Ampco-Pittsburgh Corporation — 2020 Form 10-K 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. The filing covers the fiscal year ended December 31, 2020, with comparative 2019 information. The company operates in the United States, Europe and China and had 1,533 active employees at year-end.
COVID-19 materially affected 2020 operations, particularly FCEP, where certain facilities were temporarily idled, employees were furloughed, and customers deferred deliveries. Air and Liquid Processing largely mitigated the pandemic’s effect on sales and operating income.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $328.5 million | $397.9 million | Down 17.4% |
| Income from continuing operations | $6.4 million | $(10.9) million | Improved $17.4 million |
| Net income attributable to Ampco-Pittsburgh | $8.0 million | $(21.0) million | Improved $29.0 million |
| Basic diluted EPS from continuing operations | $0.56 / $0.54 | $(0.95) / $(0.95) | Improved |
| Gross margin before depreciation and amortization | 21.6% | 18.0% | Up 3.6 percentage points |
| Operating cash flow from continuing operations | $33.6 million | $(3.3) million | Improved $36.9 million |
| Capital expenditures | $8.5 million | $11.0 million | Down $2.5 million |
| Cash and cash equivalents | $16.8 million | $7.0 million | Up $9.9 million |
| Total debt | $37.2 million | $70.9 million | Down $33.6 million |
| Total shareholders’ equity | $85.0 million | $55.6 million | Up $29.4 million |
All dollar amounts in the table are approximate and based on the filing’s stated amounts in thousands. The 2020 income tax benefit included a $3.5 million CARES Act benefit related to net operating loss carrybacks. Adjusted income from continuing operations, a non-GAAP measure, was $6.0 million in 2020 versus $5.7 million in 2019.
Segment results and material changes
- FCEP: Sales declined to $237.9 million from $305.6 million. The segment generated $8.6 million of operating income versus a $6.1 million loss in 2019. Lower roll shipments and reduced forged engineered product demand were partly offset by improved pricing and product mix, lower raw material costs, elimination of Avonmore costs and lower selling and administrative expenses.
- Air and Liquid Processing: Sales declined modestly to $90.7 million from $92.3 million, while operating income increased to $10.1 million from $10.0 million. Product mix and process improvements offset lower heat exchanger volume and competitive pricing pressure.
- Backlog: Consolidated backlog decreased to $246.1 million from $321.3 million. FCEP backlog declined to $191.9 million from $270.7 million, primarily because of COVID-related customer postponements. Air and Liquid backlog increased to $54.2 million from $50.6 million.
- Restructuring: Prior-year actions included the sale of the Avonmore Plant and ASW Steel, operational improvements and workforce reductions. The company stated that these actions reduced annualized costs and eliminated approximately $4.6 million of Avonmore excess costs.
- Equity financing and debt reduction: In September 2020, the company issued 5.5 million common shares and 12.3 million Series A warrants for gross proceeds of $19.3 million and net proceeds of $18.1 million. Most proceeds were used to repay revolving credit borrowings.
- Share count and warrants: Common shares issued and outstanding increased to 18.3 million at year-end from 12.7 million. Each Series A warrant permits the purchase of 0.4464 shares at an effective price of $5.75 per whole share and expires August 1, 2025.
Liquidity, debt and cash flow
Operating cash flow improved substantially because of lower working-capital investment and better operating results. Cash increased to $16.8 million at year-end, although the majority was held by foreign operations and domestic cash was generally used to reduce revolving borrowings.
- The amended asset-based revolving credit facility permits borrowings of up to $92.5 million, matures May 20, 2022, and had $6.0 million outstanding at December 31, 2020.
- Remaining revolver availability was approximately $48.3 million, net of standard availability reserves. The company was in compliance with applicable bank covenants at year-end.
- Debt included $6.0 million of revolver borrowings, $19.9 million of sale-and-leaseback financing, $9.2 million of industrial revenue bonds, $1.1 million of minority shareholder debt and $1.1 million of finance leases.
- The company repaid a $4.1 million Industrial Revenue Bond at maturity during 2020.
- Expected capital expenditure commitments were approximately $3.3 million over the following 12 to 18 months.
- Management stated that cash on hand, future operating cash flow and revolver availability were expected to fund operating and capital requirements, while also intending to negotiate a longer-term credit arrangement before the revolver maturity.
Outlook, commentary, risks and unusual items
Management indicated that demand appeared to bottom in the second quarter of 2020 and could return to 2019 levels in the latter part of 2021, assuming no additional mass COVID-19 shutdowns. The company expected manufacturing-efficiency and cost-saving initiatives to mitigate inflationary pressures, although commodity-cost increases may not be fully recoverable through pricing.
- COVID-19 could continue to cause customer delays or cancellations, facility shutdowns, supply-chain disruptions, employee absences, impairment charges, receivable write-offs and liquidity pressure.
- FCEP remains exposed to cyclical steel, aluminum and oil-and-gas markets, excess global steel capacity, pricing pressure and foreign-currency volatility.
- Commodity prices and availability, particularly steel scrap, energy, ferroalloys and graphite electrodes, may affect margins and production.
- Asbestos liabilities totaled $180.2 million at year-end, offset by $117.9 million of related insurance receivables. The company paid $8.7 million of net asbestos-related costs in 2020 and expected approximately $6.0 million in 2021. Future claims, defense costs and insurer solvency could materially change the estimates.
- The company recorded a $0.3 million asbestos-related charge for the potential insolvency of an insurance carrier.
- Approximately 36% of employees were covered by collective bargaining agreements, with agreements covering approximately 65% of those employees expiring in 2021. One agreement covering 25% of covered employees was subsequently extended to March 2025.
- The company has not paid cash dividends since mid-2017 and does not expect to resume dividends in the foreseeable future.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020. The company is a smaller reporting company and its auditor was not required to attest to internal control effectiveness.
Most important facts for investors to verify
- Whether FCEP volumes, backlog and customer order patterns recover as management anticipated, particularly after the COVID-19 disruption.
- The company’s ability to refinance or extend the $92.5 million revolving credit facility before its May 2022 maturity.
- Actual revolver availability, covenant compliance and cash location, including the accessibility of foreign-held cash.
- The sustainability of 2020 profitability excluding the $3.5 million CARES Act tax benefit and other unusual items.
- The ultimate cost of asbestos claims and the collectability of the $117.9 million insurance receivable, including potential insurer insolvencies and coverage erosion.
- The dilution impact and exercise activity of the outstanding Series A warrants and other equity awards.
- Whether capital spending, pension obligations, deferred payroll taxes and asbestos payments can be funded from operating cash flow.