Ampco-Pittsburgh Corporation — Q3 2021 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). This unaudited report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $81,185 | $75,674 | $260,413 | $241,515 |
| Operating income (loss) | $(2,361) | $178 | $(985) | $4,443 |
| Net income (loss) | $(1,466) | $1,238 | $72 | $6,701 |
| Net income (loss) attributable to Ampco-Pittsburgh | $(1,589) | $968 | $(359) | $5,778 |
| Basic earnings (loss) per share | $(0.08) | $0.07 | $(0.02) | $0.45 |
| Operating margin | (2.9%) | 0.2% | (0.4%) | 1.8% |
| Cash flow from operations | Not separately provided | Not separately provided | $(4,398) | $33,944 |
Net sales increased 7.3% in the quarter and 7.8% year to date. Costs of products sold rose to 83.7% of sales in Q3 from 78.6% in the prior-year quarter and to 81.8% from 78.5% for the nine-month period. Higher costs primarily reflected raw materials, energy, transportation, maintenance, machine outages and product mix.
At September 30, 2021, cash and cash equivalents were $12,251, compared with $16,842 at December 31, 2020. Total assets were $463,874 and total shareholders’ equity was $88,661. Outstanding debt was $47,900, including $16,516 under the revolving credit facility. Remaining revolver availability was approximately $42,000, net of standard reserves, and the company was in compliance with applicable covenants.
Capital expenditures were $11,982 during the first nine months. The company has a planned FCEP capital program of approximately $25,000 to $30,000 over two to three years; commitments for future capital expenditures were approximately $20,000 at quarter-end.
Material changes versus the prior comparable period
- FCEP sales increased 12.3% in Q3 and 12.6% year to date, driven by higher forged engineered product and mill-roll shipments. FCEP operating results declined to a $2,832 loss in Q3 from $1,301 of income and to $688 of income year to date from $5,434.
- ALP sales declined 5.5% in Q3 and 4.3% year to date because of lower shipments and supply-chain and transportation constraints. ALP operating income increased 28% in Q3 to $2,891 but declined 6% year to date to $7,265.
- Operating cash flow deteriorated by $38,342 year to date, primarily because of increased working capital as activity recovered from pandemic-affected levels.
- The 2020 comparison benefited from a $3,502 CARES Act tax benefit and $769 of business-interruption insurance proceeds. Management stated that these items increased 2020 earnings per share by a combined $0.33.
- Financing cash flow was positive $11,609 in 2021 versus negative $17,428 in 2020, reflecting net revolver borrowings of $10,516 and $3,308 of warrant-exercise proceeds. The prior year included $18,150 of rights-offering proceeds.
- Backlog increased to $278,263 from $246,131 at December 31, 2020; the majority was expected to ship in 2022.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical earnings or revenue guidance. FCEP market conditions were improving but remained below pre-pandemic levels, with management expecting sales orders to return to pre-pandemic levels in 2022. FCEP is pursuing price increases, surcharge changes, product diversification, productivity improvements and equipment upgrades. ALP reported steady demand and is implementing price increases and productivity initiatives.
- COVID-19 and the Delta variant continued to create risks involving customer delays or cancellations, raw-material availability, transportation, facility disruptions, labor availability and higher production costs.
- Inflation in raw materials, energy and transportation, together with extended equipment outages, pressured margins.
- Asbestos liability was $165,867 at September 30, 2021, offset by an asbestos insurance receivable of $109,713. The company had approximately 3,094 active asbestos claims after administrative closures. Actual liability and insurance recoveries could differ materially from recorded estimates.
- Insurance coverage may be eroded by claims involving Howden, and recoveries depend on insurer solvency, policy limits and settlement-agreement compliance.
- Other identified risks include cyclical steel demand, excess global capacity, foreign-exchange movements, commodity prices, Brexit-related restrictions, restructuring execution, capital availability, labor actions, equipment reliability, cybersecurity and exchange-listing compliance.
- Environmental remediation and compliance exposure was approximately $100 at September 30, 2021.
Management stated that available cash, expected operating cash flow and revolver availability should be sufficient for operating and capital requirements, while also noting that it was exploring potential financing alternatives. Disclosure controls and procedures were concluded to be effective, and no material changes to internal control over financial reporting were identified.
Most important facts for an investor to verify
- Whether FCEP price increases and surcharges offset continuing raw-material, energy, transportation and maintenance inflation.
- The sustainability and timing of the anticipated 2022 recovery in FCEP orders and backlog conversion.
- Operating cash-flow recovery, working-capital needs and the company’s ability to fund approximately $20,000 of committed capital expenditures.
- Revolver availability, covenant compliance, borrowing costs and refinancing or other financing alternatives before the June 2026 maturity.
- Future asbestos claims, insurance recoveries, insurer solvency and potential reserve adjustments through the projected 2052 resolution period.
- The effect of the 2020 CARES Act tax benefit and business-interruption proceeds when assessing year-over-year earnings quality.