Ampco-Pittsburgh Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2020. Ampco-Pittsburgh manufactures specialty metal products and customized equipment through two segments: Forged and Cast Engineered Products (FCEP) and Air and Liquid Processing. The results reflect significant COVID-19 disruption, including temporary FCEP facility idling, employee furloughs, customer delivery deferrals and reduced demand. The 2019 comparison includes ASW Steel as discontinued operations; ASW was sold on September 30, 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $74.8 million | $102.5 million | $165.8 million | $210.0 million |
| Income (loss) from continuing operations | $(0.1) million | $(0.7) million | $4.3 million | $(12.6) million |
| Net income (loss) attributable to Ampco-Pittsburgh | $0.7 million | $(3.9) million | $4.8 million | $(19.0) million |
| Diluted earnings (loss) per share | $0.05 | $(0.31) | $0.37 | $(1.52) |
| Operating margin | Approximately (0.1%) | Approximately (0.6%) | Approximately 2.6% | Approximately (6.0%) |
| Operating cash flow from continuing operations | Not separately reported | Not separately reported | $31.4 million | $(8.2) million |
FCEP sales declined 35.8% in the quarter and 27.2% year to date, primarily from lower mill-roll shipments, customer deferrals and reduced forged engineered product demand. Air and Liquid Processing sales increased approximately 1.5% in the quarter and 1.0% year to date. Costs of products sold improved to 80.2% of sales in Q2 and 78.5% year to date, compared with 82.5% and 83.2%, respectively, in the prior-year periods.
At June 30, 2020, cash and cash equivalents were $15.9 million, compared with $7.0 million at December 31, 2019. Total debt was $52.3 million, including $15.8 million outstanding under the revolving credit facility. Remaining revolver availability was approximately $34.4 million, net of standard reserves, and the company was in compliance with applicable covenants. Total liabilities were $411.3 million and shareholders’ equity was $61.2 million.
Material changes versus the prior comparable period
- Sales decreased $27.7 million, or approximately 27%, in Q2 and $44.2 million, or approximately 21%, for the first six months.
- Year-to-date continuing-operations results improved by $16.9 million versus 2019, helped by the absence of the $10.1 million Avonmore impairment charge, lower restructuring and bad-debt costs, elimination of Avonmore excess costs, and a $0.8 million business-interruption insurance recovery.
- The six-month 2020 results included a $3.5 million discrete CARES Act tax benefit from net operating loss carrybacks and release of part of a deferred-tax valuation allowance.
- FCEP incurred estimated net unabsorbed costs of approximately $9.6 million in Q2 and $8.4 million year to date from pandemic-related idling and furloughs, partly offset by approximately $2.4 million of foreign government subsidies and reimbursements.
- Backlog declined to $258.1 million at June 30, 2020, from $321.3 million at December 31, 2019, and $355.5 million at June 30, 2019. FCEP backlog was $205.7 million; Air and Liquid Processing backlog was $52.4 million.
- Operating cash flow improved by $39.6 million year over year, principally from lower working-capital investment and improved operating results. Debt-related financing cash outflows were $19.3 million, including $18.5 million of revolver repayments.
Outlook, risks and unusual items
Management stated that demand appeared to have bottomed during the second quarter but could not determine when, or if, demand would return to 2019 levels. No specific revenue, earnings or margin guidance was provided. Management expects funds on hand, future operating cash flow and revolver availability to fund operations and capital requirements; approximately $5.0 million of capital expenditures was committed for the next 12–18 months.
On June 23, 2020, the revolving credit facility was amended to reduce maximum borrowings to $92.5 million and extend maturity to May 20, 2022. In July 2020, the company repaid a $4.1 million industrial revenue bond upon maturity. On June 26, 2020, it filed a registration statement for a proposed rights offering of up to $20.0 million of units; the registration statement was not yet effective and proceeds were intended for restructuring, liquidity improvement and debt reduction.
Asbestos liabilities totaled approximately $191.4 million at June 30, 2020, against asbestos insurance receivables of $125.1 million. The company had 6,254 asbestos claims pending at period end and paid approximately $16.2 million of gross settlement and defense costs during the first six months, a substantial majority of which was paid or reported by insurers. Future liability and insurance recoveries could differ materially from recorded estimates.
Key risks include prolonged COVID-19-related demand weakness, order cancellations or deferrals, supply-chain and workforce disruptions, additional receivable write-offs or asset impairments, reduced revolver availability, capital-market access, cyclical steel-industry demand, commodity and foreign-exchange volatility, asbestos litigation and insurer solvency. Management concluded that disclosure controls were effective as of June 30, 2020, and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether FCEP demand, facility utilization and backlog recover after the pandemic-related second-quarter trough.
- The sustainability of improved operating cash flow and the company’s ability to maintain revolver excess-availability requirements.
- Status, pricing and dilution effects of the proposed $20.0 million rights offering.
- Future asbestos claims, settlement costs, insurance recoveries and potential insurer insolvencies.
- How much of the six-month earnings improvement reflects recurring operational changes versus the $3.5 million CARES Act tax benefit and $0.8 million insurance proceeds.
- Completion and funding of the approximately $5.0 million capital expenditure program and repayment of scheduled debt obligations.