AMPCO-PITTSBURGH CORPORATION (in thousands, except per share amounts)
EXECUTIVE OVERVIEW
Liquidity
The Corporation continues to focus on improving its financial strength and
reducing indebtedness. In
COVID-19
On
In
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On
To date, in response to the pandemic, the Corporation has:
• Periodically and temporarily idled certain of its forged and cast roll
manufacturing facilities due to market conditions resulting in unabsorbed
costs;
• Furloughed employees, particularly within the FCEP segment;
• Received approximately $4,200 in the form of subsidies and reimbursements
for a portion of furloughed employee costs from certain foreign
jurisdictions in which the Corporation operates;
• Recognized approximately $1,000 of anticipated bad debts and slow-moving
inventory reserves in the first quarter of 2020 for customers expected to be
more severely impacted by the pandemic;
• Deferred contributions to employee benefits plans until the end of 2020, and
employer-side social security payments of $2,163 to the end of 2021 and
2022; and
• Recognized a discrete income tax benefit of $3,502 , upon enactment of the
CARES Act, for the carryback of net operating losses to an earlier period,
at a higher tax rate, thereby releasing a portion of the valuation allowance
the Corporation had previously established against its deferred income tax
assets. The carryback of net operating losses resulted in a refund of income
taxes previously paid of $3,502 .
It is difficult to isolate the impact of the pandemic on the Corporation's operating results, particularly in relation to the unabsorbed costs resulting from the periodic and temporary idling of certain of the Corporation's forged and cast roll operations, furloughing of certain of its employees and movements in the global foreign exchange and equity markets. Additionally, the Corporation is uncertain of the full effect the pandemic will have on it for the longer term. The Corporation may experience long-term disruptions to its operations resulting from changes in government policy or guidance; quarantines of employees, customers and suppliers in areas affected by the pandemic; and closures of businesses or manufacturing facilities critical to its business or supply chains. It may also incur higher write-offs of accounts receivables and impairment charges on its asset values, including property, plant and equipment and intangible assets. The Corporation is actively monitoring, and will continue to actively monitor, the pandemic and the potential impact on its operations, financial condition, liquidity, suppliers, industry, and workforce.
Restructuring Efforts
During 2019, the Corporation undertook significant measures to return to profitability, which helped to offset some of the adverse effects stemming from the pandemic. Restructuring efforts included:
• Completing the sale of certain assets ofAkers National Roll Company ("ANR"), an indirect subsidiary of the Corporation located inAvonmore, Pennsylvania ("Avonmore Plant") inSeptember 2019 , which eliminated excess capacity and net operating costs from the Corporation's cost structure of approximately$4,572 (the "Excess Costs ofAvonmore "); • Completing the sale ofASW Steel, Inc. ("ASW"), an indirect subsidiary of the Corporation, which had net losses of$9,085 in 2019 and required significant funding; • Implementing operational and efficiency improvements at its domestic forged roll facilities and commencing similar initiatives at its European cast roll operations in the second half of 2019; and • Completing selected reductions in force across the organization, which yielded an annualized savings of approximately$4,000 . 14
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The Segments
The FCEP segment produces forged hardened steel rolls, cast rolls and open-die
forged products. Forged hardened steel rolls are used primarily in cold rolling
mills by producers of steel, aluminum and other metals. Cast rolls, which are
produced in a variety of iron and steel qualities, are used mainly in hot and
cold strip mills, medium/heavy section mills and plate mills. Forged engineered
products ("FEP") are principally sold to customers in the steel distribution
market, oil and gas industry and the aluminum and plastic extrusion industries.
The segment has operations in
Roll market conditions improved late in 2020 as steel demand and pricing began to show signs of recovering from the COVID-related downturn earlier in the year. The oil and gas market also showed signs of improvement and demand increased starting toward the end of the third quarter of 2020. The primary focus for this segment is diversification and development of its forged engineered products for use in other industries and ongoing operational and efficiency improvements at its facilities.
The Air and Liquid Processing segment includes
CONSOLIDATED RESULTS OF OPERATIONS OVERVIEW
The Corporation
2020 2019
Net Sales :
Forged and Cast Engineered Products $ 237,889 72 % $ 305,630 77 %
Air and Liquid Processing 90,655 28 % 92,274 23 %
Consolidated $ 328,544 100 % $ 397,904 100 %
Income (Loss) from Continuing Operations:
Forged and Cast Engineered Products (1)$ 8,621 $ (6,130 ) Air and Liquid Processing 10,133 10,002 Corporate costs (12,308 ) (14,780 ) Consolidated$ 6,446 $ (10,908 )
Backlog:
Forged and Cast Engineered Products$ 191,919 78 %$ 270,737 84 % Air and Liquid Processing 54,212 22 % 50,594 16 % Consolidated$ 246,131 100 %$ 321,331 100 % (1) Income (loss) from continuing operations for the Forged and Cast Engineered Products segment for 2019 includes an impairment charge of$10,082 to record the Avonmore Plant at its estimated net realizable value less costs to sell.
Net sales equaled
Backlog equaled
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years from the backlog reporting date. Prior to
Gross margin, excluding depreciation and amortization, as a percentage of net
sales was 21.6% and 18.0% for 2020 and 2019, respectively. The improvement is
principally associated with the FCEP segment which benefited from the
elimination of the Excess Costs of
Selling and administrative expenses totaled
• Lower bad debt expense of approximately$1,229 principally due to bad debt expense of$1,366 for a cast roll customer who filed for bankruptcy in 2019 (the "Bad Debt Expense"); • Lower professional fees and employee severance costs of approximately$2,719 associated with the Corporation's restructuring efforts, which began in the first quarter of 2019, and ongoing cost containment initiatives; • Lower employee-related costs, in part, due to reduction-in-force actions completed in 2019; • Lower commissions of approximately$1,937 primarily due to the lower volume of FEP sales; and • Elimination of selling and administrative expenses at the Avonmore Plant of approximately$704 .
Depreciation and amortization equaled
Impairment charge of
Charge for asbestos litigation of
Investment-related income equaled
Interest expense equaled
Other income - net equaled
Income tax benefit (provision) equaled
Loss from discontinued operations, net of tax for 2019 of
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Net income attributable to
Non-GAAP Financial Measures
The Corporation presents below non-GAAP adjusted income from continuing
operations, which is calculated as income (loss) from continuing operations,
excluding the Impairment Charge, the Restructuring-Related Costs, the Excess
Costs of
The Corporation presents non-GAAP adjusted income from continuing operations for
each of the years because it is a key measure used by the Corporation's
management and its Board of Directors to understand and evaluate the
Corporation's operating performance and to develop operational goals for
managing its business. This non-GAAP financial measure excludes significant
charges or credits, that are one-time in nature, unrelated to the Corporation's
ongoing results of operations or beyond its control. Additionally, a portion of
the incentive and compensation arrangements for certain employees is based on
the Corporation's business performance. The Corporation believes this non-GAAP
financial measure helps identify underlying trends in its business that could
otherwise be masked by the effect of the items that it excludes from adjusted
income from continuing operations. In particular, the Corporation believes that
the exclusion of the Impairment Charge, the Restructuring-Related Costs, the
Excess Costs of
Adjusted income from continuing operations is not prepared in accordance with
GAAP and should not be considered in isolation of, or as an alternative to,
measures prepared in accordance with GAAP. There are limitations related to the
use of adjusted income from continuing operations rather than income (loss) from
continuing operations, which is the nearest GAAP equivalent. Among other things,
the Excess Costs of
The adjustments reflected in adjusted income from continuing operations are pre-tax. There is no significant tax impact associated with these adjustments due to the Corporation having a valuation allowance recorded against a substantial majority of its deferred income tax assets for the jurisdictions where the expenses are recognized.
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The following is a reconciliation of income (loss) from continuing operations to non-GAAP adjusted income from continuing operations for 2020 and 2019, respectively:
2020 2019
Income (loss) from continuing operations, as reported (GAAP)
Impairment Charge (1) 0 10,082 Restructuring-Related Costs (2) 0 2,350 Excess Costs of Avonmore (3) 0 4,572 Bad Debt Expense (4) 0 1,366 Proceeds from Business Interruption Insurance Claim (5) (769 ) (1,803 ) Asbestos-Related Charge (6) 283 0
Income from continuing operations, as adjusted (Non-GAAP)
(1) Represents an impairment charge recognized in the first quarter of 2019 to
record the Avonmore Plant to its estimated net realizable value less costs
to sell in anticipation of its sale, which was completed in September 2019 .
(2) Represents professional fees associated with the Corporation's overall
restructuring plan and employee severance costs due to reductions in force.
(3) Represents estimated net operating costs not expected to continue after the
sale of the Avonmore Plant, which was completed in September 2019 . The
estimated excess costs include judgments made by the Corporation in
allocating manufacturing and operating costs between ANR and the
Corporation's other operations and in anticipating how it will conduct
business following the sale of the Avonmore Plant.
(4) Represents bad debt expense for a British cast roll customer who filed for
bankruptcy in 2019.
(5) Represents business interruption insurance proceeds received in 2020 and
2019 for equipment outages that occurred in 2018.
(6) Represents a charge for the potential insolvency of an asbestos-related
insurance carrier.
Forged and Cast Engineered Products
2020 2019
Net sales $ 237,889 $ 305,630
Operating income (loss) $ 8,621 $ (6,130 )
Backlog $ 191,919 $ 270,737 Net sales decreased by
• Lower volume of shipments of mill rolls, both forged and cast, as a result
of customers temporarily deferring deliveries in response to the COVID-19
pandemic, which reduced net sales by approximately $68,900 ; and
• Lower demand for FEP due principally to the depressed oil and gas industry,
which reduced net sales by approximately $8,300 ; offset by
• More favorable pricing and product mix during the current year, which
improved sales by approximately $8,300 when compared to the prior year.
Operating results improved
• The Impairment Charge of$10,082 to write down certain assets of the Avonmore Plant to their estimated net realizable value; • The Excess Costs ofAvonmore of approximately$4,572 , which were eliminated in connection with the sale of Avonmore Plant; • A portion of the Restructuring-Related Costs, or$816 , due to reductions in force; and • The Bad Debt Expense of$1,366 for a cast roll customer who filed for bankruptcy in 2019.
In addition, operating results for the current year benefited from:
• Changes in pricing and product mix which favorably impacted earnings by
approximately $3,300 ;
• Lower raw material costs which positively impacted operating results by
approximately $4,500 ; and
• Lower selling and administrative expense of approximately $4,600 due to a
lower cost structure attributable to restructuring efforts taken in the
prior year and lower commissions associated with the lower volume of FEP
sales.
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However, operating results for the current year were adversely affected by:
• Unabsorbed costs largely due to the periodic and temporary idling of certain
facilities and furloughing employees caused by the pandemic, a portion of
which was offset by subsidies and reimbursements from certain foreign
jurisdictions, resulting in a net negative impact on earnings of
approximately $8,900 in 2020;
• Lower volume of shipments which adversely impacted operating results for the
current year by approximately $5,000 when compared to the prior year;
• Lower Proceeds from the Business Interruption Insurance Claim which equaled
$769 in 2020 versus $1,803 in 2019, a difference of $1,034 ; and
• Charges for anticipated bad debts and slow-moving inventory reserves of
approximately $1,000 for customers expected to be more severely impacted by
the pandemic.
Changes in exchange rates for the current year, when compared to the prior year, did not have a significant impact on sales or operating results.
Backlog equaled
Air and Liquid Processing
2020 2019
Net sales $ 90,655 $ 92,274
Operating income $ 10,133 $ 10,002
Backlog $ 54,212 $ 50,594 Net sales for 2020 decreased from the prior year by
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by (used in) operating activities for continuing
operations equaled
Deferred employer-side social security payments equaled
Net cash flows used in investing activities for continuing operations equaled
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Net cash flows used in financing activities for continuing operations equaled
The effect of exchange rate changes on cash and cash equivalents is primarily
attributable to the fluctuation of the British pound and Swedish krona against
the
Net cash flows used in discontinued operations for 2019 represent the cash flows of ASW.
As a result of the above, cash and cash equivalents increased by
Funds on hand, funds generated from future operations and availability under the
revolving credit facility are expected to be sufficient to finance operational
and capital expenditure requirements of the Corporation. The maturity date for
the revolving credit facility is
With respect to environmental matters, see Note 22 , Environmental Matters, to the Consolidated Financial Statements. With respect to litigation, see Note 20 , Litigation, to the Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
The Corporation's off-balance sheet arrangements include the previously mentioned expected future capital expenditures and letters of credit unrelated to the Industrial Revenue Bonds. See Note 12 , Commitments and Contingent Liabilities, to the Consolidated Financial Statements. These arrangements are not considered significant to the liquidity, capital resources, market risk, or credit risk of the Corporation.
EFFECTS OF INFLATION
While inflationary and market pressures on costs are likely to be experienced, it is anticipated that ongoing improvements in manufacturing efficiencies and cost savings efforts will mitigate the effects of inflation on the Corporation's 2021 operating results. The ability to pass on increases in the price of commodities to the customer is contingent upon current market conditions, with the Corporation potentially having to absorb some portion or all of the increase. Product pricing for the FCEP segment's mill roll product is reflective of current costs, with a significant portion of orders subject to a variable-index surcharge program which helps to protect the segment and its customers against the volatility in the cost of certain raw materials and natural gas. Additionally, long-term labor agreements exist at each of the key locations. Certain of these agreements will expire in 2021. As is consistent with past practice, the Corporation will negotiate with the intent to secure mutually beneficial arrangements covering multiple years. See Note 12 , Commitments and Contingent Liabilities, to the Consolidated Financial Statements. Finally, commitments have been executed for certain commodities (copper and aluminum). See Note 15 , Derivate Instruments, to the Consolidated Financial Statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Corporation has identified critical accounting policies that are important to the presentation of its financial condition, changes in financial condition and results of operations and involve the most complex or subjective assessments. Critical accounting policies relate to assessing recoverability of property, plant and equipment and accounting for pension and other postretirement benefits, litigation and loss contingencies, and income taxes.
Property, plant and equipment is reviewed for recoverability whenever events or
circumstances indicate the carrying amount of the long-lived assets may not be
recoverable. If the undiscounted cash flows generated from the use and eventual
disposition of the assets are less than their carrying value, then the asset
value may not be fully recoverable, potentially resulting in a write-down of the
asset value. Estimates of future cash flows are based on expected market
conditions over the remaining useful life of the primary asset(s). Accordingly,
assumptions are made about pricing, volume and asset-resale values. Actual
results may differ from these assumptions. At
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Equipment, causing the Corporation to evaluate whether the property, plant and
equipment of the asset groupings within the FCEP segment was deemed to be
impaired. Accordingly, as of
Accounting for pension and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, input from the Corporation's actuaries is evaluated and extensive use is made of assumptions about inflation, long-term rate of return on plan assets, longevity, employee turnover and discount rates. The curtailment of the majority of the Corporation's defined benefit pension plans and the amendment of various other postretirement benefit plans has helped to mitigate the volatility in net periodic pension and other postretirement benefit costs resulting from changes in these assumptions.
The expected long-term rate of return on plan assets is an estimate of the
average rates of earnings expected to be earned on funds invested or to be
invested to provide for the benefits included in the projected benefit
obligation. Since these benefits will be paid over many years, the expected
long-term rate of return is reflective of current investment returns and
investment returns over a longer period. Also, consideration is given to target
and actual asset allocations, inflation and real risk-free return. The
Corporation believes the expected long-term rate of return ranging between 6.60%
and 7.25% for its domestic plans and 3.55% for its foreign plans to be
reasonable. Actual returns on plan assets for 2020 approximated 12.02% for the
domestic plans and 14.07% for the foreign plans. A percentage point decrease in
the expected long-term rate of return would increase annual pension expense by
approximately
The discount rates used in determining future pension obligations and other
postretirement benefits for each of the plans are based on rates of return for
high-quality fixed-income investments currently available and expected to be
available during the period to maturity of the pension and other postretirement
benefits. High-quality fixed-income investments are defined as those investments
which have received one of the two highest ratings given by a recognized rating
agency with maturities of 10+ years. Assumed discount rates range between 2.50%
and 2.63% for its domestic plans, 2.61% for its other postretirement benefits
plans, and 1.45% for its foreign plans, at
The Corporation believes that the amounts recorded in the accompanying
consolidated financial statements related to pension and other postretirement
benefits are based on assumptions that are appropriate at
Litigation and loss contingency accruals are made when it is determined that it is probable that a liability has been incurred and the amount can be reasonably estimated. Specifically, the Corporation and certain of its subsidiaries are involved in various claims and lawsuits incidental to its businesses. In addition, claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products manufactured by predecessors of Air & Liquid (the "Asbestos Liability"). To assist the Corporation in determining whether an estimate could be made of the potential liability for pending and unasserted future claims for the Asbestos Liability along with applicable insurance coverage, and the amounts of any estimates, the Corporation hires a nationally recognized asbestos-liability expert and insurance consultant. Based on their analyses, reserves for probable and reasonably estimable costs for the Asbestos Liability, including defense costs, and receivables for the insurance recoveries that are deemed probable are established. These amounts rely on assumptions which are based on currently known facts and strategy.
In 2018, the Corporation undertook a review of the Asbestos Liability claims,
defense costs and the likelihood for insurance recoveries. The Corporation
extended its estimate of the Asbestos Liability, including the estimated costs
of settlement and defense costs relating to pending claims and future claims
projected to be filed against it through 2052, the estimated final date by which
the Corporation expects to have settled all asbestos-related claims. Key
variables in these assumptions, including the ability to reasonably estimate the
Asbestos Liability through the expected final date by which the Corporation
expects to have settled all asbestos-related claims, are summarized in Note
20 , Litigation, to the Consolidated Financial Statements. Key assumptions
include the number and type of new claims to be filed each year, the average
cost of disposing of each new claim, average annual defense costs, and the
solvency risk with respect to the relevant insurance carriers. Other factors
that may affect the Asbestos Liability and the Corporation's ability to recover
under its insurance policies include uncertainties surrounding the litigation
process from jurisdiction to jurisdiction and from case to case, reforms that
may be made by state and federal courts, the passage of state or federal tort
reform legislation, and continued solvency of the insurance carriers. In 2020,
the Corporation recorded an asbestos-related charge of
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The Corporation intends to evaluate the Asbestos Liability and related insurance receivables as well as the underlying assumptions on a regular basis to determine whether any adjustments to the estimates are required. Due to the uncertainties surrounding asbestos litigation and insurance, these regular reviews may result in the incurrence of future charges or credits; however, the Corporation is currently unable to estimate such future changes. Adjustments, if any, to the Corporation's estimate of the Asbestos Liability and/or insurance receivables could be material to its operating results for the periods in which the adjustments to the liability or receivable are recorded, and to its liquidity and consolidated financial position when such liabilities are paid.
Accounting for income taxes includes the Corporation evaluation of the
underlying accounts, permanent and temporary differences, its tax filing
positions and interpretations of existing tax law. A valuation allowance is
recorded against deferred income tax assets to reduce them to the amount that is
"more likely than not" to be realized. In doing so, assumptions are made about
the future profitability of the Corporation and the nature of that
profitability. Actual results may differ from these assumptions. If the
Corporation determined it would not be able to realize all or part of the
deferred income tax assets in the future, an adjustment to the valuation
allowance would be established resulting in a charge to net income (loss).
Likewise, if the Corporation determined it would be able to realize deferred
income tax assets in excess of the net amount recorded, a portion of the
existing valuation allowance would be released resulting in a credit to net
income (loss). As of
The Corporation does not recognize a tax benefit in the financial statements
related to a tax position taken or expected to be taken in a tax return unless
it is "more likely than not" that the tax authorities will sustain the tax
position solely on the basis of the position's technical merits. Consideration
is primarily given to legislation and statutes, legislative intent, regulations,
rulings and case law as well as their applicability to the facts and
circumstances of the tax position when assessing the sustainability of the tax
position. In the event a tax position no longer meets the "more likely than not"
criteria, the Corporation would reverse the tax benefit by recognizing a
liability and recording a charge to earnings. Conversely, if the Corporation
subsequently determined that a tax position met the "more likely than not"
criteria, it would recognize the tax benefit by reducing the liability and
recording a credit to earnings. As of
See Note 21 , Income Taxes, to the Consolidated Financial Statements.
RECENTLY IMPLEMENTED and ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 , Summary of Significant Accounting Policies, to the Consolidated Financial Statements.
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