NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
|
Unaudited
Condensed Consolidated Financial
Statements
|
The
condensed
consolidated balance sheet as of September 30, 2007, the condensed consolidated
statements of operations for the nine and three months ended September 30,
2007
and 2006 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 2007 and 2006 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 nine and three months ended September 30, 2007 are not necessarily
indicative of the operating results expected for the full year.
Certain
information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted.
Recently
Adopted
Accounting Pronouncement
Effective
January
1, 2007, the Corporation adopted the provisions of FASB Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes” (FIN 48) which provides guidance
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return as well as subsequent changes in a
tax
position, calculation of penalties and interest, accounting in interim periods,
disclosure, and transition. As a result, at January 1, 2007, the Corporation
recognized a decrease in the liability for unrecognized tax benefits of
approximately $65,000, which was recorded as an adjustment to the opening
balance of retained earnings, resulting in a balance of approximately $929,000,
including penalties and interest. If the unrecognized tax benefits were
recognized, the full amount would reduce the Corporation’s effective tax rate.
Penalties and interest related to the potential disallowance of a tax position
taken are recognized as a component of the income tax provision. Accrued
penalties and interest approximated $64,000 as of January 1, 2007. It is
expected that the amount of unrecognized tax benefits will change within the
next 12 months; however, the impact is not expected to be significant. The
Corporation is subject to taxation in the U.S., various states and foreign
jurisdictions, and remains subject to examination by taxing authorities for
tax
years 2004-2006.
2.
|
Investment
in Joint Venture
|
In
May 2007, a newly-formed subsidiary of Union Electric Steel (UES), a
wholly-owned subsidiary of the Corporation, entered into an agreement with
Maanshan Iron & Steel Company Limited (Maanshan) to form a joint venture
which will principally manufacture and sell forged backup rolling-mill rolls
of
a size and weight currently not able to be
-
6 -
produced
by UES. It
is anticipated that the joint venture will begin production at the end of 2009
and will have an initial annual capacity ofapproximately 10,000 metric tons.
UES
will contribute $14,700,000 cash over a number of years, with the initial
contribution of approximately $3,000,000 made before the end of 2007, for a
49%
interest in the newly-created joint venture and Maanshan will contribute $15.3
million cash for a 51% interest. UES will account for its interest in the joint
venture under the equity method of accounting.
At
September 30, 2007 and December 31, 2006, approximately 58% and 60%,
respectively, of the inventories were valued on the LIFO method, with the
remaining inventories being valued on the FIFO method. Inventories
were comprised of the following:
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
15,806
|
|
|
$
|
12,624
|
|
Work-in-process
|
|
|
32,004
|
|
|
|
28,490
|
|
Finished
goods
|
|
|
8,931
|
|
|
|
7,425
|
|
Supplies
|
|
|
8,418
|
|
|
|
7,373
|
|
|
|
$
|
65,159
|
|
|
$
|
55,912
|
|
4.
Property,
Plant and
Equipment
|
Property,
plant and equipment were comprised of the
following:
|
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Land
and land
improvements
|
|
$
|
4,440
|
|
|
$
|
4,438
|
|
Buildings
|
|
|
27,194
|
|
|
|
27,162
|
|
Machinery
and
equipment
|
|
|
149,803
|
|
|
|
143,067
|
|
|
|
|
181,437
|
|
|
|
174,667
|
|
Accumulated
depreciation
|
|
|
(111,204
|
)
|
|
|
(106,074
|
)
|
|
|
$
|
70,233
|
|
|
$
|
68,593
|
|
5.
|
Other
Current Liabilities
|
Other
current liabilities
were comprised of the following:
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Customer-related
liabilities
|
|
$
|
10,498
|
|
|
$
|
9,867
|
|
Accrued
sales
commissions
|
|
|
3,048
|
|
|
|
2,837
|
|
Accrued
income taxes payable
|
|
|
3,683
|
|
|
|
1,043
|
|
Other
|
|
|
10,674
|
|
|
|
8,966
|
|
|
|
$
|
27,903
|
|
|
$
|
22,713
|
|
Included
in
customer-related liabilities are costs expected to be incurred with respect
to
product warranties. Changes in the liability for product warranty
claims for the nine and three months ended September 30, 2007 and 2006 consisted
of:
|
|
(in
thousands)
|
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
beginning of the period
|
|
$
|
5,567
|
|
|
$
|
3,786
|
|
|
$
|
6,779
|
|
|
$
|
4,290
|
|
Satisfaction
of warranty claims
|
|
|
(2,115
|
)
|
|
|
(2,101
|
)
|
|
|
(870
|
)
|
|
|
(757
|
)
|
Provision
for
warranty claims
|
|
|
2,913
|
|
|
|
2,769
|
|
|
|
548
|
|
|
|
1,112
|
|
Other,
primarily impact from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
changes
in foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
rates
|
|
|
147
|
|
|
|
224
|
|
|
|
55
|
|
|
|
33
|
|
Balance
at
end of the period
|
|
$
|
6,512
|
|
|
$
|
4,678
|
|
|
$
|
6,512
|
|
|
$
|
4,678
|
|
6.
Pension
and Other Postretirement Benefits
Contributions
for
the nine months ended September 30, 2007 and 2006 were as follows:
|
|
(in
thousands)
|
|
|
|
2007
|
|
|
2006
|
|
U.S.
pension
benefits plans
|
|
$
|
-
|
|
|
$
|
-
|
|
U.K.
pension
benefits plan
|
|
$
|
1,326
|
|
|
$
|
425
|
|
Other
postretirement benefits
(e.g.
net
payments)
|
|
$
|
499
|
|
|
$
|
518
|
|
U.K.
defined
contribution plan
|
|
$
|
362
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
As
a result of the unfunded status of the U.K. pension benefits plan, the
Corporation has committed to contribute an additional $400,000 (£200,000) in
2007 bringing total contributions for 2007 to the plan to approximately
$1,900,000.
Net
periodic
pension and other postretirement costs include the following
components:
|
|
(in
thousands)
|
|
|
|
U.S.
Pension
Benefits
|
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,980
|
|
|
$
|
1,771
|
|
|
$
|
641
|
|
|
$
|
590
|
|
Interest
cost
|
|
|
5,755
|
|
|
|
5,254
|
|
|
|
1,971
|
|
|
|
1,752
|
|
Expected
return on plan assets
|
|
|
(8,723
|
)
|
|
|
(9,372
|
)
|
|
|
(2,901
|
)
|
|
|
(3,124
|
)
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
481
|
|
|
|
463
|
|
|
|
161
|
|
|
|
154
|
|
Actuarial
gain
|
|
|
(86
|
)
|
|
|
(89
|
)
|
|
|
(18
|
)
|
|
|
(30
|
)
|
Net
benefit
income
|
|
$
|
(593
|
)
|
|
$
|
(1,973
|
)
|
|
$
|
(146
|
)
|
|
$
|
(658
|
)
|
-
8
-
|
|
(in
thousands)
|
|
|
|
U.K.
Pension
Benefits
|
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
2,023
|
|
|
$
|
1,666
|
|
|
$
|
685
|
|
|
$
|
573
|
|
Expected
return on plan assets
|
|
|
(1,990
|
)
|
|
|
(1,620
|
)
|
|
|
(674
|
)
|
|
|
(557
|
)
|
Amortization
of actuarial loss
|
|
|
351
|
|
|
|
288
|
|
|
|
119
|
|
|
|
99
|
|
Net
benefit
cost
|
|
$
|
384
|
|
|
$
|
334
|
|
|
$
|
130
|
|
|
$
|
115
|
|
|
|
(in
thousands)
|
|
|
Other
Postretirement Benefits
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
300
|
|
|
$
|
302
|
|
|
$
|
103
|
|
|
$
|
131
|
|
Interest
cost
|
|
|
568
|
|
|
|
611
|
|
|
|
151
|
|
|
|
214
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost (benefit)
|
|
|
26
|
|
|
|
(335
|
)
|
|
|
8
|
|
|
|
(112
|
)
|
Actuarial
loss
|
|
|
76
|
|
|
|
207
|
|
|
|
(1
|
)
|
|
|
101
|
|
Net
benefit
cost
|
|
$
|
970
|
|
|
$
|
785
|
|
|
$
|
261
|
|
|
$
|
334
|
|
7.
|
Commitments
and Contingent Liabilities
|
Outstanding
commercial letters of credit as of September 30, 2007 approximated $21,025,000,
a major portion of which serves as collateral for the Industrial Revenue Bond
debt.
In
connection with the sale of certain subsidiaries in 2003, the Corporation
provided typical warranties to the buyer (such as those relating to income
taxes, intellectual property, legal proceedings, product liabilities and title
to property, plant and equipment) which primarily expire with the statutes
of
limitations. Losses suffered by the buyer as a result of the Corporation’s
breach of warranties are reimbursable by the Corporation up to approximately
$2,000,000. No amount has been paid to date and based on experience while owning
the subsidiaries, the Corporation expects that no amounts will become
due.
Through
2006, Davy
Roll received U.K. governmental grants totaling $1,880,000 (£1,000,000) toward
the purchase and installation of certain machinery and equipment. Under the
agreement, the grants are repayable if certain conditions are not met including
achieving and maintaining a targeted level of employment through March
2009. At this date, Davy’s level of employment exceeds and is
expected to continue to exceed the targeted level of employment; accordingly,
no
liability has been recorded.
See
also Note 2 for
contributions to a joint venture, Note 11 regarding litigation and Note 12
for
environmental matters.
-
9 -
8.
Comprehensive
Income (Loss)
The
Corporation's
comprehensive income (loss) for the nine and three months ended September 30,
2007 and 2006 consisted of:
|
|
(in
thousands)
|
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
29,041
|
|
|
$
|
18,773
|
|
|
$
|
9,399
|
|
|
$
|
6,644
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments
|
|
|
672
|
|
|
|
2,705
|
|
|
|
(508
|
)
|
|
|
391
|
|
Unrecognized
components of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
benefit plans
|
|
|
566
|
|
|
|
-
|
|
|
|
188
|
|
|
|
-
|
|
Adjustment
to
minimum pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liability
|
|
|
-
|
|
|
|
(1,919
|
)
|
|
|
-
|
|
|
|
(283
|
)
|
Unrealized
holding gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses)
on marketable securities
|
|
|
1,020
|
|
|
|
(17
|
)
|
|
|
358
|
|
|
|
80
|
|
Change
in the
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
derivatives (cash flow hedges)
|
|
|
(1,108
|
)
|
|
|
(582
|
)
|
|
|
(791
|
)
|
|
|
20
|
|
Comprehensive
income
|
|
$
|
30,191
|
|
|
$
|
18,960
|
|
|
$
|
8,646
|
|
|
$
|
6,852
|
|
9.
Foreign
Exchange and Futures
Contracts
Certain
of the
Corporation’s operations are subject to risk from exchange rate fluctuations in
connection with sales in foreign currencies. To minimize this risk,
forward foreign exchange contracts are purchased which are designated as fair
value or cash flow hedges. As of September 30, 2007, approximately $96,082,000
of anticipated foreign-denominated sales has been hedged with the underlying
contracts settling at various dates through March 2011. As of
September 30, 2007, the fair value of contracts expected to settle within the
next 12 months, which is recorded in other current liabilities, approximated
$2,404,000 and the fair value of the remaining contracts, which is recorded
in
other noncurrent liabilities, approximated $2,721,000. The change in
the fair value of the contracts designated as cash flow hedges is recorded
as a
component of accumulated other comprehensive income (loss) and approximated
$(2,435,000), net of income taxes, as of September 30, 2007. The change in
fair
value will be reclassified into earnings when the projected sales occur with
approximately $(1,929,000) expected to be released to pre-tax earnings within
the next 12 months. During the nine months ended September 30, 2007
and 2006, approximately $(813,000) and $(591,000), respectively, were released
to pre-tax earnings, and during the three months ended September 30, 2007 and
2006, approximately $(320,000) and $(221,000), respectively, were released
to
pre-tax earnings.
(Losses)
gains on
foreign exchange transactions approximated $(752,000) and $665,000 for the nine
months ended September 30, 2007 and 2006, respectively, and $(270,000) and
$21,000 for the three months ended September 30, 2007 and 2006,
respectively.
In
addition, one of the Corporation’s subsidiaries is subject to risk from
increases in the price of a commodity (copper) used in the production of
inventory. To minimize this risk, futures contracts are
-
10 -
entered
into which
are designated as cash flow hedges. At September 30, 2007,
approximately 87% or $1,562,000 of anticipated copper purchases over the next
3
months are hedged. The fair value of these contracts was
insignificant as of September 30, 2007. During the nine months ended
September 30, 2007 and 2006, approximately $(25,000) and $1,490,000,
respectively, were released to pre-tax earnings and during the three months
ended September 30, 2007 and 2006, approximately $141,000 and $26,000,
respectively, were released to pre-tax earnings.
Additionally,
during the nine months ended September 30, 2007, the remaining termination
gain
of $779,000 resulting from the cancellation of futures contracts in May 2006
was
released to pre-tax earnings.
By
comparison, approximately $618,000 was released to pre-tax earnings during
the
nine and three months ended September 30, 2006.
10.
Business
Segments
Presented
below are
the net sales and income before income taxes for the Corporation's two business
segments.
|
|
(in
thousands)
|
|
|
|
Nine
Months
|
|
|
Three
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged
and Cast Rolls
|
|
$
|
185,010
|
|
|
$
|
154,897
|
|
|
$
|
61,251
|
|
|
$
|
54,468
|
|
Air
and
Liquid Processing
|
|
|
78,630
|
|
|
|
68,516
|
|
|
|
25,909
|
|
|
|
24,601
|
|
Total
Reportable Segments
|
|
$
|
263,640
|
|
|
$
|
223,413
|
|
|
$
|
87,160
|
|
|
$
|
79,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged
and Cast Rolls
|
|
$
|
41,345
|
|
|
$
|
26,088
|
|
|
$
|
13,222
|
|
|
$
|
9,681
|
|
Air
and
Liquid Processing
|
|
|
6,925
|
|
|
|
4,693
|
|
|
|
2,629
|
|
|
|
1,613
|
|
Total
Reportable Segments
|
|
|
48,270
|
|
|
|
30,781
|
|
|
|
15,851
|
|
|
|
11,294
|
|
Other
expense, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporate
costs – net
|
|
|
(5,124
|
)
|
|
|
(3,121
|
)
|
|
|
(1,925
|
)
|
|
|
(1,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,146
|
|
|
$
|
27,660
|
|
|
$
|
13,926
|
|
|
$
|
9,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
Litigation
(claims not in thousands)
The
Corporation and
its subsidiaries are involved in various claims and lawsuits incidental to
their
businesses. In addition, claims have been asserted alleging personal injury
from
exposure to asbestos-containing components historically used in some products
of
certain of the Corporation’s operating subsidiaries (“Asbestos Liability”) and
of an inactive subsidiary of the Corporation. Those subsidiaries, and in some
cases the Corporation, are defendants (among a number of defendants, typically
over 50) in cases filed in various state and federal courts. The following
table
reflects approximate information about the claims for Asbestos Liability against
the subsidiaries and the Corporation, along with certain asbestos claims
asserted against the inactive subsidiary, for the nine months ended September
30, 2007:
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11 -
Approximate
open claims at end of period
|
8,274
|
(1)
|
Gross
settlement and defense costs (in 000’s)
|
$12,124
|
Approximate
claims settled or dismissed
|
2,352
|
|
|
(1)
|
Included
as “open claims” are approximately
2,447
claims
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.
|
Substantially
all
settlement and defense costs reflected in the above table were 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.
Asbestos
Insurance
Certain
of the
Corporation’s subsidiaries and the Corporation have an arrangement (the
“Coverage Arrangement”) with insurers responsible for historical primary and
some umbrella insurance coverage for Asbestos Liability (the “Paying Insurers”).
Under the Coverage Arrangement, the Paying Insurers accept financial
responsibility, subject to the limits of the policies and based on fixed defense
percentages and specified indemnity allocation formulas, for a substantial
majority of the pending claims for Asbestos Liability.
The
Coverage
Arrangement includes an acknowledgement that Howden Buffalo, 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 Coverage
Arrangement does not provide for any prioritization on access to the applicable
policies or monetary cap other than the limits of the policies, and,
accordingly, Howden may access the policies at any time for any covered claim
arising out of a Product. In general, access by Howden to the policies covering
the Products will erode the coverage under the policies available to the
Corporation and the relevant subsidiaries for Asbestos Liability alleged to
arise out of not only the Products but also other historical products of the
Corporation and its subsidiaries covered by the applicable
policies.
Asbestos
Valuations
The
Corporation
retained Hamilton, Rabinovitz & Alschuler, 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. HR&A was not requested to estimate
asbestos claims against the inactive subsidiary, which the Corporation believes
are immaterial. The methodology used by HR&A to project the operating
subsidiaries’ liability for pending and unasserted potential future claims for
Asbestos Liability 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, 2004
through August 31, 2006;
|
|
•
|
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, 2004 through August 31,
2006 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 the number of future claims for Asbestos
Liability that would be filed through the year 2013, as well as the settlement
or indemnity costs that would be incurred to resolve both pending and future
unasserted claims through 2013. This methodology has been accepted by numerous
courts.
The
Corporation
also retained The Claro Group LLC (“Claro”), a nationally-recognized insurance
consulting firm, to assist, in combination with advice to the Corporation from
outside counsel, in analyzing potential recoveries from relevant historical
insurance for Asbestos Liability. Using HR&A’s projection for settlement or
indemnity costs for Asbestos Liability and management’s projections of
associated defense costs (based on current defense cost levels with an annual
5%
inflation factor), Claro allocated the Asbestos Liability to the insurance
policies. The allocations took into account the Coverage Arrangement,
self-insured retentions, policy exclusions, policy limits, policy provisions
regarding coverage for defense costs, attachment points, prior impairment of
policies and gaps in the coverage, insolvencies among certain of the insurance
carriers, 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. Based upon Claro’s
allocations, and taking into account the
Corporation’s
analysis of publicly available information on the credit-worthiness of various
insurers, the Corporation estimated the probable insurance recoveries for
Asbestos Liability and defense costs through 2013. Although the Corporation,
after consulting with its counsel and Claro, believes that the assumptions
employed in the insurance valuation were appropriate, 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 has recorded reserves for the total
costs, including defense costs, for Asbestos Liability claims pending or
projected to be asserted through 2013 of $140 million, of which approximately
60% is attributable to settlement and defense costs for unasserted claims
projected to be filed through 2013. While it is reasonably possible that the
Corporation will incur additional charges for Asbestos Liability and defense
costs in excess of
- 13
-
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 the next seven years.
Accordingly, no reserve has been recorded for any costs that may be incurred
after 2013.
The
Corporation has
also recorded a receivable of $114.5 million 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 Coverage Arrangement, and the probable payments and
reimbursements relating to the estimated indemnity and defense costs for pending
and unasserted future Asbestos Liability claims. The insurance receivable
recorded by the Corporation does not assume any recovery from insolvent
carriers, and substantially all of the insurance recoveries deemed probable
were
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 $25.5 million
difference between insurance recoveries and projected costs is not due to
exhaustion of the total product liability insurance 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 the subsidiaries and it may incur after 2013. 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
Corporation
intends to evaluate its estimated Asbestos Liability and related insurance
receivables as well as the underlying assumptions on a periodic basis to
determine whether any adjustments to the estimates are required. Due to the
uncertainties surrounding asbestos litigation and insurance, these periodic
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
-
14 -
insurance
receivables could be material to operating results for the periods in which
the
adjustments to the liability or receivable is recorded, and to the Corporation’s
liquidity and consolidated financial position.
12.
Environmental
Matters
The
Corporation is
currently performing certain remedial actions in connection with the sale of
real estate previously owned and has been named a Potentially Responsible Party
at three third-party landfill sites. In addition, as a result of the 2003 sale
of certain subsidiaries, the Corporation retained the liability to remediate
certain environmental contamination at two of the sold locations and has agreed
to indemnify the buyer against third-party claims arising from the discharge
of
certain contamination from one of these locations, the cost for which was
accrued at the time of sale. 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, the potential liability for all environmental proceedings of
approximately $2,073,000 at September 30, 2007 is considered adequate based
on
information known to date.
13.
|
Recently
Issued Accounting
Pronouncements
|
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments”, which provides
relief from having to separately determine the fair value of an embedded
derivative that would otherwise be required to be bifurcated from its host
contract. SFAS No. 155 became effective on January 1, 2007 and did
not have a significant impact on the Corporation’s financial position or results
of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures”, which
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles, and expands disclosures about fair
value measures. This statement applies under other accounting
pronouncements that require or permit fair value measurements; it does not
require any new fair value measures. SFAS No. 157 becomes effective for the
Corporation on January 1, 2008 and is not expected to have a significant impact
on the Corporation’s financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”, which permits entities to choose to
measure certain financial instruments and other items at fair
value. SFAS No. 159 becomes effective for the Corporation on January
1, 2008 and is not expected to have a significant impact on the Corporation’s
financial position or results of operations.
-
15
-