NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share and claim amounts)
1.
|
Unaudited Condensed Consolidated Financial Statements
|
The condensed consolidated balance sheet as of March 31, 2013 and the
condensed consolidated statements of operations, comprehensive (loss) income and cash flows for the three months ended March 31, 2013 and 2012 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 months ended March 31, 2013 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 December 2011, the Financial Accounting Standards Board (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 became effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively. The new guidance affects disclosures only and did not impact operating results, financial
position or liquidity of the Corporation.
In February 2013, the FASB issued ASU 2013-02,
Comprehensive Income: Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) on the respective line items in net income if
the amount being reclassified is required to be reclassified in its entirety to net income. Information may be reported either on the face of the income statement or in the footnotes to the financial statements. For other amounts that are not
required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other required disclosures. The guidance became effective for reporting periods beginning on or after
January 1, 2013. The guidance affects disclosures only. It 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, ASU
2013-02 did not impact the operating results, financial position or liquidity of the Corporation.
At March 31, 2013 and December 31, 2012, approximately 65% and 68% of the inventories were valued on the LIFO
method with the remaining inventories valued on the FIFO method. Inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
Raw materials
|
|
$
|
20,564
|
|
|
$
|
22,514
|
|
Work-in-process
|
|
|
31,568
|
|
|
|
31,164
|
|
Finished goods
|
|
|
7,677
|
|
|
|
5,907
|
|
Supplies
|
|
|
10,807
|
|
|
|
11,084
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,616
|
|
|
$
|
70,669
|
|
|
|
|
|
|
|
|
|
|
7
3.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
Land and land improvements
|
|
$
|
5,006
|
|
|
$
|
5,006
|
|
Buildings
|
|
|
44,519
|
|
|
|
43,411
|
|
Machinery and equipment
|
|
|
236,348
|
|
|
|
237,473
|
|
Construction-in-progress
|
|
|
9,710
|
|
|
|
7,493
|
|
Other
|
|
|
8,621
|
|
|
|
8,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304,204
|
|
|
|
302,057
|
|
Accumulated depreciation
|
|
|
(154,213
|
)
|
|
|
(151,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
149,991
|
|
|
$
|
150,297
|
|
|
|
|
|
|
|
|
|
|
Land and buildings of Union Electric Steel UK Limited (UES-UK) equal to approximately $4,062 (£2,672) at
March 31, 2013 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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
Customer-related liabilities
|
|
$
|
11,785
|
|
|
$
|
13,444
|
|
Accrued sales commissions
|
|
|
1,982
|
|
|
|
2,146
|
|
Other
|
|
|
8,816
|
|
|
|
8,883
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,583
|
|
|
$
|
24,473
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
6,625
|
|
|
$
|
5,498
|
|
Satisfaction of warranty claims
|
|
|
(545
|
)
|
|
|
(692
|
)
|
Provision for warranty claims
|
|
|
575
|
|
|
|
589
|
|
Other, primarily impact from changes in foreign currency exchange rates
|
|
|
(246
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
6,409
|
|
|
$
|
5,472
|
|
|
|
|
|
|
|
|
|
|
5.
|
Pension and Other Postretirement Benefits
|
Contributions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
U.K. pension benefits plan
|
|
$
|
438
|
|
|
$
|
444
|
|
Other postretirement benefits (e.g. net payments)
|
|
$
|
122
|
|
|
$
|
137
|
|
U.K. defined contribution plan
|
|
$
|
74
|
|
|
$
|
78
|
|
8
Net periodic pension and other postretirement costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
U.S. Pension Benefits
|
|
2013
|
|
|
2012
|
|
|
|
|
Service cost
|
|
$
|
1,169
|
|
|
$
|
821
|
|
Interest cost
|
|
|
2,020
|
|
|
|
2,194
|
|
Expected return on plan assets
|
|
|
(2,359
|
)
|
|
|
(2,383
|
)
|
Amortization of prior service cost
|
|
|
166
|
|
|
|
167
|
|
Amortization of actuarial loss
|
|
|
1,808
|
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
2,804
|
|
|
$
|
2,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
U.K. Pension Benefits
|
|
2013
|
|
|
2012
|
|
|
|
|
Interest cost
|
|
$
|
618
|
|
|
$
|
623
|
|
Expected return on plan assets
|
|
|
(595
|
)
|
|
|
(522
|
)
|
Amortization of actuarial loss
|
|
|
153
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
176
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Other Postretirement Benefits
|
|
2013
|
|
|
2012
|
|
|
|
|
Service cost
|
|
$
|
201
|
|
|
$
|
161
|
|
Interest cost
|
|
|
208
|
|
|
|
230
|
|
Amortization of prior service cost
|
|
|
21
|
|
|
|
22
|
|
Amortization of actuarial loss
|
|
|
84
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
514
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of credit as of March 31, 2013 approximated $18,656, 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-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 12 regarding litigation and Note 13 for environmental matters.
7.
|
Derivative Instruments
|
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 consolidated balance sheet 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 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).
9
As of March 31, 2013, approximately $19,143 of anticipated foreign-denominated sales
has been hedged which are covered by fair value contracts settling at various dates through January 2014. The fair value of assets held as collateral for the fair value contracts as of March 31, 2013 approximated $760. As of March 31,
2013, there were no cash flow contracts outstanding for future sales.
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, excluding depreciation) when the projected sales occur. At March 31, 2013, approximately 57% or $3,249 of anticipated copper purchases over the next nine months and 57% or $427 of anticipated aluminum purchases
over the next four months are hedged. The fair value of assets held as collateral as of March 31, 2013 equaled $485.
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.
At March 31, 2013, the Corporation has purchase commitments covering 46% or $6,276 of anticipated natural gas usage through 2015 at
one of its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the consolidated balance sheet.
The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
Gains (losses) on foreign exchange transactions included in other income (expense) approximated $(300) and $27 for the three months ended
March 31, 2013 and 2012, respectively.
The location and fair value of the foreign currency sales contracts recorded on
the consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Cash flow hedge contracts
|
|
Other current assets
|
|
$
|
0
|
|
|
$
|
46
|
|
|
|
|
|
Fair value hedge contracts
|
|
Other current liabilities
|
|
|
578
|
|
|
|
0
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
218
|
|
|
|
|
|
Fair value hedged items
|
|
Receivables
|
|
|
63
|
|
|
|
(94
|
)
|
|
|
Other current assets
|
|
|
500
|
|
|
|
0
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
0
|
|
|
|
223
|
|
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 March 31, 2013 and 2012 and the amount recognized as and reclassified from accumulated other comprehensive income (loss) for each of the periods is summarized below. All amounts
are after-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2013
|
|
Comprehensive
Income (Loss)
Beginning of
the Year
|
|
|
Plus
Recognized as
Comprehensive
Income (Loss)
|
|
|
Less
Gain (Loss) Reclassified
from Accumulated Other
Comprehensive
Income
(Loss)
|
|
|
Comprehensive
Income (Loss) End
of the Period
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
292
|
|
|
|
0
|
|
|
|
5
|
|
|
|
287
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
26
|
|
|
|
(193
|
)
|
|
|
(8
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
318
|
|
|
$
|
(193
|
)
|
|
$
|
(3
|
)
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
114
|
|
|
$
|
(26
|
)
|
|
$
|
50
|
|
|
$
|
38
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
309
|
|
|
|
0
|
|
|
|
4
|
|
|
|
305
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
(314
|
)
|
|
|
251
|
|
|
$
|
(177
|
)
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109
|
|
|
$
|
225
|
|
|
$
|
(123
|
)
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 pre-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain (Loss)
in Statements
|
|
Estimated to be
Reclassified in the
|
|
|
Three Months Ended March 31,
|
|
|
|
of Operations
|
|
Next 12 Months
|
|
|
2013
|
|
|
2012
|
|
Foreign currency sales contracts - cash flow hedges
|
|
Net sales
|
|
|
n/a
|
|
|
$
|
0
|
|
|
$
|
79
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
Depreciation
|
|
$
|
28
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
Costs of products sold (excluding depreciation)
|
|
|
(255
|
)
|
|
|
(14
|
)
|
|
|
(284
|
)
|
11
8.
|
Accumulated Other Comprehensive Loss
|
Net change and ending balances for the various components of other comprehensive income (loss) and accumulated other
comprehensive loss as of and for the three months ended March 31, 2013 and 2012 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, 2013
|
|
$
|
(1,543
|
)
|
|
$
|
(81,783
|
)
|
|
$
|
633
|
|
|
$
|
318
|
|
|
$
|
(82,375
|
)
|
Net Change
|
|
|
(2,898
|
)
|
|
|
1,426
|
|
|
|
210
|
|
|
|
(190
|
)
|
|
|
(1,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
(4,441
|
)
|
|
$
|
(80,357
|
)
|
|
$
|
843
|
|
|
$
|
128
|
|
|
$
|
(83,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2012
|
|
$
|
(4,736
|
)
|
|
$
|
(75,225
|
)
|
|
$
|
562
|
|
|
$
|
109
|
|
|
$
|
(79,290
|
)
|
Net Change
|
|
|
1,742
|
|
|
|
1,266
|
|
|
|
89
|
|
|
|
348
|
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
(2,994
|
)
|
|
$
|
(73,959
|
)
|
|
$
|
651
|
|
|
$
|
457
|
|
|
$
|
(75,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the line items affected on the condensed consolidated statements of operations for components
reclassified from accumulated other comprehensive income (loss). Amounts in parentheses represent credits to net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Affected Line Item
|
Amortization of unrecognized employee benefit costs
|
|
$
|
1,440
|
|
|
$
|
1,296
|
|
|
Costs of products sold (excluding depreciation)
|
|
|
|
573
|
|
|
|
480
|
|
|
Selling and administrative
|
|
|
|
219
|
|
|
|
195
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
1,971
|
|
|
Total before income tax
|
|
|
|
(806
|
)
|
|
|
(705
|
)
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,426
|
|
|
$
|
1,266
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) on sale of marketable securities
|
|
$
|
(7
|
)
|
|
$
|
(32
|
)
|
|
Selling and administrative
|
|
|
|
2
|
|
|
|
11
|
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
(21
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses (gains) from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
(79
|
)
|
|
Net sales
|
Foreign currency purchase contracts
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
Depreciation
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
14
|
|
|
|
284
|
|
|
Costs of products sold
(excluding depreciation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
198
|
|
|
Total before income tax
|
|
|
|
(4
|
)
|
|
|
(75
|
)
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3
|
|
|
$
|
123
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
12
The income tax expense (benefit) associated with the various components of other
comprehensive income (loss) for the three months ended March 31, 2013 and 2012 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 March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Tax expense (benefit) associated with changes in:
|
|
|
|
|
|
|
|
|
Unrealized holding gains/losses on marketable securities
|
|
$
|
(116
|
)
|
|
$
|
(59
|
)
|
Fair value of cash flow hedges
|
|
|
116
|
|
|
|
(137
|
)
|
Tax expense (benefit) associated with reclassification adjustments:
|
|
|
|
|
|
|
|
|
Amortization of unrecognized employee benefit costs
|
|
|
(806
|
)
|
|
|
(705
|
)
|
Realized gains/losses from sale of marketable securities
|
|
|
2
|
|
|
|
11
|
|
Realized gains/losses from settlement of cash flow hedges
|
|
|
(4
|
)
|
|
|
(75
|
)
|
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 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 2013,
the Compensation Committee granted 173,750 non-qualified stock options to select employees. The options have a ten-year life and vest over a three-year period.
The Incentive Plan also provides for annual grants of shares of the Corporations common stock to 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 and will be fully vested as of the grant date. In May 2013, 11,656 shares of the Corporations common stock were issued to the non-employee directors.
Stock-based compensation expense for the three months ended March 31, 2013 and 2012 equaled $296 and $399, respectively.
The related income tax benefit recognized in the condensed consolidated statement of operations for each of the periods was approximately $104 and $140, respectively.
The Corporations financial assets and liabilities that are reported at fair value in the accompanying condensed
consolidated balance sheets as of March 31, 2013 and December 31, 2012 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 March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,705
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,705
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
500
|
|
|
|
0
|
|
|
|
500
|
|
Other current liabilities
|
|
|
0
|
|
|
|
578
|
|
|
|
0
|
|
|
|
578
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,358
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,358
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
264
|
|
|
|
0
|
|
|
|
264
|
|
Other current liabilities
|
|
|
0
|
|
|
|
223
|
|
|
|
0
|
|
|
|
223
|
|
13
Presented below are the net sales and income before income taxes for the Corporations two business segments.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
45,113
|
|
|
$
|
43,948
|
|
Air and Liquid Processing
|
|
|
24,511
|
|
|
|
29,657
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
$
|
69,624
|
|
|
$
|
73,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes:
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
2,063
|
|
|
$
|
4,140
|
|
Air and Liquid Processing
|
|
|
2,210
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
4,273
|
|
|
|
6,614
|
|
Other expense, including corporate costs
|
|
|
(3,206
|
)
|
|
|
(2,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,067
|
|
|
$
|
3,840
|
|
|
|
|
|
|
|
|
|
|
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 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.
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Total claims pending at the beginning of the period
|
|
|
8,007
|
|
|
|
8,145
|
|
New claims served
|
|
|
381
|
|
|
|
88
|
|
Claims dismissed
|
|
|
(106
|
)
|
|
|
(150
|
)
|
Claims settled
|
|
|
(55
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
Total claims pending at the end of the period
(1)
|
|
|
8,227
|
|
|
|
8,018
|
|
|
|
|
|
|
|
|
|
|
Gross settlement and defense costs (in 000s)
|
|
$
|
6,087
|
|
|
$
|
4,853
|
|
|
|
|
|
|
|
|
|
|
Avg. gross settlement and defense costs per claim resolved (in 000s)
|
|
$
|
37.81
|
|
|
$
|
22.57
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included as open claims are approximately 1,634 and 1,663 claims as of March 31, 2013 and 2012, 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.
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
14
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 in dissolution, numbering approximately 289 as of
March 31, 2013, 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 sub
limits 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 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, 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 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&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, 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
Offices 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.
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
15
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, the nature of the underlying claims for Asbestos Liability asserted against the subsidiaries and the Corporation as reflected in the Corporations
asbestos claims database, and the status of negotiations with insurers not party to the Settlement Agreements, 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 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 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 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 Corporations 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. 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 Corporations receivable at
December 31, 2012 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 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 following table summarizes activity relating to insurance recoveries.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Insurance receivable asbestos, beginning of the year
|
|
$
|
118,115
|
|
|
$
|
126,206
|
|
Settlement and defense costs paid by insurance carriers
|
|
|
(8,432
|
)
|
|
|
(3,363
|
)
|
|
|
|
|
|
|
|
|
|
Insurance receivable asbestos, end of the period
|
|
$
|
109,683
|
|
|
$
|
122,843
|
|
|
|
|
|
|
|
|
|
|
The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers, 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 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 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
16
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.
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 Corporations consultants, the potential liability for all environmental proceedings of approximately $1,100 at March 31, 2013 is considered adequate based on
information known to date.
17