Ampco-Pittsburgh Corporation: Q3 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2020, filed November 16, 2020. Ampco-Pittsburgh manufactures engineered specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing.
Financial performance and liquidity
Amounts are in thousands, except per-share data.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $75,674 | $90,872 | $241,515 | $300,885 |
| Income (loss) from continuing operations | $178 | $(1,340) | $4,443 | $(13,952) |
| Net income (loss) | $1,238 | $(4,621) | $6,701 | $(23,026) |
| Net income (loss) attributable to Ampco-Pittsburgh | $968 | $(5,055) | $5,778 | $(24,061) |
| Diluted EPS from continuing operations | $0.07 | $(0.13) | $0.43 | $(1.19) |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $33,944 | $(8,194) |
- Sales declined approximately 16.7% in Q3 and 19.7% year to date, principally because COVID-19 caused lower FCEP shipments and customer delivery deferrals.
- Operating margin was approximately 0.2% in Q3 2020 versus negative 1.5% in Q3 2019; year-to-date operating margin was approximately 1.8% versus negative 4.6%.
- Cash and cash equivalents increased to $18,280 at September 30, 2020, from $6,960 at December 31, 2019.
- Total debt declined to $32,598 from $70,857 at year-end 2019. The revolving credit facility had no borrowings outstanding, with approximately $55,800 of remaining availability, net of reserves. The company was in compliance with applicable covenants.
- Capital expenditures were $6,015 through September 30, 2020. Future capital expenditure commitments approximated $5,000 over the next 12 to 18 months.
Material changes versus the prior comparable period
- FCEP sales fell to $54,499 in Q3 and $173,723 year to date, from $67,452 and $231,299, respectively. FCEP nevertheless improved to operating income of $1,301 in Q3 and $5,434 year to date, compared with losses of $437 and $10,640.
- Air and Liquid Processing sales declined modestly to $21,175 in Q3 and $67,792 year to date. Segment income was broadly stable in Q3 and increased to $7,691 year to date from $7,371.
- Costs of products sold as a percentage of sales improved to 78.6% in Q3 and 78.5% year to date, from 83.1% and 83.2%. Benefits included the Avonmore plant closure, lower raw-material costs, improved pricing and product mix, and lower expenses; these were partly offset by COVID-related unabsorbed costs.
- The prior-year periods included a $10,082 Avonmore impairment charge, $9,031 of discontinued-operation losses from ASW, restructuring costs, and other unusual items. These items did not recur in 2020.
- September 2020’s equity rights offering generated $18,150 of net proceeds after issuance costs, funding repayment of revolving debt. The offering issued 5,507,889 common shares and 12,339,256 Series A warrants, increasing common shares outstanding to approximately 18.312 million.
- Backlog decreased to $259,785 at September 30, 2020, from $321,331 at December 31, 2019, primarily due to lower FCEP backlog. Air and Liquid Processing backlog increased to $64,341 from $50,594.
Outlook, commentary, risks and unusual items
- Management stated that demand appeared to bottom in the second quarter and could return to 2019 levels in the latter part of 2021, assuming no additional mass COVID-19 shutdowns. This is not formal quantitative guidance.
- COVID-19 led to temporary FCEP facility idling, employee furloughs, delivery delays, potential order cancellations, approximately $1,000 of bad-debt and slow-moving-inventory reserves, and approximately $2,800 of foreign-government subsidies and reimbursements.
- The CARES Act produced a $3,502 tax benefit and refund through net operating loss carrybacks. Management cautioned that the pandemic could cause further receivable write-offs, asset impairments, supply-chain disruptions and liquidity pressure.
- Asbestos liabilities totaled $185,934 at September 30, 2020, with related insurance receivables of $121,584. There were 5,868 pending asbestos claims, and gross settlement and defense costs paid during the first nine months were $21,699, substantially covered by insurers. Future adjustments could be material.
- The company deferred $3,794 of employee benefit plan contributions, due in January 2021, and $1,424 of employer-side social security payments, due in December 2021 and December 2022.
- Other risks include cyclical steel demand, excess global steel capacity, commodity prices, access to capital, covenant availability requirements, asbestos insurance recoveries, environmental matters, exchange rates, cybersecurity, NYSE listing compliance and potential warrant dilution.
- No cash dividend has been declared since mid-2017, and the company does not expect to declare dividends in the foreseeable future.
Most important facts for investors to verify
- Whether FCEP shipment volumes, customer deferrals and backlog stabilize after the COVID-19 downturn.
- Whether the company can sustain positive operating cash flow and preserve approximately $55,800 of revolving-credit availability.
- The timing and cash impact of deferred benefit-plan contributions, social security payments and other obligations.
- The adequacy of asbestos reserves and insurance recoveries, including insurer solvency and potential future reserve changes.
- The effect of the equity offering and outstanding Series A warrants on future share count, dilution and liquidity.
- Whether the projected recovery toward 2019 demand levels in late 2021 occurs and whether further impairment, restructuring or pandemic-related charges arise.