Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-898

 

 

AMPCO-PITTSBURGH CORPORATION

 

 

 

Pennsylvania   25-1117717
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

600 Grant Street, Suite 4600

Pittsburgh, Pennsylvania 15219

(Address of principal executive offices)

(412) 456-4400

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On November 3, 2014, 10,425,664 common shares were outstanding.

 

 

 


Table of Contents

AMPCO-PITTSBURGH CORPORATION

INDEX

 

              

Page

No.

 

Part I – Financial Information:

  
  

Item 1 –

  

Financial Statements (Unaudited)

  
     

Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013

     3   
     

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2014 and 2013

     4   
     

Condensed Consolidated Statements of Comprehensive (Loss) Income – Three and Nine Months Ended September 30, 2014 and 2013

     5   
     

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013

     6   
     

Notes to Condensed Consolidated Financial Statements

     7   
  

Item 2 –

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   
  

Item 3 –

  

Quantitative and Qualitative Disclosures About Market Risk

     20   
  

Item 4 –

  

Controls and Procedures

     20   

Part II – Other Information:

  
  

Item 1 –

  

Legal Proceedings

     21   
  

Item 1A –

  

Risk Factors

     21   
  

Item 6 –

  

Exhibits

     21   
  

Signatures

     22   
  

Exhibit Index

     23   
  

Exhibits

  
     

Exhibit 31.1

  
     

Exhibit 31.2

  
     

Exhibit 32.1

  
     

Exhibit 32.2

  
     

Exhibit 101

  

 

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Table of Contents

PART I – FINANCIAL INFORMATION

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par value)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 91,973      $ 97,910   

Receivables, less allowance for doubtful accounts of $715 in 2014 and $551 in 2013

     53,241        50,279   

Inventories

     63,195        64,129   

Insurance receivables – asbestos

     19,000        24,500   

Other current assets

     12,192        9,968   
  

 

 

   

 

 

 

Total current assets

     239,601        246,786   

Property, plant and equipment, net

     151,398        151,288   

Insurance receivables – asbestos

     78,471        86,241   

Deferred income tax assets

     1,764        6,832   

Investments in joint ventures

     4,052        5,010   

Other noncurrent assets

     6,627        6,516   
  

 

 

   

 

 

 
   $ 481,913      $ 502,673   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 18,428      $ 15,768   

Accrued payrolls and employee benefits

     9,469        8,875   

Industrial Revenue Bond debt

     13,311        13,311   

Asbestos liability – current portion

     23,000        27,000   

Other current liabilities

     19,501        21,720   
  

 

 

   

 

 

 

Total current liabilities

     83,709        86,674   

Employee benefit obligations

     41,484        49,146   

Asbestos liability

     118,659        131,293   

Other noncurrent liabilities

     515        565   
  

 

 

   

 

 

 

Total liabilities

     244,367        267,678   
  

 

 

   

 

 

 

Commitments and contingent liabilities (Note 6)

    

Shareholders’ equity:

    

Common stock – par value $1; authorized 20,000 shares; issued and outstanding 10,425 shares in 2014 and 10,373 shares outstanding in 2013

     10,425        10,373   

Additional paid-in capital

     127,384        125,852   

Retained earnings

     139,869        144,635   

Accumulated other comprehensive loss

     (40,132     (45,865
  

 

 

   

 

 

 

Total shareholders’ equity

     237,546        234,995   
  

 

 

   

 

 

 
   $ 481,913      $ 502,673   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Net sales

   $ 65,409      $ 64,433      $ 198,270      $ 203,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Costs of products sold (excluding depreciation)

     53,244        48,177        158,715        158,577   

Selling and administrative

     8,950        8,979        27,424        28,135   

Depreciation

     2,941        2,840        9,007        8,725   

Credit for asbestos litigation

     0        (16,340     0        (16,340

Loss on disposal of assets

     232        0        287        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     65,367        43,656        195,433        179,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     42        20,777        2,837        24,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Investment-related income

     38        27        125        51   

Interest expense

     (61     (60     (169     (181

Other – net

     (395     (532     (344     (1,539
  

 

 

   

 

 

   

 

 

   

 

 

 
     (418     (565     (388     (1,669
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes and equity losses in Chinese joint venture

     (376     20,212        2,449        23,210   

Income tax benefit (provision)

     178        (7,057     (773     (7,958

Equity losses in Chinese joint venture

     (145     (450     (820     (1,315
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (343   $ 12,705      $ 856      $ 13,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share:

        

Basic

   $ (0.03   $ 1.23      $ 0.08      $ 1.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.03   $ 1.22      $ 0.08      $ 1.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.18      $ 0.18      $ 0.54      $ 0.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding:

        

Basic

     10,424        10,363        10,398        10,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     10,477        10,408        10,448        10,404   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(in thousands)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Net (loss) income

   $ (343   $ 12,705      $ 856      $ 13,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax where applicable:

        

Adjustments for changes in:

        

Foreign currency translation

     (4,066     4,285        (1,945     97   

Unrecognized employee benefit costs (including effects of foreign currency translation)

     1,056        (1,352     5,137        86   

Unrealized holding (losses) gains on marketable securities

     (66     103        113        296   

Fair value of cash flow hedges

     (72     152        (180     (277

Reclassification adjustments for items included in net income:

        

Amortization of unrecognized employee benefit costs

     827        1,458        2,612        4,245   

Realized (gains) from sale of marketable securities

     (24     (17     (59     (51

Realized (gains) losses from settlement of cash flow hedges

     (13     144        55        206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,358     4,773        5,733        4,602   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (2,701   $ 17,478      $ 6,589      $ 18,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

    

Nine Months Ended

September 30,

 
     2014     2013  

Net cash flows provided by operating activities

   $ 9,694      $ 28,957   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (10,217     (10,264

Purchases of long-term marketable securities

     (667     (810

Proceeds from sale of long-term marketable securities

     603        678   

Other

     185        6   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (10,096     (10,390
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Dividends paid

     (5,613     (5,590

Proceeds from the issuance of common stock

     581        67   

Excess tax benefits from the exercise of stock options

     60        2   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (4,972     (5,521
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (563     340   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (5,937     13,386   

Cash and cash equivalents at beginning of period

     97,910        78,889   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 91,973      $ 92,275   
  

 

 

   

 

 

 

Supplemental information:

    

Income tax payments

   $ 3,406      $ 877   
  

 

 

   

 

 

 

Interest payments

   $ 169      $ 182   
  

 

 

   

 

 

 

Non-cash investing activities:

    

Purchases of property, plant and equipment included in accounts payable

   $ 694      $ 677   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except claim amounts)

 

1. Unaudited Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of September 30, 2014 and the condensed consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2014 and 2013 and condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 have been prepared by Ampco-Pittsburgh Corporation (the “Corporation”) without audit. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the operating results expected for the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Certain amounts for the preceding periods have been reclassified for comparative purposes.

Recently Implemented Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires, under certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance became effective January 1, 2014 but did not affect the balance sheet, operating results or liquidity of the Corporation.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a common revenue standard for U.S. GAAP and IFRS. The guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. It requires companies to apply a five-step model when recognizing revenue relating to the transfer of goods or services to customers in an amount that reflects the consideration that the company expects to be entitled to receive for those goods and services. It also requires comprehensive disclosures regarding revenue recognition. The guidance becomes effective January 1, 2017. The Corporation is currently evaluating the impact that the guidance will have on its financial position, operating results and liquidity.

 

2. Inventories

Approximately 59% and 56% of the inventories at September 30, 2014 and December 31, 2013, respectively, were valued on the LIFO method with the remaining inventories valued on the FIFO method. Inventories were comprised of the following:

 

     September 30,
2014
     December 31,
2013
 

Raw materials

   $ 17,418       $ 17,411   

Work-in-process

     25,398         29,322   

Finished goods

     9,224         5,894   

Supplies

     11,155         11,502   
  

 

 

    

 

 

 
   $ 63,195       $ 64,129   
  

 

 

    

 

 

 

 

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Table of Contents
3. Property, Plant and Equipment

Property, plant and equipment were comprised of the following:

 

     September 30,
2014
    December 31,
2013
 

Land and land improvements

   $ 5,167      $ 5,122   

Buildings

     44,084        44,116   

Machinery and equipment

     258,916        250,936   

Construction-in-progress

     4,381        5,315   

Other

     8,859        8,711   
  

 

 

   

 

 

 
     321,407        314,200   

Accumulated depreciation

     (170,009     (162,912
  

 

 

   

 

 

 
   $ 151,398      $ 151,288   
  

 

 

   

 

 

 

Land and buildings of Union Electric Steel UK Limited (“UES-UK”) equal to approximately $3,200 (£1,974) at September 30, 2014 are held as collateral by the trustees of the UES-UK defined benefit pension plan (see Note 5).

 

4. Other Current Liabilities

Other current liabilities were comprised of the following:

 

     September 30,
2014
     December 31,
2013
 

Customer-related liabilities

   $ 10,986       $ 10,610   

Accrued sales commissions

     1,572         1,648   

Income taxes payable

     19         1,063   

Other

     6,924         8,399   
  

 

 

    

 

 

 
   $ 19,501       $ 21,720   
  

 

 

    

 

 

 

Included in customer-related liabilities are costs expected to be incurred with respect to product warranties. Changes in the liability for product warranty claims consisted of the following:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Balance at beginning of the period

   $ 6,912      $ 6,425      $ 6,899      $ 6,625   

Satisfaction of warranty claims

     (246     (344     (1,635     (1,558

Provision for warranty claims

     619        316        1,898        1,578   

Other, primarily impact from changes in foreign currency exchange rates

     (190     231        (67     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of the period

   $ 7,095      $ 6,628      $ 7,095      $ 6,628   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

5. Pension and Other Postretirement Benefits

Contributions were as follows:

 

    

Nine Months Ended

September 30,

 
     2014      2013  

U.S. defined benefit pension plan

   $ 0       $ 5,000 (1) 

U.K. defined benefit pension plan

   $ 1,405       $ 1,308   

Other postretirement benefits (e.g. net payments)

   $ 438       $ 436   

U.K. defined contribution pension plan

   $ 300       $ 227   

 

  (1) Voluntary contribution

 

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Net periodic pension and other postretirement costs include the following components:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

U.S. Defined Benefit Pension Plan

        

Service cost

   $ 921      $ 1,106      $ 2,762      $ 3,318   

Interest cost

     2,190        2,016        6,571        6,052   

Expected return on plan assets

     (2,686     (2,342     (8,060     (7,026

Amortization of prior service cost

     213        160        640        480   

Amortization of actuarial loss

     1,046        1,788        3,138        5,360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 1,684      $ 2,728      $ 5,051      $ 8,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

U.K. Defined Benefit Pension Plan

        

Interest cost

   $ 679      $ 656      $ 2,048      $ 1,891   

Expected return on plan assets

     (795     (651     (2,399     (1,842

Amortization of actuarial loss

     151        202        455        509   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 35      $ 207      $ 104      $ 558   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Postretirement Benefit Plan

        

Service cost

   $ 90      $ 235      $ 415      $ 707   

Interest cost

     138        232        550        695   

Amortization of prior service cost

     (168     21        (274     64   

Amortization of actuarial loss

     47        61        57        181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 107      $ 549      $ 748      $ 1,647   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the second quarter of 2014, certain health care benefits to be provided on or after January 1, 2015 under the Other Postretirement Benefit Plan were modified. The plan change resulted in a remeasurement of the plan liability as of May 1, 2014, reducing the liability by approximately $9,500. Additionally, as a result of the remeasurement, the discount rate was changed from 5.00% to 4.50% increasing the liability by approximately $2,000.

 

6. Commitments and Contingent Liabilities

Outstanding standby and commercial letters of credit as of September 30, 2014 approximated $18,049, the majority of which serve as collateral for the Industrial Revenue Bond debt.

In 2010, UES-UK was awarded a government grant of up to $1,325 (£850) toward the purchase and installation of certain machinery and equipment of which $1,083 (£680) has been received to date. Under the agreement, the grant is repayable if certain conditions are not met including achieving and maintaining a targeted level of employment through 2017. UES-UK’s level of employment currently exceeds and is expected to continue to exceed the targeted level of employment; accordingly, no liability has been recorded.

See Note 7 for derivative instruments, Note 12 for litigation and Note 13 for environmental matters.

 

7. Derivative Instruments

Certain operations of the Corporation are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, foreign currency sales contracts are entered into which are designated as cash flow or fair value hedges. As of September 30, 2014, approximately $13,493 of anticipated foreign-denominated sales has been hedged which are covered by fair value and cash flow contracts settling at various dates through October 2015. The fair value of assets held as collateral for the fair value contracts as of September 30, 2014 approximated $811.

Additionally, certain divisions of the Air and Liquid Processing segment are subject to risk from increases in the price of commodities (copper and aluminum) used in the production of inventory. To minimize this risk, futures contracts are entered into which are designated as cash flow hedges. At September 30, 2014, approximately 57% or $2,835 of anticipated copper purchases over the next nine months and 38% or $485 of anticipated aluminum purchases over the next six months are hedged.

 

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The Corporation previously entered into foreign currency purchase contracts to manage the volatility associated with Euro-denominated progress payments to be made for certain machinery and equipment. As of December 31, 2010, all contracts had been settled and the underlying fixed assets were placed in service.

No portion of the existing cash flow or fair value hedges is considered to be ineffective, including any ineffectiveness arising from the unlikelihood of an anticipated transaction to occur. Additionally, no amounts have been excluded from assessing the effectiveness of a hedge.

At September 30, 2014, the Corporation has purchase commitments covering 35% or $3,716 of anticipated natural gas usage through 2017 for one of its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheet.

The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.

Losses on foreign exchange transactions included in other income (expense) approximated $(236) and $(135) for the three months ended September 30, 2014 and 2013 and $(55) and $(528) for the nine months ended September 30, 2014 and 2013, respectively.

The location and fair value of the foreign currency sales contracts recorded on the condensed consolidated balance sheets were as follows:

 

    

Location

   September 30,
2014
    December 31,
2013
 

Fair value hedge contracts

   Other current assets    $ 251      $ 426   
   Other noncurrent assets      9        17   
   Other current liabilities      291        0   
   Other noncurrent liabilities      21        0   

Fair value hedged items

   Receivables      (18     (36
   Other current assets      246        0   
   Other noncurrent assets      19        0   
   Other current liabilities      200        488   
   Other noncurrent liabilities      16        40   

Cash flow hedge contracts

   Other current liabilities      13        0   

The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive loss. The balances as of September 30, 2014 and 2013 and the amount recognized as and reclassified from accumulated other comprehensive loss for each of the periods is summarized below. All amounts are after-tax.

 

Three Months Ended September 30, 2014

   Comprehensive
Income (Loss)
Beginning of
the Period
    Plus
Recognized as
Comprehensive
Income (Loss)
    Less
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Loss
    Comprehensive
Income (Loss)
End of
the Period
 

Foreign currency sales contracts – cash flow hedges

   $ (21   $ 31      $ 13      $ (3

Foreign currency purchase contracts

     265        0        3        262   

Futures contracts – copper and aluminum

     29        (103     (3     (71
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 273      $ (72   $ 13      $ 188   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2013

                        

Foreign currency sales contracts – cash flow hedges

   $ 0      $ 0      $ 0      $ 0   

Foreign currency purchase contracts

     282        0        4        278   

Futures contracts – copper and aluminum

     (331     152        (148     (31
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (49   $ 152      $ (144   $ 247   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Nine Months Ended September 30, 2014

   Comprehensive
Income (Loss)
Beginning of
the Period
     Plus
Recognized as
Comprehensive
Income (Loss)
    Less
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Loss
    Comprehensive
Income (Loss)
End of
the Period
 

Foreign currency sales contracts – cash flow hedges

   $ 0       $ 10      $ 13      $ (3

Foreign currency purchase contracts

     275         0        13        262   

Futures contracts – copper and aluminum

     38         (190     (81     (71
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 313       $ (180   $ (55   $ 188   
  

 

 

    

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2013

                         

Foreign currency sales contracts – cash flow hedges

   $ 0       $ 0      $ 0      $ 0   

Foreign currency purchase contracts

     292         0        14        278   

Futures contracts – copper and aluminum

     26         (277     (220     (31
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 318       $ (277   $ (206   $ 247   
  

 

 

    

 

 

   

 

 

   

 

 

 

The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive loss to earnings is summarized below. All amounts are pre-tax.

 

    

Location of
Gain (Loss)
in Statements
of Operations

   Estimated to be
Reclassified in the
Next 12 Months
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
        2014     2013     2014     2013  

Foreign currency sales contracts – cash flow hedges

  

Sales

   $ (7   $ 22      $ 0      $ 22      $ 0   

Foreign currency purchase contracts

   Depreciation      28        6        6        20        20   

Futures contracts – copper and aluminum

   Costs of products sold (excluding depreciation)      (120     (7     (237     (130     (352

 

8. Accumulated Other Comprehensive Loss

Net change and ending balances for the various components of accumulated other comprehensive loss as of and for the nine months ended September 30, 2014 and 2013 is summarized below. All amounts are net of tax, where applicable.

 

     Foreign
Currency
Translation
Adjustments
    Unrecognized
Employee
Benefit Costs
    Unrealized
Holding Gains
on Marketable
Securities
     Cash Flow
Hedges
    Accumulated
Other
Comprehensive
Loss
 

Balance at January 1, 2014

   $ 277      $ (47,462   $ 1,007       $ 313      $ (45,865

Net Change

   $ (1,945     7,749        54         (125     5,733   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2014

   $ (1,668   $ (39,713   $ 1,061       $ 188      $ (40,132
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at January 1, 2013

   $ (1,543   $ (81,783   $ 633       $ 318      $ (82,375

Net Change

     97        4,331        245         (71     4,602   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013

   $ (1,446   $ (77,452   $ 878       $ 247      $ (77,773
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following summarizes the line items affected on the condensed consolidated statements of operations for components reclassified from accumulated other comprehensive loss. Amounts in parentheses represent credits to income.

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

     
     2014     2013     2014     2013    

Affected Line Item

Amortization of unrecognized employee benefit costs

   $ 844      $ 1,442      $ 2,752      $ 4,262     

Costs of products sold

(excluding depreciation)

     401        573        1,136        1,682     

Selling and administrative

     44        217        128        650     

Other income (expense)

  

 

 

   

 

 

   

 

 

   

 

 

   
     1,289        2,232        4,016        6,594     

Total before income tax

     (462     (774     (1,404     (2,349  

Income tax provision

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 827      $ 1,458      $ 2,612      $ 4,245     

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

Realized (gains) from sale of marketable securities

   $ (37   $ (26   $ (91   $ (79  

Selling and administrative

     13        9        32        28     

Income tax provision

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (24   $ (17   $ (59   $ (51  

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

Realized (gains) losses from settlement of cash flow hedges:

          

Foreign currency sales contracts

   $ (22   $ 0      $ (22   $ 0     

Depreciation

Foreign currency purchase contracts

     (6     (6     (20     (20  

Depreciation

Futures contracts – copper and aluminum

     7        237        130        352     

Costs of products sold

(excluding depreciation)

  

 

 

   

 

 

   

 

 

   

 

 

   
     (21     231        88        332     

Total before income tax

     8        (87     (33     (126  

Income tax provision

  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (13   $ 144      $ 55      $ 206     

Net of tax

  

 

 

   

 

 

   

 

 

   

 

 

   

The income tax expense (benefit) associated with the various components of other comprehensive (loss) income is summarized below. Foreign currency translation adjustments exclude the effect of income taxes since earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Tax expense (benefit) associated with changes in:

        

Unrecognized employee benefit costs

   $ 0      $ 0      $ (2,739   $ 0   

Unrealized holding losses/gains on marketable securities

     37        (55     (60     (159

Fair value of cash flow hedges

     40        (93     107        165   

Tax expense (benefit) associated with reclassification adjustments:

        

Amortization of unrecognized employee benefit costs

     (462     (774     (1,404     (2,349

Realized gains from sale of marketable securities

     13        9        32        28   

Realized gains/losses from settlement of cash flow hedges

     8        (87     (33     (126

 

9. Stock-Based Compensation

In May 2011, the shareholders of the Corporation approved the adoption of the 2011 Omnibus Incentive Plan (“Incentive Plan”) which authorizes the issuance of up to 1,000,000 shares of the Corporation’s common stock for grants of equity-based compensation. Awards under the Incentive Plan may include incentive non-qualified stock options, stock appreciation rights, restricted shares and restricted stock units, performance awards, other stock-based awards or short-term cash incentive awards. Unexercised portions of terminated or forfeited awards are available for new awards. The Incentive Plan is administered by the Compensation Committee of the Board of Directors who has the authority to determine, within the limits of the express provisions of the Incentive Plan, the individuals to whom the awards will be granted; the nature, amount and terms of such awards; and the objectives and conditions for earning such awards.

 

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During the second quarter of 2014, the Compensation Committee granted 176,000 non-qualified stock options to select employees. The options have a ten-year life and vest over a three-year period. The exercise price of $20.00 was equal to the closing price of the Corporation’s common stock on the New York Stock Exchange on the date of grant and the fair value of the options was $7.40 per share. The fair value of the options as of the date of grant was calculated using the Black-Scholes option-pricing model based on an assumption for the expected life of the options of six years, a risk-free interest rate of 1.98%, an expected dividend yield of 3.60%, expected forfeiture rate of 8% and an expected volatility of 53.02%. The resultant stock-based compensation expense of approximately $1,200 will be recognized over the requisite service period of three years.

The Incentive Plan also provides for annual grants of shares of the Corporation’s common stock to non-employee directors following the Corporation’s annual shareholder meeting. Each annual director award will be for a number of shares having a fair market value equal to $25 and will be fully vested as of the grant date. During the second quarter of 2014, 12,500 shares of the Corporation’s common stock were awarded to non-employee directors.

Stock-based compensation expense for the three months ended September 30, 2014 and 2013 equaled $305 and $341, respectively. The related income tax benefit recognized in the condensed consolidated statements of operations for each of the periods was approximately $107 and $120, respectively. Stock-based compensation expense for the nine months ended September 30, 2014 and 2013 equaled $903 and $845, respectively. The related income tax benefit recognized in the condensed consolidated statements of operations for each of the periods was approximately $316 and $296, respectively.

 

10. Fair Value

The Corporation’s financial assets and liabilities that are reported at fair value in the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 were as follows:

 

     Quoted Prices in
Active Markets
for Identical
Inputs
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

As of September 30, 2014

           

Investments

           

Other noncurrent assets

   $ 4,303       $ 0       $ 0       $     4,303   

Foreign currency exchange contracts

           

Other current assets

     0         497         0         497   

Other noncurrent assets

     0         28         0         28   

Other current liabilities

     0         504         0         504   

Other noncurrent liabilities

     0         37         0         37   

As of December 31, 2013

           

Investments

           

Other noncurrent assets

   $ 4,092       $ 0       $ 0       $ 4,092   

Foreign currency exchange contracts

           

Other current assets

     0         426         0         426   

Other noncurrent assets

     0         17         0         17   

Other current liabilities

     0         488         0         488   

Other noncurrent liabilities

     0         40         0         40   

The investments held as other noncurrent assets represent assets held in a “Rabbi” trust for the purpose of providing benefits under a non-qualified defined benefit pension plan. The fair value of the investments is based on quoted prices of the investments in active markets. The fair value of foreign currency exchange contracts is determined based on the fair value of similar contracts with similar terms and remaining maturities. The fair value of futures contracts is based on market quotations. The fair value of the variable-rate IRB debt approximates its carrying value. Additionally, the fair value of trade receivables and trade payables approximates their carrying value.

 

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Table of Contents
11. Business Segments

Presented below are the net sales and (loss) income before income taxes for the Corporation’s two business segments.

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Net Sales:

        

Forged and Cast Rolls

   $ 42,321      $ 41,800      $ 127,353      $ 132,299   

Air and Liquid Processing

     23,088        22,633        70,917        71,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments

   $ 65,409      $ 64,433      $ 198,270      $ 203,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income before Income Taxes:

        

Forged and Cast Rolls

   $ (110   $ 4,996      $ 2,792      $ 9,670   

Air and Liquid Processing

     2,014        18,081        6,823        22,369   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments

     1,904        23,077        9,615        32,039   

Other expense, including corporate costs – net

     (2,280     (2,865     (7,166     (8,829
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (376   $ 20,212      $ 2,449      $ 23,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12. Litigation (claims not in thousands)

The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses. In addition, it is also subject to asbestos litigation as described below.

Asbestos Litigation

Claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products of predecessors of the Corporation’s Air & Liquid subsidiary (“Asbestos Liability”). Those subsidiaries, and in some cases the Corporation, are defendants (among a number of defendants, often in excess of 50) in cases filed in various state and federal courts.

Asbestos Claims

The following table reflects approximate information about the claims for Asbestos Liability against the subsidiary and the Corporation. The information in the table presented for 2013 includes certain asbestos claims asserted against an inactive subsidiary in dissolution.

 

    

Nine Months Ended

September 30,

 
     2014     2013  

Total claims pending at the beginning of the period

     8,319        8,007   

New claims served

     1,078        1,056   

Claims dismissed

     (371     (351

Claims settled

     (182     (188
  

 

 

   

 

 

 

Total claims pending at the end of the period (1)

     8,844        8,524   
  

 

 

   

 

 

 

Gross settlement and defense costs (in 000’s)

   $ 16,634      $ 15,994   
  

 

 

   

 

 

 

Avg. gross settlement and defense costs per claim resolved (in 000’s)

   $ 30.08      $ 29.67   
  

 

 

   

 

 

 

 

  (1) Included as “open claims” are approximately 1,633 and 1,636 claims as of September 30, 2014 and 2013, respectively, classified in various jurisdictions as “inactive” or transferred to a state or federal judicial panel on multi-district litigation, commonly referred to as the MDL.

A substantial majority of the settlement and defense costs reflected in the above table was reported and paid by insurers. Because claims are often filed and can be settled or dismissed in large groups, the amount and timing of settlements, as well as the number of open claims, can fluctuate significantly from period to period.

 

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Table of Contents

Asbestos Insurance

The Corporation and its Air & Liquid subsidiary are parties to a series of settlement agreements (“Settlement Agreements”) with insurers that have coverage obligations for Asbestos Liability (the “Settling Insurers”). Under the Settlement Agreements, the Settling Insurers accept financial responsibility, subject to the terms and conditions of the respective agreements, including overall coverage limits, for pending and future claims for Asbestos Liability. The Settlement Agreements encompass the substantial majority of insurance policies that provide coverage for claims for Asbestos Liability.

The Settlement Agreements include acknowledgements that Howden North America, Inc. (“Howden”) is entitled to coverage under policies covering Asbestos Liability for claims arising out of the historical products manufactured or distributed by Buffalo Forge, a former subsidiary of the Corporation (the “Products”). The Settlement Agreements do not provide for any prioritization on access to the applicable policies or any sublimits of liability as to Howden or the Corporation and Air & Liquid, and, accordingly, Howden may access the coverage afforded by the Settling Insurers for any covered claim arising out of a Product. In general, access by Howden to the coverage afforded by the Settling Insurers for the Products will erode coverage under the Settlement Agreements available to the Corporation and Air & Liquid for Asbestos Liability.

On February 24, 2011, the Corporation and Air & Liquid filed a lawsuit in the United States District Court for the Western District of Pennsylvania against thirteen domestic insurance companies, certain underwriters at Lloyd’s, London and certain London market insurance companies, and Howden. The lawsuit seeks a declaratory judgment regarding the respective rights and obligations of the parties under excess insurance policies that were issued to the Corporation from 1981 through 1984 as respects claims against the Corporation and its subsidiary for Asbestos Liability and as respects asbestos bodily-injury claims against Howden arising from the Products. The Corporation and Air & Liquid have reached Settlement Agreements with all but two of the defendant insurers in the coverage action. Those Settlement Agreements specify the terms and conditions upon which the insurer parties are to contribute to defense and indemnity costs for claims for Asbestos Liability. One of the Settlement Agreements entered into by the Corporation and Air & Liquid also provided for the dismissal of claims, without prejudice, regarding two upper-level excess policies issued by one of the insurers. The Court has entered Orders dismissing all claims in the action filed against each other by the Corporation and Air & Liquid, on the one hand, and by the settling insurers, on the other. Howden also reached an agreement with eight domestic insurers addressing asbestos-related bodily injury claims arising from the Products, and claims as to those insurers and Howden have been dismissed. Various counterclaims, cross claims and third party claims have been filed in the litigation and remain pending although only two domestic insurers and Howden remain in the litigation as to the Corporation and Air & Liquid. On September 27, 2013, the Court issued a memorandum opinion and order granting in part and denying in part cross motions for summary judgment filed by the Corporation and Air & Liquid, Howden, and the insurer parties still in the litigation. The September 27, 2013 ruling is not a final ruling for appellate purposes, but when final it could be appealed by the parties to the litigation.

Asbestos Valuations

In 2006, the Corporation retained Hamilton, Rabinovitz & Associates, Inc. (“HR&A”), a nationally recognized expert in the valuation of asbestos liabilities, to assist the Corporation in estimating the potential liability for pending and unasserted future claims for Asbestos Liability. Based on this analysis, the Corporation recorded a reserve for Asbestos Liability claims pending or projected to be asserted through 2013 as at December 31, 2006. HR&A’s analysis has been periodically updated since that time. Most recently, the HR&A analysis was updated in 2012, and additional reserves were established by the Corporation as at December 31, 2012 for Asbestos Liability claims pending or projected to be asserted through 2022. The methodology used by HR&A in its projection in 2012 of the operating subsidiaries’ liability for pending and unasserted potential future claims for Asbestos Liability, which is substantially the same as the methodology employed by HR&A in prior estimates, relied upon and included the following factors:

 

    HR&A’s interpretation of a widely accepted forecast of the population likely to have been exposed to asbestos;

 

    epidemiological studies estimating the number of people likely to develop asbestos-related diseases;

 

    HR&A’s analysis of the number of people likely to file an asbestos-related injury claim against the subsidiaries and the Corporation based on such epidemiological data and relevant claims history from January 1, 2010 to December 20, 2012;

 

    an analysis of pending cases, by type of injury claimed and jurisdiction where the claim is filed;

 

    an analysis of claims resolution history from January 1, 2010 to December 20, 2012 to determine the average settlement value of claims, by type of injury claimed and jurisdiction of filing; and

 

    an adjustment for inflation in the future average settlement value of claims, at an annual inflation rate based on the Congressional Budget Office’s ten year forecast of inflation.

Using this information, HR&A estimated in 2012 the number of future claims for Asbestos Liability that would be filed through the year 2022, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2022. This methodology has been accepted by numerous courts.

 

15


Table of Contents

In conjunction with developing the aggregate liability estimate referenced above, the Corporation also developed an estimate of probable insurance recoveries for its Asbestos Liabilities. In developing the estimate, the Corporation considered HR&A’s projection for settlement or indemnity costs for Asbestos Liability and management’s projection of associated defense costs (based on the current defense to indemnity cost ratio), as well as a number of additional factors. These additional factors included the Settlement Agreements then in effect, policy exclusions, policy limits, policy provisions regarding coverage for defense costs, attachment points, prior impairment of policies and gaps in the coverage, policy exhaustions, insolvencies among certain of the insurance carriers, and the nature of the underlying claims for Asbestos Liability asserted against the subsidiaries and the Corporation as reflected in the Corporation’s asbestos claims database, as well as estimated erosion of insurance limits on account of claims against Howden arising out of the Products. In addition to consulting with the Corporation’s outside legal counsel on these insurance matters, the Corporation consulted with a nationally-recognized insurance consulting firm it retained to assist the Corporation with certain policy allocation matters that also are among the several factors considered by the Corporation when analyzing potential recoveries from relevant historical insurance for Asbestos Liabilities. Based upon all of the factors considered by the Corporation, and taking into account the Corporation’s analysis of publicly available information regarding the credit-worthiness of various insurers, the Corporation estimated the probable insurance recoveries for Asbestos Liability and defense costs through 2022. Although the Corporation believes that the assumptions employed in the insurance valuation were reasonable and previously consulted with its outside legal counsel and insurance consultant regarding those assumptions, there are other assumptions that could have been employed that would have resulted in materially lower insurance recovery projections.

Based on the analyses described above, the Corporation’s reserve at December 31, 2012 for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2022 was $181,022, of which approximately 73% was attributable to settlement costs for unasserted claims projected to be filed through 2022 and future defense costs. The reserve at September 30, 2014 was $141,659. While it is reasonably possible that the Corporation will incur additional charges for Asbestos Liability and defense costs in excess of the amounts currently reserved, the Corporation believes that there is too much uncertainty to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them beyond 2022. Accordingly, no reserve has been recorded for any costs that may be incurred after 2022.

The Corporation’s receivable at December 31, 2012 for insurance recoveries attributable to the claims for which the Corporation’s Asbestos Liability reserve has been established, including the portion of incurred defense costs covered by the Settlement Agreements in effect through December 31, 2012, and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $118,115. The Corporation increased its receivable at September 30, 2013 by $16,340 to take into account the effect of the Settlement Agreements reached in August 2013.

The following table summarizes activity relating to insurance recoveries.

 

    

Nine Months Ended

September 30,

 
     2014     2013  

Insurance receivable – asbestos, beginning of the year

   $ 110,741      $ 118,115   

Settlement and defense costs paid by insurance carriers

     (13,270     (17,592

Changes in estimated coverage

     0        16,340   
  

 

 

   

 

 

 

Insurance receivable – asbestos, end of the period

   $ 97,471      $ 116,863   
  

 

 

   

 

 

 

The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers or carriers not party to a Settlement Agreement, and a substantial majority of the insurance recoveries deemed probable was from insurance companies rated A – (excellent) or better by A.M. Best Corporation. There can be no assurance, however, that there will not be further insolvencies among the relevant insurance carriers, or that the assumed percentage recoveries for certain carriers will prove correct. The difference between insurance recoveries and projected costs is not due to exhaustion of all insurance coverage for Asbestos Liability. The Corporation and the subsidiaries have substantial additional insurance coverage which the Corporation expects to be available for Asbestos Liability claims and defense costs that the subsidiaries and it may incur after 2022. However, this insurance coverage also can be expected to have gaps creating significant shortfalls of insurance recoveries as against claims expense, which could be material in future years.

The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently known facts and strategy. The Corporation’s actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Corporation’s or HR&A’s calculations vary significantly from actual results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, the average cost of disposing of each such new claim, average annual defense costs, compliance by relevant parties with the terms of the Settlement Agreements, the resolution of remaining coverage issues with insurance carriers, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect the Corporation’s Asbestos Liability and ability to recover under its insurance policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction

 

16


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and from case to case, reforms that may be made by state and federal courts, and the passage of state or federal tort reform legislation.

The Corporation intends to evaluate its estimated 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 Corporation incurring future charges; however, the Corporation is currently unable to estimate such future charges. Adjustments, if any, to the Corporation’s estimate of its recorded Asbestos Liability and/or insurance receivables could be material to operating results for the periods in which the adjustments to the liability or receivable are recorded, and to the Corporation’s liquidity and consolidated financial position.

 

13. Environmental Matters

The Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned. Environmental exposures are difficult to assess and estimate for numerous reasons including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. In the opinion of management and in consideration of advice from the Corporation’s consultants, the potential liability for all environmental proceedings of approximately $311 at September 30, 2014 is considered adequate based on information known to date.

 

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Table of Contents

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in thousands, except share and per share amounts)

Executive Overview

The Corporation operates in two business segments – Forged and Cast Rolls and Air and Liquid Processing. The Forged and Cast Rolls segment produces and sells forged-hardened steel rolls and cast iron and steel rolls to manufacturers of steel and aluminum throughout the world. The Air and Liquid Processing segment manufactures centrifugal pumps for the marine defense, refrigeration and power generation industries; constructs large custom-designed air handling systems for commercial, institutional and industrial building markets; and produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including fossil fuel and nuclear power generation, automotive, industrial process and HVAC. A significant portion of its products are distributed through a common independent group of sales offices located throughout the United States and Canada.

For the Forged and Cast Rolls segment, in North America and the European Union, our primary markets, the steel industry continues to operate significantly below capacity. This industry condition, coupled with excess global roll supply, has at times necessitated price discounting to maintain market share, particularly in Europe. Furthermore, indigenous roll suppliers in China and Korea have established a significant presence in their home markets and have made inroads in export markets through extraordinarily low price offerings resulting in a reduction in roll sales internationally compared to a year ago. For the remainder of the year, demand for traditional roll products is expected to remain weak and at depressed margins. Although representing a smaller portion of the segment’s business activity, sales of non-roll products and services, which utilize available production capacity, are expected to increase. Losses by the segment’s Chinese forged roll joint venture company (in which it has a 49% interest and accounts for on the equity method of accounting) are anticipated to continue during the year. While an impairment charge to reduce the carrying amount of the investment in the joint venture company to its estimated fair value was recognized in the fourth quarter of 2013, the Corporation will continue to monitor the carrying value of the investment to determine if future charges are necessary.

For the Air and Liquid Processing segment, spending on new construction by the institutional markets remains slow while continued strength in spending in the fossil-fueled power generation market is encouraging. The focus for this segment is to continue to develop new product lines and to strengthen the sales distribution networks.

Consolidated Sales and Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

Net sales were $65,409 and $64,433 for the three months ended September 30, 2014 and 2013 and $198,270 and $203,995 for the nine months ended September 30, 2014 and 2013, respectively. Backlog approximated $173,541 at September 30, 2014 versus $197,461 as of December 31, 2013 and $200,108 at September 30, 2013. A discussion of sales and backlog for the Corporation’s two segments is included below.

Costs of products sold, excluding depreciation, as a percentage of net sales approximated 81.4% and 74.8% for the three months ended September 30, 2014 and 2013 and 80.0% and 77.7% for the nine months ended September 30, 2014 and 2013, respectively. The increase is primarily attributable to a reduction in the volume of shipments and reduced selling prices for the Forged and Cast Rolls group. Pension and other post retirement benefit costs are lower in the current year; however, the prior year benefited from insurance proceeds for lost margin on rolls damaged in 2012 which was recorded as a reduction to costs of products sold in the third quarter of 2013.

Selling and administrative expenses for the nine months ended September 30, 2014 were less than the comparable prior year period primarily due to lower pension and other post retirement benefit costs.

Credit for asbestos litigation represents estimated additional insurance recoveries for asbestos liabilities through 2022 as a result of insurance coverage settlement agreements entered into during the third quarter of 2013.

Income from operations approximated $42 and $20,777 for the three months ended September 30, 2014 and 2013 and $2,837 and $24,879 for the nine months ended September 30, 2014 and 2013, respectively. A discussion of operating results for the Corporation’s two segments is included below.

Forged and Cast Rolls. Sales for the quarter were slightly better from the prior year quarter principally due to higher exchange rates for our U.K. operations which increased revenues by approximately $1,100. On a year-to-date basis, the higher exchange rates increased revenues by approximately $3,400. The expected increase in sales was offset by depressed pricing and a lower volume of shipments. Operating results for the current year periods were less than the comparable prior year periods due to weaker margins which adversely impacted earnings by $2,068 and $4,725 for the three and nine months ended September 30, 2014, respectively, and a lower volume of shipments which reduced earnings by $721 and $1,990 for the same periods. Additionally, operating income of the prior year periods benefited from receipt of approximately $1,500 of insurance proceeds for lost margin on rolls damaged in 2012.

 

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Lower freight and commission costs for the nine months ended September 30, 2014 offset the impact to operating income by approximately $1,400. Backlog approximated $131,266 at September 30, 2014 against $159,344 as of December 31, 2013 and $161,267 as of September 30, 2014. The decline in backlog is due to shipments outpacing new orders and declining profitability. Approximately $77,000 of the current backlog is expected to ship after 2014.

Air and Liquid Processing. Sales for segment for the three months ended September 30, 2014 were slightly better when compared to the same period of the prior year but somewhat less on a year-to-date basis. Operating income for the three and nine months ended September 30, 2014 was less than the same periods of the prior year due to the credit for asbestos litigation of $16,340 representing estimated additional insurance recoveries for asbestos liabilities through 2022 as a result of insurance coverage settlement agreements entered into during the third quarter of 2013. Additionally, for Buffalo Pumps, earnings for the quarter were down slightly on a lower volume of shipments but, on a year-to-date basis, continue to exceed the prior year due to a higher volume of shipments to U.S. Navy shipbuilders and a more profitable profit mix. For Buffalo Air Handling, earnings for the quarter and year to date improved from a year ago on a higher volume of shipments and manufacturing efficiencies. For Aerofin, although operating income for the quarter improved from a year ago, year-to-date operating income fell slightly below the prior year due to a lower volume of shipments, particularly to the OEM market, but was partially offset by a favorable product mix. Backlog approximated $42,275 at September 30, 2014 against $38,117 as of December 31, 2013 and $38,841 as of September 30, 2013. Approximately $21,200 of the current backlog is expected to ship after 2014.

Other income (expense) fluctuated primarily from changes in foreign exchange gains and losses and charges related to operations discontinued many years ago.

Effective income tax rate decreased for the nine months ended September 30, 2014 versus the same period of 2013. In the current year, a higher portion of earnings is from our U.K. operations which are taxed at a lower statutory rate. Certain state net deferred income tax assets were revalued during the year, however, as a result of a reduction in the statutory state income tax rate for New York somewhat offsetting the benefit of the higher earnings from our U.K. operations. The tax provision for an interim period is computed as the difference between the estimated tax provision for the year and the amounts reported for previous interim periods. Accordingly, the effective income tax rate from quarter-to-quarter or between a quarter and the comparable prior year quarter includes an adjustment necessary to record the year-to-date tax provision at the estimated annual effective income tax rate for that year.

Net income and earnings per common share equaled $(343) or $(0.03) per common share and $856 or $0.08 per common share for the three and nine months ended September 30, 2014 and $12,705 or $1.23 per common share and $13,937 or $1.35 per common share for the three and nine months ended September 30, 2013, respectively. Net income for 2013 includes an after-tax credit of $10,621 or $1.03 per common share for estimated additional insurance recoveries for asbestos liabilities through 2022 as a result of insurance coverage settlement agreements entered into during the third quarter of 2013.

Liquidity and Capital Resources

Net cash flows provided by operating activities decreased for the nine months ended September 30, 2014 when compared to the nine months ended September 30, 2013. While the credit for asbestos litigation recorded in 2013 improved earnings, it did not impact cash flows by the same amount. Instead, the additional insurance coverage will reduce ongoing payments required by the Corporation’s Air & Liquid System’s subsidiary. Net asbestos-related payments, including reimbursements for past costs, equaled $3,364 and

$(1,592) for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net cash flows provided by operating activities is primarily due to changes in working capital, principally an increase in accounts receivable, and less asbestos-related insurance recoveries as the first quarter of 2013 included a higher reimbursement from insurance carriers for past costs. During 2013, voluntary contributions to employee benefit plans equaled $5,000. No voluntary contributions were made is 2014.

Net cash flows used in investing activities represent primarily capital expenditures for the Forged and Cast Rolls segment. As of September 30, 2014, future capital expenditures approximating $4,353, to be spent over the next 12-18 months, have been approved.

Net cash flows used in financing activities represent primarily payment of dividends offset by proceeds from the exercise of stock options and resulting excess tax benefits.

As a result of the above, cash and cash equivalents decreased $5,937 in 2014 and ended the period at $91,973 (of which approximately $8,443 is held by foreign operations) in comparison to $97,910 at December 31, 2013 (of which approximately $8,100 was held by foreign operations). Repatriation of foreign funds may result in the Corporation accruing and paying additional income tax; however, the majority of such amounts are currently deemed to be permanently reinvested and no additional provision for income tax has been made.

 

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Funds on hand and funds generated from future operations are expected to be sufficient to finance the operational and capital expenditure requirements of the Corporation. The Corporation also maintains short-term lines of credit and an overdraft facility in excess of the cash needs of its businesses. The total available at September 30, 2014 was approximately $9,400 (including £3,000 in the U.K. and €400 in Belgium).

Litigation and Environmental Matters

See Notes 12 and 13 to the condensed consolidated financial statements.

Critical Accounting Pronouncements

The Corporation’s critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2013, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-Q contain forward-looking statements that reflect the Corporation’s current views with respect to future events and financial performance.

Forward-looking statements are identified by the use of the words “believes,” “expects,” “anticipates,” “estimates,” “projects,” “forecasts” and other expressions that indicate future events and trends. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations and involve risks and uncertainties. For the Corporation, these risks and uncertainties include, but are not limited to, those described under Item 1A, Risk Factors, of Part II of this Form 10-Q. In addition, there may be events in the future that the Corporation is not able to predict accurately or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. Except as required by applicable law, the Corporation undertakes no obligation to update any forward-looking statement whether as a result of new information, events or otherwise.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Corporation’s exposure to market risk from December 31, 2013.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission (“SEC”) rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Corporation’s management, including the principal executive officer and principal financial officer, has concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2014.

(c) Changes in internal control over financial reporting. There were no changes in the Corporation’s internal control over financial reporting during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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PART II – OTHER INFORMATION

AMPCO-PITTSBURGH CORPORATION

 

Item 1 Legal Proceedings

 

     The information contained in Note 12 to the condensed consolidated financial statements (Litigation) is incorporated herein by reference.

 

Item 1A Risk Factors

 

     There are no material changes to the Risk Factors contained in Item 1A to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Items 2-5 None

 

Item 6 Exhibits

 

  (3) Articles of Incorporation and By-laws

 

  (a) Articles of Incorporation
       Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1983, March 31, 1984, March 31, 1985, March 31, 1987 and September 30, 1998.

 

  (b) By-laws
       Incorporated by reference to the Form 8-K dated December 21, 2010.

 

  (31.1) Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

  (31.2) Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

  (32.1) Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  (32.2) Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  (101) Interactive Data File (XBRL)

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    AMPCO-PITTSBURGH CORPORATION
DATE: November 10, 2014     BY:   /s/ Robert A. Paul
    Robert A. Paul
    Chairman and Chief Executive Officer
DATE: November 10, 2014     BY:   /s/ Marliss D. Johnson
   

Marliss D. Johnson

    Chief Financial Officer and Treasurer

 

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AMPCO-PITTSBURGH CORPORATION

EXHIBIT INDEX

 

Exhibit    (31.1) Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   (31.2) Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   (32.1) Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   (32.2) Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   (101) Interactive Data File (XBRL)

 

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