NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Unaudited Condensed Consolidated Financial Statements
1.
|
Unaudited Condensed Consolidated Financial Statements
|
The condensed consolidated balance sheet as of September 30, 2012, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30,
2012 and 2011 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 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, 2012 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.
Recently Implemented Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04,
Fair Value Measurement: Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
ASU 2011-04 is to be applied prospectively and is effective for the Corporation for interim and annual periods beginning in 2012. The guidance primarily
changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements and did not impact operating results, financial position or liquidity of the
Corporation.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income
, which eliminates the option to present
other comprehensive income and its components as part of the statement of shareholders equity. All non-owner changes in shareholders equity will be presented either in a single continuous statement along with net income or in a separate
statement immediately following the statement of income. ASU 2011-05 is to be applied retrospectively and is effective for the Corporation for interim and annual periods beginning in 2012. The guidance does not change whether items are reported in
net income or other comprehensive income or when items in other comprehensive income are reclassified to net income; accordingly, adoption of ASU 2011-05 did not impact operating results, financial position or liquidity of the Corporation. The
Corporation elected to present other comprehensive income and its components as a separate statement immediately following its condensed consolidated statements of operations.
Recently Issued Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities,
which requires expanded
disclosures, including gross and net information, about financial and derivative instruments that are either offset in the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. The guidance is effective for
reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively. The new guidance affects disclosures only and will not impact operating results, financial position or liquidity of the Corporation.
At September 30, 2012 and December 31, 2011, approximately 61% and 62%, respectively, of the inventories were
valued on the LIFO method with the remaining inventories valued on the FIFO method. Inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Raw materials
|
|
$
|
20,870
|
|
|
$
|
20,798
|
|
Work-in-process
|
|
|
32,758
|
|
|
|
29,314
|
|
Finished goods
|
|
|
13,518
|
|
|
|
7,835
|
|
Supplies
|
|
|
11,495
|
|
|
|
10,597
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,641
|
|
|
$
|
68,544
|
|
|
|
|
|
|
|
|
|
|
7
3.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Land and land improvements
|
|
$
|
4,982
|
|
|
$
|
4,974
|
|
Buildings
|
|
|
41,694
|
|
|
|
41,433
|
|
Machinery and equipment
|
|
|
235,020
|
|
|
|
224,426
|
|
Construction-in-progress
|
|
|
10,028
|
|
|
|
12,446
|
|
Other
|
|
|
8,589
|
|
|
|
8,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,313
|
|
|
|
291,698
|
|
Accumulated depreciation
|
|
|
(149,945
|
)
|
|
|
(141,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,368
|
|
|
$
|
150,240
|
|
|
|
|
|
|
|
|
|
|
Land and buildings of Union Electric Steel UK Limited (UES-UK) equal to approximately $1,351,000
(£836,000) at September 30, 2012 are held as collateral by the trustees of the UES-UK contributory defined benefit pension plan (see Note 5).
4.
|
Other Current Liabilities
|
Other current liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Customer-related liabilities
|
|
$
|
10,106
|
|
|
$
|
10,506
|
|
Accrued sales commissions
|
|
|
1,702
|
|
|
|
2,245
|
|
Dividend payable
|
|
|
1,862
|
|
|
|
1,859
|
|
Other
|
|
|
7,879
|
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,549
|
|
|
$
|
20,337
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of the period
|
|
$
|
5,488
|
|
|
$
|
4,942
|
|
|
$
|
5,498
|
|
|
$
|
5,113
|
|
Satisfaction of warranty claims
|
|
|
(604
|
)
|
|
|
(386
|
)
|
|
|
(1,869
|
)
|
|
|
(1,926
|
)
|
Provision for warranty claims
|
|
|
980
|
|
|
|
872
|
|
|
|
2,211
|
|
|
|
2,170
|
|
Other, primarily impact from changes in foreign currency exchange rates
|
|
|
87
|
|
|
|
(76
|
)
|
|
|
111
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
5,951
|
|
|
$
|
5,352
|
|
|
$
|
5,951
|
|
|
$
|
5,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
5.
|
Pension and Other Postretirement Benefits
|
Contributions for the nine months ended September 30, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
2012
|
|
|
2011
|
|
U.S. pension benefits plans
|
|
$
|
0
|
|
|
$
|
0
|
|
U.K. pension benefits plan
|
|
$
|
1,333
|
|
|
$
|
1,276
|
|
Other postretirement benefits (e.g. net payments)
|
|
$
|
449
|
|
|
$
|
487
|
|
U.K. defined contribution plan
|
|
$
|
232
|
|
|
$
|
307
|
|
Net periodic pension and other postretirement costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
U.S. Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
986
|
|
|
$
|
779
|
|
|
$
|
2,958
|
|
|
$
|
2,336
|
|
Interest cost
|
|
|
2,129
|
|
|
|
2,216
|
|
|
|
6,386
|
|
|
|
6,650
|
|
Expected return on plan assets
|
|
|
(2,389
|
)
|
|
|
(2,415
|
)
|
|
|
(7,167
|
)
|
|
|
(7,244
|
)
|
Amortization of prior service cost
|
|
|
167
|
|
|
|
164
|
|
|
|
501
|
|
|
|
492
|
|
Amortization of actuarial loss
|
|
|
1,522
|
|
|
|
1,059
|
|
|
|
4,565
|
|
|
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
2,415
|
|
|
$
|
1,803
|
|
|
$
|
7,243
|
|
|
$
|
5,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Pension Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
626
|
|
|
$
|
649
|
|
|
$
|
1,871
|
|
|
$
|
1,952
|
|
Expected return on plan assets
|
|
|
(525
|
)
|
|
|
(579
|
)
|
|
|
(1,569
|
)
|
|
|
(1,742
|
)
|
Amortization of actuarial loss
|
|
|
150
|
|
|
|
124
|
|
|
|
447
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
251
|
|
|
$
|
194
|
|
|
$
|
749
|
|
|
$
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
280
|
|
|
$
|
161
|
|
|
$
|
603
|
|
|
$
|
482
|
|
Interest cost
|
|
|
230
|
|
|
|
255
|
|
|
|
689
|
|
|
|
765
|
|
Amortization of prior service cost
|
|
|
21
|
|
|
|
21
|
|
|
|
64
|
|
|
|
64
|
|
Amortization of actuarial loss
|
|
|
(152
|
)
|
|
|
64
|
|
|
|
54
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
379
|
|
|
$
|
501
|
|
|
$
|
1,410
|
|
|
$
|
1,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of credit as of September 30, 2012 approximated $19,053,000, 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 $1,325,000 (£850,000) toward the purchase and installation of certain machinery and equipment of which $1,083,000 (£680,000) 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-UKs 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 11 regarding litigation and Note 12 for environmental matters.
9
7.
|
Foreign Currency Exchange and Futures Contracts
|
Certain of the Corporations operations 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 and are recorded in the condensed consolidated balance sheets as either an asset or a
liability measured at their fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. To the extent that a derivative is designated and effective as a cash flow hedge of an exposure to future
changes in value, the change in fair value of the derivative is deferred in accumulated other comprehensive income (loss). Any portion considered to be ineffective, including that arising from the unlikelihood of an anticipated transaction to occur,
is reported as a component of earnings (other income/expense) immediately. Upon occurrence of the anticipated transaction, the derivative designated and effective as a cash flow hedge is de-designated as a fair value hedge and the change in fair
value previously deferred in accumulated other comprehensive income (loss) is reclassified to earnings (net sales) with subsequent changes in fair value recorded as a component of earnings (other income/expense). To the extent that a derivative is
designated and effective as a hedge of an exposure to changes in fair value, the change in the derivatives fair value will be offset in the condensed consolidated statement of operations by the change in the fair value of the item being hedged
and is recorded as a component of earnings (other income/expense).
As of September 30, 2012, approximately $20,556,000 of
anticipated foreign-denominated sales has been hedged of which $877,000 is covered by cash flow contracts settling at various dates through March 2013 and the remaining $19,679,000 is covered by fair value contracts settling at various dates through
September 2013. The fair value of assets held as collateral for the fair value hedge contracts as of September 30, 2012 approximated $808,000.
Additionally, certain of the Corporations divisions 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. The change in fair value of the derivative is deferred in accumulated other comprehensive income (loss). Any portion considered to be ineffective, including that arising
from the unlikelihood of an anticipated transaction to occur, is reported as a component of earnings (other income/expense) immediately. Upon occurrence of the anticipated transaction, the futures contract is settled and the change in fair value
previously deferred in accumulated other comprehensive income (loss) is reclassified to earnings (costs of products sold) when the projected sale occurs. At September 30, 2012, approximately 58% or $2,856,000 of anticipated copper purchases
over the next eight months and 63% or $794,000 of anticipated aluminum purchases over the next six months are hedged. The fair value of assets held as collateral as of September 30, 2012 equaled $500,000.
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. The change in the fair value is included in accumulated other
comprehensive income (loss) and is being amortized to pre-tax earnings (as an offset to depreciation expense) over the life of the underlying assets.
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 the hedge.
The location and fair value of the foreign
currency sales contracts recorded on the consolidated balance sheets as of September 30, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Location of Fair Value
in Balance Sheets
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
Cash flow hedge contracts
|
|
Other current assets
|
|
$
|
111
|
|
|
$
|
256
|
|
|
|
Noncurrent assets
|
|
$
|
0
|
|
|
$
|
57
|
|
|
|
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
$
|
394
|
|
|
$
|
107
|
|
|
|
Noncurrent assets
|
|
$
|
0
|
|
|
$
|
112
|
|
|
|
|
|
Fair value hedged item
|
|
Accounts receivable
|
|
$
|
(74
|
)
|
|
$
|
(72
|
)
|
|
|
Other current liability
|
|
$
|
340
|
|
|
$
|
174
|
|
|
|
Noncurrent liability
|
|
$
|
0
|
|
|
$
|
116
|
|
10
The change in the fair value of the cash flow contracts is recorded as a component of
accumulated other comprehensive income (loss). The balances as of December 31, 2011 and September 30, 2012 and the amount recognized as and released from accumulated other comprehensive income (loss) for the nine months ended
September 30, 2012 is summarized below. All amounts are after-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Recognized
as
Comprehensive Income (Loss)
|
|
|
Released from Accumulated
Other Comprehensive
Income (Loss)
|
|
|
|
|
|
|
December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2012
|
|
|
2012
|
|
|
2012
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
114
|
|
|
$
|
14
|
|
|
$
|
83
|
|
|
$
|
45
|
|
|
|
|
|
|
Foreign currency sales contracts fair value hedges
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
$
|
309
|
|
|
$
|
0
|
|
|
$
|
13
|
|
|
$
|
296
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
$
|
(314
|
)
|
|
$
|
158
|
|
|
$
|
(273
|
)
|
|
$
|
117
|
|
The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive income (loss)
to earnings is summarized below. All amounts are pretax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Location of Gain (Loss)
In Statements of
Operations
|
|
Estimated to be
reclassified with the
next 12 months
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Foreign currency sales
contracts cash flow hedges
|
|
Sales
|
|
$
|
72
|
|
|
$
|
52
|
|
|
$
|
(18
|
)
|
|
$
|
131
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
Foreign currency sales
contracts fair value hedges
|
|
N/A
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
Foreign currency purchase
contracts
|
|
Depreciation expense
|
|
$
|
27
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
20
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
Futures contracts copper and
aluminum
|
|
Costs of products sold
(excluding depreciation)
|
|
$
|
117
|
|
|
$
|
(192
|
)
|
|
$
|
(46
|
)
|
|
$
|
(438
|
)
|
|
$
|
734
|
|
Gains (losses) on foreign exchange transactions included in other income (expense) approximated $77,000 and $(103,000)
for the three months ended September 30, 2012 and 2011, respectively, and $155,000 and $27,000 for the nine months ended September 30, 2012 and 2011, respectively.
At September 30, 2012, the Corporation has purchase commitments covering 48% or $8,000,000 of anticipated natural gas usage over approximately the next three years at one of its subsidiaries. The
commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheets.
The
Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
11
8.
|
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 Corporations 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. 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.
In May 2012, the Compensation Committee granted 164,500 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 $17.67 was equal to the closing price of the Corporations common stock on the New York Stock Exchange on the date of grant and the fair value of the options was $6.68 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 0.76%, an expected dividend yield of
3.01% and an expected volatility of 53.46%. The resultant stock-based compensation expense of $1,099,000 will be recognized over the requisite service period of three years.
The Incentive Plan also provides for annual grants of shares of the Corporations common stock to the eight non-employee directors following the Corporations annual shareholder meeting. Each
annual director award will be for a number of shares having a fair market value equal to $25,000 and will be fully vested as of the grant date. In June 2012, 11,320 shares of common stock were issued to the non-employee directors.
Stock-based compensation expense for the three months ended September 30, 2012 and 2011 equaled $296,000 and $497,000, respectively.
The related income tax benefit recognized in the condensed consolidated statement of operations for each of the periods was approximately $103,000 and $174,000, respectively. Stock-based compensation expense for the nine months ended
September 30, 2012 and 2011 equaled $961,000 and $1,458,000, respectively. The related income tax benefit recognized in the condensed consolidated statement of operations for each of the periods was approximately $336,000 and $510,000,
respectively.
The Corporations financial assets and liabilities that are reported at fair value in the accompanying condensed
consolidated balance sheets as of September 30, 2012 and December 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
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, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,318
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,318
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
0
|
|
|
$
|
(74
|
)
|
|
$
|
0
|
|
|
$
|
(74
|
)
|
Other current assets
|
|
$
|
0
|
|
|
$
|
505
|
|
|
$
|
0
|
|
|
$
|
505
|
|
Other current liabilities
|
|
$
|
0
|
|
|
$
|
340
|
|
|
$
|
0
|
|
|
$
|
340
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,090
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,090
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
0
|
|
|
$
|
(72
|
)
|
|
$
|
0
|
|
|
$
|
(72
|
)
|
Other current assets
|
|
$
|
0
|
|
|
$
|
363
|
|
|
$
|
0
|
|
|
$
|
363
|
|
Other noncurrent assets
|
|
$
|
0
|
|
|
$
|
169
|
|
|
$
|
0
|
|
|
$
|
169
|
|
Other current liabilities
|
|
$
|
0
|
|
|
$
|
174
|
|
|
$
|
0
|
|
|
$
|
174
|
|
Other noncurrent liabilities
|
|
$
|
0
|
|
|
$
|
116
|
|
|
$
|
0
|
|
|
$
|
116
|
|
12
Fair Value of Financial Instruments
The investments held as other noncurrent assets represent assets held in the Rabbi trust for the purpose of providing benefits
under the 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 approximate their carrying value.
Presented below are the net sales and income before income taxes for the Corporations two business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
46,431
|
|
|
$
|
49,312
|
|
|
$
|
133,963
|
|
|
$
|
182,114
|
|
Air and Liquid Processing
|
|
|
25,759
|
|
|
|
24,951
|
|
|
|
81,788
|
|
|
|
76,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
$
|
72,190
|
|
|
$
|
74,263
|
|
|
$
|
215,751
|
|
|
$
|
258,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
4,846
|
|
|
$
|
4,604
|
|
|
$
|
12,226
|
|
|
$
|
30,274
|
|
Air and Liquid Processing
|
|
|
1,026
|
|
|
|
1,815
|
|
|
|
5,734
|
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
5,872
|
|
|
|
6,419
|
|
|
|
17,960
|
|
|
|
37,371
|
|
Other expense, including corporate costs net
|
|
|
(2,341
|
)
|
|
|
(2,978
|
)
|
|
|
(7,930
|
)
|
|
|
(8,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,531
|
|
|
$
|
3,441
|
|
|
$
|
10,030
|
|
|
$
|
28,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Litigation (claims not in thousands)
|
The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses. In
addition, 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 Corporations Air & Liquid Systems Corporation subsidiary (Asbestos Liability) and of an inactive subsidiary in dissolution. 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.
13
Asbestos Claims
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 in dissolution, for the nine months ended September, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Total claims pending at the beginning of the period
|
|
|
8,145
|
|
|
|
8,081
|
|
New claims served
|
|
|
1,343
|
|
|
|
1,434
|
|
Claims dismissed
|
|
|
(329
|
)
|
|
|
(1,162
|
)
|
Claims settled
|
|
|
(190
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
Total claims pending at the end of the period
|
|
|
8,969
|
(1)
|
|
|
8,156
|
(
2
)
|
|
|
|
|
|
|
|
|
|
Gross settlement and defense costs (in 000s)
|
|
$
|
16,738
|
|
|
$
|
16,927
|
|
|
|
|
|
|
|
|
|
|
Average gross settlement and defense costs per claim resolved (in 000s)
|
|
$
|
32
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included as open claims are approximately 1,658 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.
|
|
(2)
|
Included as open claims are approximately 1,688 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.
|
A substantial majority of the settlement and defense costs reflected in the above table were 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. In 2006, for the first time, a claim for Asbestos
Liability against one of the Corporations subsidiaries was tried to a jury. The trial resulted in a defense verdict. Plaintiffs appealed that verdict and in 2008 the California Court of Appeals reversed the jury verdict and remanded the case
back to the trial court. In 2012, the plaintiffs dismissed the case with prejudice which means it cannot be re-filed.
Asbestos Insurance
The Corporation and its Air & Liquid Systems Corporation (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). The Settlement Agreements include agreements with insurers encompassing all known solvent primary policies and solvent first-layer excess policies
with responsibilities for Asbestos Liability. The Settlement Agreements also include an agreement, effective on October 8, 2012, with insurers responsible for the majority of the solvent second-layer and above excess insurance policies issued
to the Corporation from 1981 through 1984. 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 claims against the Corporations inactive subsidiary that is in dissolution proceedings, numbering approximately 284 as of September 30, 2012, are not included within the Settlement Agreements. The
Corporation believes that the claims against the inactive subsidiary in dissolution are immaterial.
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.
14
On February 24, 2011, the Corporation and its Air & Liquid subsidiary filed a
lawsuit in the United States District Court for the Western District of Pennsylvania against thirteen domestic insurance companies, certain underwriters at Lloyds, 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 entered into an agreement, effective October 8, 2012, as described above, with eight of the
domestic defendant insurers in the action. That agreement specifies the terms and conditions upon which the insurer parties would contribute to defense and indemnity costs for claims for Asbestos Liability. Howden also reached an agreement with such
insurers, effective the same day, addressing asbestos-related bodily injury claims arising from the Products. On October 16, 2012, the Court entered Orders dismissing all claims filed by the Corporation and Air & Liquid, Howden and the
eight settling excess insurers against each other in the litigation. Various counterclaims, cross claims and third party claims have been filed in the litigation and remain pending as to non-settled parties.
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. HR&A was not requested to estimate asbestos claims against the inactive subsidiary in dissolution or the former division, which
the Corporation believes are immaterial. 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&As analysis was updated in
2008, and additional reserves were established by the Corporation as at December 31, 2008 for Asbestos Liability claims pending or projected to be asserted through 2018. HR&As analysis was most recently updated in 2010, and additional
reserves were established by the Corporation as at December 31, 2010 for Asbestos Liability claims pending or projected to be asserted through 2020. The methodology used by HR&A in its projection in 2010 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 the 2006 and 2008 estimates, relied upon and included the following factors:
|
|
|
HR&As 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&As 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, 2008 to August 30, 2010;
|
|
|
|
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, 2008 to August 30, 2010 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
Offices ten year forecast of inflation.
|
Using this information, HR&A estimated in 2010 the number
of future claims for Asbestos Liability that would be filed through the year 2020, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2020. This methodology has been
accepted by numerous courts. For purposes of its consolidated financial statements for the nine months ended September 30, 2012, the Corporation reviewed its current Asbestos Liability and ultimately utilized the estimate by HR&A completed
in 2010, as updated by the Corporation to reflect its Asbestos Liability expenditures through September 30, 2012.
15
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&As projection for settlement or indemnity costs for Asbestos Liability and
managements 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, 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, policy exhaustions, 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 Corporations 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 Corporations outside legal counsel on these insurance matters, the Corporation retained in 2010 a nationally-recognized insurance consulting firm 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 Corporations 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 2020. 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 Corporations reserve at December 31, 2010 for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be
asserted through 2020 was $218,303,000,of which approximately 85% was attributable to settlement costs for unasserted claims projected to be filed through 2020 and future defense costs ($180,716,000 as of September 30, 2012). 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 2020. Accordingly, no reserve has been recorded for any costs that may be incurred after 2020.
The Corporations receivable at December 31, 2010 for insurance recoveries attributable to the claims for which the
Corporations Asbestos Liability reserve has been established, including the portion of incurred defense costs covered by the Settlement Agreements in effect through September 30, 2012, and the probable payments and reimbursements relating
to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $141,839,000 ($115,916,000 as of September 30, 2012).
The following table summarizes activity for the three and nine months ended September 30, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Insurance receivable asbestos at beginning of period
|
|
$
|
119,625
|
|
|
$
|
133,927
|
|
|
$
|
126,206
|
|
|
$
|
141,839
|
|
Settlements and defense costs paid by insurance carriers
|
|
|
(3,709
|
)
|
|
|
(3,924
|
)
|
|
|
(10,290
|
)
|
|
|
(11,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivable asbestos at end of period
|
|
$
|
115,916
|
|
|
$
|
130,003
|
|
|
$
|
115,916
|
|
|
$
|
130,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
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 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 the subsidiaries and it may incur after 2020.
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 insurance receivable through September 30, 2012
does not reflect the impact of the settlement agreement reached by the Corporation and its Air & Liquid Systems Corporation subsidiary with eight domestic excess insurers effective October 8, 2012. The Corporations analysis of
the impact of that settlement agreement remains on-going. The Corporation believes that such agreement is generally consistent with and supportive of its prior determination of its insurance receivable under applicable accounting standards.
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 Corporations actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Corporations or HR&As 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, the
resolution of coverage issues with insurance carriers, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect the Corporations Asbestos Liability and ability to recover under its insurance policies
include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, 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 Corporations 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 Corporations 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. Settlements were paid by the Corporations insurance carriers at two third-party landfill sites where it was named a Potentially Responsible Party. In addition, as a result of a sale of a segment in 2003, the Corporation retained the
liability to remediate certain environmental contamination and has agreed to indemnify the buyer against third-party claims arising from the discharge of certain contamination, the costs for which were 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 and in consideration of advice from the Corporations consultants, the potential liability for all
environmental proceedings of approximately $1,210,000 at September 30, 2012 is considered adequate based on information known to date.
17