Ampco-Pittsburgh Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2021, filed August 9, 2021. 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 financial statements are unaudited and presented in thousands, except per-share data.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $92,428 | $74,778 | $179,228 | $165,841 |
| Income from operations | $469 | $(86) | $1,376 | $4,265 |
| Operating margin | 0.5% | (0.1)% | 0.8% | 2.6% |
| Net income attributable to Ampco-Pittsburgh | $1,063 | $668 | $1,230 | $4,810 |
| Diluted earnings per share | $0.05 | $0.05 | $0.06 | $0.37 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $(2,754) | $31,435 |
Six-month costs of products sold rose to 80.9% of sales from 78.5%, primarily due to higher raw-material costs and product mix. Selling and administrative expense increased to $23,628 from $22,029. The company reported $2,127 of other income in the second quarter and $1,915 for the six-month period, including investment income, pension-related income and other items.
- FCEP second-quarter sales increased 41% to $71,028, while segment pretax income increased to $1,674 from a $423 loss. Six-month sales increased 13% to $134,379, but segment pretax income declined to $3,520 from $4,133.
- ALP second-quarter sales declined 12% to $21,400 and segment pretax income declined to $2,062 from $2,846. Six-month sales declined 4% to $44,849 and segment pretax income declined to $4,374 from $5,430.
- Backlog was $253,706 at June 30, 2021, compared with $246,131 at December 31, 2020. FCEP backlog declined to $189,860 from $191,919, while ALP backlog increased to $63,846 from $54,212.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $13,313 at June 30, 2021, compared with $16,842 at December 31, 2020.
- Total assets were $468,954 and total shareholders’ equity was $91,608, compared with $463,208 and $84,999, respectively, at year-end.
- Total borrowings were $40,882, including $14,269 classified as current debt, compared with total borrowings of $37,243 at December 31, 2020.
- The amended and restated asset-based revolving facility provides $100,000 of capacity, expandable to $130,000 with lender approval, and matures June 29, 2026. Borrowings were $10,131, with approximately $46,700 of remaining availability, net of reserves. The company was in compliance with applicable covenants.
- Capital expenditures were $6,714 for the first six months. Future capital expenditure commitments were approximately $18,400, within a broader FCEP upgrade program expected to cost approximately $25,000 to $30,000 over three years.
Material changes versus the prior comparable period
- Second-quarter sales improved substantially as mill-roll shipments and forged engineered product shipments recovered with improving customer demand. Management stated that FCEP roll-market conditions remained below pre-pandemic levels, with sales orders expected to return to pre-pandemic levels in 2022.
- Despite higher sales, six-month operating income and attributable net income declined because the prior-year period included a $3,502 CARES Act tax benefit and $769 of business-interruption insurance proceeds. These items had a combined favorable impact of approximately $0.34 per share in the first half of 2020.
- Operating cash flow deteriorated by $34,189 year over year to a use of $2,754, primarily because working capital increased as business activity recovered.
- The company received $3,217 from warrant exercises and used net revolving-credit borrowings of $4,131 during the first half of 2021, compared with $18,500 of revolving-credit repayments in the prior-year period.
- Common shares issued and outstanding increased to 19.076 million at June 30, 2021, from 18.312 million at December 31, 2020, primarily reflecting warrant exercises and other stock issuances.
Outlook, risks and unusual items
Management described improving FCEP demand, including recovery in steel distribution and oil and gas markets, while focusing on diversification, operational efficiency and capacity-enhancing capital investment. ALP demand was mixed: Aerofin showed initial improvement, Buffalo Air Handling had steady demand but pricing pressure, and Buffalo Pumps benefited from marine-defense demand.
- COVID-19 may continue to cause customer delays or cancellations, temporary facility disruptions, workforce constraints, supply-chain interruptions and asset impairment or receivable losses. The company cannot determine the pandemic’s full future impact.
- Asbestos liabilities were $170,776 at June 30, 2021, offset by an asbestos insurance receivable of $112,279. The company reported 6,064 total pending claims, including 3,159 active claims after administrative closures. Actual costs and insurance recoveries could differ materially from estimates.
- The company’s income tax provision included approximately $745 related to restructuring a foreign sales office and revaluing U.K. deferred taxes following legislation increasing the future U.K. tax rate.
- Other principal risks include cyclical demand, excess global steel capacity, foreign-exchange and commodity-price volatility, Brexit-related burdens, access to capital, equipment failures, labor disruptions, cybersecurity, exchange-listing requirements and asbestos litigation.
- No material changes were reported to the risk factors in the 2020 Form 10-K. Management concluded that disclosure controls and procedures were effective as of June 30, 2021.
Important facts for investors to verify
- Whether operating cash flow recovers as working-capital investment normalizes and whether the company can fund its planned FCEP capital program without materially increasing borrowings.
- Progress toward the stated expectation that FCEP orders return to pre-pandemic levels in 2022, including trends in mill rolls, FEP and backlog conversion.
- Whether higher raw-material costs, unfavorable product mix and ALP pricing pressure continue to constrain margins.
- Availability under the revolving credit facility, covenant compliance and refinancing or funding alternatives for future capital needs.
- Updates to asbestos claim activity, reserve assumptions, insurance recoveries and insurer solvency.
- The effect of the prior-year CARES Act tax benefit and other unusual items when assessing year-over-year earnings quality.