing costs, which decreased operating income by approximately $400 for the three months ended March 31, 2024;
• Lower gains on the disposal of property, plant and equipment associated with equipment being replaced in the prior year in connection with the segment’s strategic capital expenditure program of approximately $125; offset by
• Net improvement in production levels at the remaining facilities, which increased operating income by approximately $500 for the three months ended March 31, 2024; and
• Benefit from the higher net volume of shipments, which improved operating income by approximately $300 for the three months ended March 31, 2024.

Changes in exchange rates did not have a significant impact on operating income for the three months ended March 31, 2024, when compared to the three months ended March 31, 2023.

Backlog decreased at March 31, 2024 from December 31, 2023 by $23,491. The backlog for mill roll orders at March 31, 2024 decreased from December 31, 2023 by approximately $19,200 primarily due to timing of 2025 orders from most of the segment's major forged roll customers which are expected in the second and third quarter of 2024. The backlog for FEP was comparable at March 31, 2024 and December 31, 2023. Lower foreign exchange rates used to translate the backlog of the Corporation’s foreign subsidies into the U.S. dollar decreased backlog at March 31, 2024 when compared to backlog at December 31, 2023 by approximately $4,000. At March 31, 2024, approximately 12% of backlog is expected to ship after 2024.

Air and Liquid Processing

Net sales for the three months ended March 31, 2024 improved over the comparable prior year period by $5,021 principally due to an increase in shipments of air handling systems attributable to higher order intake as a result in the segment's expansion of its sales distribution network throughout 2023 and the additional manufacturing facility opened in the third quarter of 2023. Net sales of heat exchange coils for the three months ended March 31, 2024 were comparable to net sales for the three months ended March 31, 2023. Net sales of centrifugal pumps for the first quarter of 2024 benefited from a higher volume of shipments to commercial customers when compared to the first quarter of 2023.

Operating income for the three months ended March 31, 2024 decreased when compared to the three months ended March 31, 2023 principally due to:

• Unfavorable product mix and higher manufacturing costs, net of the benefit from the higher volume of shipments, which reduced operating income by approximately $400 for the three months ended March 31, 2024;
• Higher selling and administrative costs of approximately $500 for the three months ended March 31, 2024 primarily as a result of higher commissions and employee-related costs including costs associated with expansion of the segment’s sales distribution network; and
• Lease costs associated with the additional manufacturing facility of approximately $100.

Backlog at March 31, 2024 decreased from December 31, 2023 by $6,597. Backlog for air handling units decreased approximately $10,600 from December 31, 2023 due to the strong sales quarter and lower order activity as a result of the manufacturing facilities being at capacity for the balance of 2024. Backlog for heat exchange coils and centrifugal pumps improved from December 31, 2023 by approximately $2,100 and $1,900, respectively. At March 31, 2024, approximately 29% of backlog is expected to ship after 2024.

Liquidity and Capital Resources

Net cash flows from (used in) operating activities equaled $4,535 and $(4,391) for the three months ended March 31, 2024 and 2023, respectively. The change in net cash flows from operating activities for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 primarily is due to a lower investment in trade working capital offset by higher asbestos-related payments of approximately $2,400 for the three months ended March 31, 2024 when compared to the period of 2023. Asbestos-related payments are expected to continue in the foreseeable future. The amount of asbestos-related payments and corresponding insurance recoveries is difficult to predict and can vary based on a number of factors, including changes in assumptions, as outlined in Note 15 to the condensed consolidated financial statements.

Net cash flows used in investing activities equaled $(2,845) and $(3,357) for the three months ended March 31, 2024 and 2023, respectively, and primarily represented capital expenditures for the FCEP segment related to the previously announced capital program undertaken to upgrade existing equipment at certain of its locations. The capital program is substantially complete with the final asset to be placed in service during the second quarter 2024. At March 31, 2024, commitments for future capital expenditures approximated $3,300 which is expected to be spent over the next 12-15 months.

Net cash flows provided by financing activities equaled $2,028 and $4,998 for the three months ended March 31, 2024 and 2023 respectively, a decrease of $2,970 primarily due to:

• Lower proceeds from the equipment financing facility of $1,364;
• Lower net borrowings from the Corporation’s revolving credit facility of $507;
• Repayment of related-party debt in 2024 of $664 in comparison to proceeds from related-party debt of $229 in 2023; and
• Higher debt repayments of $206 primarily due to the commencement of principal payments on the equipment financing term loans.

The effect of exchange rate changes on cash and cash equivalents is primarily attributable to the fluctuation of the British pound and Swedish krona against the U.S. dollar.

As a result of the above, cash and cash equivalents increased by $3,543 during 2024 and ended the period at $10,829 in comparison to $7,286 at December 31, 2023. The majority of the Corporation’s cash and cash equivalents is held by its foreign operations. Domestic customer remittances are used to pay down borrowings under the Corporation’s revolving credit facility daily, resulting in minimal cash maintained by the Corporation’s domestic operations. Cash held by the Corporation’s foreign operations is considered to be permanently re-invested; accordingly, a provision for estimated local and withholding tax has not been made. If the Corporation were to remit any foreign earnings to it or any of its U.S. entities, the estimated tax impact would be insignificant.

Funds on hand, funds generated from future operations and availability under the Corporation’s revolving credit facility are expected to be sufficient to finance the Corporation’s operational requirements and debt service costs. The maturity date for the revolving credit facility is June 29, 2026 and, subject to the other terms and conditions of the revolving credit agreement, will become due on that date. As of March 31, 2024, remaining availability under the revolving credit facility approximated $23,174, net of standard availability reserves. Since a significant portion of the Corporation's debt includes variable interest, increases in the underlying benchmark rates will increase the Corporation's debt service costs.

Availability under the Corporation’s equipment financing facility is expected to be sufficient to finance the remaining expenditures associated with the capital program for the FCEP segment, in the time frame currently anticipated. At March 31, 2024, availability under the equipment financing facility approximated $2,147. Each borrowing on the equipment financing facility constitutes a secured loan transaction (each, a “Term Loan”). Each Term Loan converted to a Term Note on the earlier of (i) the date in which the associated equipment is placed in service or (ii) April 30, 2024 (previously March 31, 2024). Each Term Note has a term of 84 months, with payment commencing on the date of the Term Note.

While the Corporation anticipates it has sufficient liquidity to finance the Corporation’s operational requirements, debt service costs and capital expenditures, it may from time to time consider alternatives, potential transactions and other strategies in an attempt to enhance its liquidity. Given such measures are forward looking, the Corporation cannot ensure it would be successful in achieving such enhancements or be able to improve its liquidity.

Litigation and Environmental Matters

See Note 15 and Note 16 to the condensed consolidated financial statements.

Critical Accounting Pronouncements

The Corporation’s critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2023, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission (“SEC”) rules as controls and other procedures designed to ensure information required to be disclosed by a company in the reports it files under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Corporation’s management, including the principal executive officer and principal financial officer, has concluded the Corporation’s disclosure controls and procedures were effective as of March 31, 2024.

Changes in internal control. There has been no change in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

There are no material changes to the “Risk Factors” included under Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023. These “Risk Factors” should be carefully considered, understanding such risk factors may not describe every risk facing the Corporation. Additional risks and uncertainties not currently known to the Corporation or that the Corporation currently deems to be immaterial could adversely affect its business, financial condition and results of operations in the future.

Items 2-4 None.