Ampco-Pittsburgh Corporation: Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Ampco-Pittsburgh manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing. The 2019 comparison excludes ASW Steel, which was sold in September 2019 and reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $91.1 million | $107.5 million | Down 15.3% |
| Income (loss) from continuing operations | $4.4 million | $(12.0) million | Improved $16.3 million |
| Net income attributable to Ampco-Pittsburgh | $4.1 million | $(15.1) million | Improved $19.3 million |
| EPS from continuing operations | $0.33 | $(1.03) | Improved $1.36 |
| Operating cash flow from continuing operations | $12.6 million | $(7.1) million | Improved $19.7 million |
| Cash and cash equivalents | $13.9 million | $7.0 million at Dec. 31, 2019 | Up $7.0 million |
| Total debt | $68.2 million | $70.9 million at Dec. 31, 2019 | Down $2.6 million |
Costs of products sold were 77.0% of sales versus 83.9% in the prior-year quarter. Reported operating margin was approximately 4.8% versus negative 11.1% in Q1 2019. Net income margin attributable to Ampco-Pittsburgh was approximately 4.5% versus negative 14.1%.
Capital expenditures were $1.9 million, and management expected approximately $5.0 million of additional capital expenditures over the following 12 months. Revolving credit facility availability was approximately $31.0 million at March 31, 2020. The facility had $31.5 million outstanding, matures May 20, 2021, and the company was in compliance with applicable covenants.
Material changes versus the prior comparable period
- Sales declined primarily from lower FCEP shipment volumes, partly offset by more favorable product mix. FCEP sales fell to $68.8 million from $85.3 million, while Air and Liquid Processing sales were broadly stable at $22.3 million versus $22.2 million.
- FCEP pretax income improved to $4.6 million from a $10.0 million loss. Air and Liquid Processing pretax income increased to $2.6 million from $2.1 million.
- The prior-year period included a $10.1 million impairment charge related to the Avonmore plant, $0.9 million of restructuring-related costs, approximately $2.2 million of Avonmore excess costs, and a $2.2 million loss from discontinued operations.
- Q1 2020 benefited from approximately $3.5 million of discrete tax benefits under the CARES Act and $0.8 million of business interruption insurance proceeds. Management stated these benefits substantially offset adverse COVID-19 effects in the quarter.
- Backlog declined to $278.0 million from $321.3 million at December 31, 2019, and $349.4 million at March 31, 2019. FCEP backlog decreased to $220.6 million, while Air and Liquid Processing backlog increased to $57.4 million.
- The company generated positive operating cash flow and reduced debt, compared with negative operating cash flow and significant debt repayment and revolver borrowing activity in Q1 2019.
Outlook, risks, contingencies, and unusual items
Management provided no formal quantitative earnings or revenue guidance. It expects ongoing benefits from the Avonmore sale, operational improvements, lower costs, and workforce reductions, but stated that COVID-19 will hamper anticipated earnings.
- Certain FCEP operations were temporarily idled and employees furloughed. Customers requested order delays, with potential cancellations and further demand reductions. Approximately 21% of FCEP backlog was expected to ship after 2020, and COVID-19 could defer more shipments.
- Management recognized approximately $1.0 million of additional reserves for anticipated bad debts and slow-moving inventory, as well as higher foreign-exchange losses and unrealized losses on Rabbi trust investments.
- COVID-19 could cause further supply-chain and manufacturing disruptions, additional receivable write-offs, asset impairments, reduced borrowing-base availability, covenant pressure, and weaker access to capital markets.
- The company is seeking to refinance or extend its revolving credit facility before its May 2021 maturity. There is no assurance that refinancing will be completed or available on favorable terms.
- Asbestos liabilities totaled $201.4 million at March 31, 2020, with related insurance receivables of $132.9 million. The company had approximately 6,181 asbestos claims pending at quarter-end. Actual costs and insurance recoveries could differ materially from recorded estimates.
- Environmental compliance liability was estimated at approximately $0.2 million. Outstanding letters of credit were approximately $19.5 million and surety bonds approximately $3.4 million.
Most important facts for investors to verify
- Whether COVID-19 caused additional order cancellations, backlog deferrals, plant idlings, furloughs, or margin deterioration after March 31, 2020.
- The company’s ability to maintain required excess availability and fixed-charge coverage under the revolving credit facility.
- Progress and terms of refinancing or extending the May 20, 2021 credit facility maturity.
- Actual cash collections, bad-debt experience, inventory levels, and borrowing-base availability as demand weakened.
- Changes in asbestos claims, settlement costs, insurance recoveries, insurer solvency, and the adequacy of the $201.4 million reserve.
- The extent to which Q1 profitability depended on the $3.5 million CARES Act tax benefit and $0.8 million insurance proceeds rather than recurring operations.