NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in
thousands, except claim amounts)
1.
|
Unaudited Condensed Consolidated Financial Statements
|
The condensed consolidated balance sheet as of June 30, 2014 and the condensed consolidated statements of operations
and comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013 and condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 have been prepared by Ampco-Pittsburgh
Corporation (the Corporation) without audit. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for
the periods presented, have been made
.
The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the operating results expected for the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted. Certain amounts for the preceding periods have been reclassified for comparative purposes.
Recently Implemented Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,
which requires, under certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance became effective January 1, 2014 but did not affect the balance sheet, operating results or
liquidity of the Corporation.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides a common revenue standard for U.S. GAAP
and IFRS. The guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a companys contracts with customers. It requires companies to apply a five-step
model when recognizing revenue relating to the transfer of goods or services to customers in an amount that reflects the consideration that the company expects to be entitled to receive for those goods and services. It also requires comprehensive
disclosures regarding revenue recognition. The guidance becomes effective January 1, 2017. The Corporation is currently evaluating the impact that the guidance will have on its financial position, operating results and liquidity.
At June 30, 2014 and December 31, 2013, approximately 56% of the inventories were valued on the LIFO method with
the remaining inventories valued on the FIFO method. Inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
Raw materials
|
|
$
|
18,230
|
|
|
$
|
17,411
|
|
Work-in-process
|
|
|
29,122
|
|
|
|
29,322
|
|
Finished goods
|
|
|
7,630
|
|
|
|
5,894
|
|
Supplies
|
|
|
11,863
|
|
|
|
11,502
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,845
|
|
|
$
|
64,129
|
|
|
|
|
|
|
|
|
|
|
7
3.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
Land and land improvements
|
|
$
|
5,162
|
|
|
$
|
5,122
|
|
Buildings
|
|
|
44,260
|
|
|
|
44,116
|
|
Machinery and equipment
|
|
|
253,820
|
|
|
|
250,936
|
|
Construction-in-progress
|
|
|
9,334
|
|
|
|
5,315
|
|
Other
|
|
|
8,764
|
|
|
|
8,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,340
|
|
|
|
314,200
|
|
Accumulated depreciation
|
|
|
(169,075
|
)
|
|
|
(162,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,265
|
|
|
$
|
151,288
|
|
|
|
|
|
|
|
|
|
|
Land and buildings of Union Electric Steel UK Limited (UES-UK) equal to approximately $3,376
(£1,974) at June 30, 2014 are held as collateral by the trustees of the UES-UK defined benefit pension plan (see Note 5).
4.
|
Other Current Liabilities
|
Other current liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
|
Customer-related liabilities
|
|
$
|
10,782
|
|
|
$
|
10,610
|
|
Accrued sales commissions
|
|
|
1,608
|
|
|
|
1,648
|
|
Income taxes payable
|
|
|
55
|
|
|
|
1,063
|
|
Other
|
|
|
7,189
|
|
|
|
8,399
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,634
|
|
|
$
|
21,720
|
|
|
|
|
|
|
|
|
|
|
Included in customer-related liabilities are costs expected to be incurred with respect to product warranties.
Changes in the liability for product warranty claims consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$
|
6,797
|
|
|
$
|
6,409
|
|
|
$
|
6,899
|
|
|
$
|
6,625
|
|
Satisfaction of warranty claims
|
|
|
(658
|
)
|
|
|
(669
|
)
|
|
|
(1,389
|
)
|
|
|
(1,214
|
)
|
Provision for warranty claims
|
|
|
674
|
|
|
|
687
|
|
|
|
1,279
|
|
|
|
1,262
|
|
Other, primarily impact from changes in foreign currency exchange rates
|
|
|
99
|
|
|
|
(2
|
)
|
|
|
123
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
6,912
|
|
|
$
|
6,425
|
|
|
$
|
6,912
|
|
|
$
|
6,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Pension and Other Postretirement Benefits
|
Contributions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
U.K. defined benefit pension plan
|
|
$
|
940
|
|
|
$
|
870
|
|
Other postretirement benefits (e.g. net payments)
|
|
$
|
278
|
|
|
$
|
281
|
|
U.K. defined contribution pension plan
|
|
$
|
202
|
|
|
$
|
146
|
|
8
Net periodic pension and other postretirement costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
U.S. Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
841
|
|
|
$
|
1,043
|
|
|
$
|
1,841
|
|
|
$
|
2,212
|
|
Interest cost
|
|
|
2,151
|
|
|
|
2,016
|
|
|
|
4,381
|
|
|
|
4,036
|
|
Expected return on plan assets
|
|
|
(2,731
|
)
|
|
|
(2,325
|
)
|
|
|
(5,374
|
)
|
|
|
(4,684
|
)
|
Amortization of prior service cost
|
|
|
214
|
|
|
|
154
|
|
|
|
427
|
|
|
|
320
|
|
Amortization of actuarial loss
|
|
|
996
|
|
|
|
1,764
|
|
|
|
2,092
|
|
|
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
1,471
|
|
|
$
|
2,652
|
|
|
$
|
3,367
|
|
|
$
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Defined Benefit Pension Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
690
|
|
|
$
|
617
|
|
|
$
|
1,369
|
|
|
$
|
1,235
|
|
Expected return on plan assets
|
|
|
(808
|
)
|
|
|
(596
|
)
|
|
|
(1,604
|
)
|
|
|
(1,191
|
)
|
Amortization of actuarial loss
|
|
|
153
|
|
|
|
154
|
|
|
|
304
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
35
|
|
|
$
|
175
|
|
|
$
|
69
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
61
|
|
|
$
|
271
|
|
|
$
|
325
|
|
|
$
|
472
|
|
Interest cost
|
|
|
185
|
|
|
|
255
|
|
|
|
412
|
|
|
|
463
|
|
Amortization of prior service cost
|
|
|
(111
|
)
|
|
|
22
|
|
|
|
(106
|
)
|
|
|
43
|
|
Amortization of actuarial loss
|
|
|
6
|
|
|
|
36
|
|
|
|
10
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
141
|
|
|
$
|
584
|
|
|
$
|
641
|
|
|
$
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the quarter, certain health care benefits to be provided on or after January 1, 2015 under the
Other Postretirement Benefit Plan were modified. The plan change resulted in a remeasurement of the plan liability as of May 1, 2014, reducing the liability by approximately $9,500. Additionally, as a result of the remeasurement, the discount rate
was changed from 5.00% to 4.50% increasing the liability by approximately $2,000.
6.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of credit as of June 30, 2014 approximated $18,655, 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 7 for derivative instruments, Note 12 for litigation and Note 13 for environmental matters.
7.
|
Derivative Instruments
|
Certain operations of the Corporation are subject to risk from exchange rate fluctuations in connection with sales in
foreign currencies. To minimize this risk, foreign currency sales contracts are entered into which are designated as cash flow or fair value hedges. As of June 30, 2014, approximately $11,056 of anticipated foreign-denominated sales has been
hedged which are covered by fair value and cash flow contracts settling at various dates through May 2015. The fair value of assets held as collateral for the fair value contracts as of June 30, 2014 approximated $855.
Additionally, certain divisions of the Air and Liquid Processing segment are subject to risk from increases in the price of commodities (copper
and aluminum) used in the production of inventory. To minimize this risk, futures contracts are entered into which are designated as cash flow hedges. At June 30, 2014, approximately 57% or $2,826 of anticipated copper purchases over the next
nine months and 38% or $458 of anticipated aluminum purchases over the next six months are hedged. The fair value of assets held as collateral as of June 30, 2014 equaled $400.
9
The Corporation previously entered into foreign currency purchase contracts to manage the
volatility associated with Euro-denominated progress payments to be made for certain machinery and equipment. As of December 31, 2010, all contracts had been settled and the underlying fixed assets were placed in service.
No portion of the existing cash flow or fair value hedges is considered to be ineffective, including any ineffectiveness arising from the
unlikelihood of an anticipated transaction to occur. Additionally, no amounts have been excluded from assessing the effectiveness of a hedge.
At June 30, 2014, the Corporation has purchase commitments covering 50% or $3,227 of anticipated natural gas usage through 2015 for one of
its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheet.
The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for
trading purposes.
Gains (losses) on foreign exchange transactions included in other income (expense) approximated $(26) and $(93) for the
three months ended June 30, 2014 and 2013, respectively, and $181 and $(393) for the six months ended June 30, 2014 and 2013, respectively.
The location and fair value of the foreign currency sales contracts recorded on the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
$
|
417
|
|
|
$
|
426
|
|
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
17
|
|
|
|
|
|
Fair value hedged items
|
|
Receivables
|
|
|
(120
|
)
|
|
|
(36
|
)
|
|
|
Other current liabilities
|
|
|
321
|
|
|
|
488
|
|
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
40
|
|
|
|
|
|
Cash flow hedge contracts
|
|
Other current liabilities
|
|
|
33
|
|
|
|
0
|
|
The change in the fair value of the cash flow contracts is recorded as a component of accumulated other
comprehensive loss. The balances as of June 30, 2014 and 2013 and the amount recognized as and reclassified from accumulated other comprehensive loss for each of the periods is summarized below. All amounts are after-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
Comprehensive
Income (Loss)
Beginning of
the Period
|
|
|
Plus
Recognized as
Comprehensive
Income (Loss)
|
|
|
Less
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Loss
|
|
|
Comprehensive
Income (Loss) End
of the Period
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
(21
|
)
|
|
$
|
0
|
|
|
$
|
(21
|
)
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
270
|
|
|
|
0
|
|
|
|
5
|
|
|
|
265
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
(147
|
)
|
|
|
121
|
|
|
|
(55
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123
|
|
|
$
|
100
|
|
|
$
|
(50
|
)
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
287
|
|
|
|
0
|
|
|
|
5
|
|
|
|
282
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
(159
|
)
|
|
|
(236
|
)
|
|
|
(64
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128
|
|
|
$
|
(236
|
)
|
|
$
|
(59
|
)
|
|
$
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
Comprehensive
Income (Loss)
Beginning of
the Period
|
|
|
Plus
Recognized as
Comprehensive
Income (Loss)
|
|
|
Less
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Loss
|
|
|
Comprehensive
Income (Loss) End
of the Period
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
(21
|
)
|
|
$
|
0
|
|
|
$
|
(21
|
)
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
275
|
|
|
|
0
|
|
|
|
10
|
|
|
|
265
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
38
|
|
|
|
(87
|
)
|
|
|
(78
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
313
|
|
|
$
|
(108
|
)
|
|
$
|
(68
|
)
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts cash flow hedges
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
|
292
|
|
|
|
0
|
|
|
|
10
|
|
|
|
282
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
26
|
|
|
|
(429
|
)
|
|
|
(72
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
318
|
|
|
$
|
(429
|
)
|
|
$
|
(62
|
)
|
|
$
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive loss
to earnings is summarized below. All amounts are pre-tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain (Loss)
in Statements
of Operations
|
|
Estimated to be
Reclassified in the
Next 12 Months
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Foreign currency sales contracts cash flow hedges
|
|
Sales
|
|
$
|
(33
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
Depreciation
|
|
|
28
|
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
14
|
|
Futures contracts copper and aluminum
|
|
Costs of products
sold (excluding
depreciation)
|
|
|
35
|
|
|
|
(87
|
)
|
|
|
(101
|
)
|
|
|
(123
|
)
|
|
|
(115
|
)
|
11
8.
|
Accumulated Other Comprehensive Loss
|
Net change and ending balances for the various components of accumulated other comprehensive loss as of and for the six
months ended June 30, 2014 and 2013 is summarized below. All amounts are net of tax, where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
Employee
Benefit Costs
|
|
|
Unrealized
Holding Gains
on Marketable
Securities
|
|
|
Cash Flow
Hedges
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
|
|
Balance at January 1, 2014
|
|
$
|
277
|
|
|
$
|
(47,462
|
)
|
|
$
|
1,007
|
|
|
$
|
313
|
|
|
$
|
(45,865
|
)
|
|
|
|
|
|
|
Net Change
|
|
|
2,121
|
|
|
|
5,866
|
|
|
|
144
|
|
|
|
(40
|
)
|
|
|
8,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
2,398
|
|
|
$
|
(41,596
|
)
|
|
$
|
1,151
|
|
|
$
|
273
|
|
|
$
|
(37,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
$
|
(1,543
|
)
|
|
$
|
(81,783
|
)
|
|
$
|
633
|
|
|
$
|
318
|
|
|
$
|
(82,375
|
)
|
|
|
|
|
|
|
Net Change
|
|
|
(4,188
|
)
|
|
|
4,225
|
|
|
|
159
|
|
|
|
(367
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
(5,731
|
)
|
|
$
|
(77,558
|
)
|
|
$
|
792
|
|
|
$
|
(49
|
)
|
|
$
|
(82,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the line items affected on the condensed consolidated statements of operations for
components reclassified from accumulated other comprehensive loss. Amounts in parentheses represent credits to income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Affected Line Item
|
Amortization of unrecognized employee benefit costs
|
|
$
|
895
|
|
|
$
|
1,380
|
|
|
$
|
1,908
|
|
|
$
|
2,820
|
|
|
Costs of products sold (excluding depreciation)
|
|
|
|
336
|
|
|
|
536
|
|
|
|
735
|
|
|
|
1,109
|
|
|
Selling and administrative
|
|
|
|
27
|
|
|
|
214
|
|
|
|
84
|
|
|
|
433
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,258
|
|
|
|
2,130
|
|
|
|
2,727
|
|
|
|
4,362
|
|
|
Total before income tax
|
|
|
|
(430
|
)
|
|
|
(769
|
)
|
|
|
(942
|
)
|
|
|
(1,575
|
)
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
828
|
|
|
$
|
1,361
|
|
|
$
|
1,785
|
|
|
$
|
2,787
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) from sale of marketable securities
|
|
$
|
(26
|
)
|
|
$
|
(46
|
)
|
|
$
|
(54
|
)
|
|
$
|
(53
|
)
|
|
Selling and administrative
|
|
|
|
9
|
|
|
|
17
|
|
|
|
19
|
|
|
|
19
|
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17
|
)
|
|
$
|
(29
|
)
|
|
$
|
(35
|
)
|
|
$
|
(34
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) losses from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
$
|
(14
|
)
|
|
$
|
(14
|
)
|
|
Depreciation
|
|
|
|
|
|
|
Futures contracts copper and aluminum
|
|
|
87
|
|
|
|
101
|
|
|
|
123
|
|
|
|
115
|
|
|
Costs of products sold (excluding depreciation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
94
|
|
|
|
109
|
|
|
|
101
|
|
|
Total before income tax
|
|
|
|
(30
|
)
|
|
|
(35
|
)
|
|
|
(41
|
)
|
|
|
(39
|
)
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50
|
|
|
$
|
59
|
|
|
$
|
68
|
|
|
$
|
62
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The income tax expense (benefit) associated with the various components of other comprehensive
income (loss) 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Tax expense (benefit) associated with changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized employee benefit costs
|
|
$
|
(2,739
|
)
|
|
$
|
0
|
|
|
$
|
(2,739
|
)
|
|
$
|
0
|
|
Unrealized holding losses/gains on marketable securities
|
|
|
(71
|
)
|
|
|
12
|
|
|
|
(97
|
)
|
|
|
(104
|
)
|
Fair value of cash flow hedges
|
|
|
(61
|
)
|
|
|
142
|
|
|
|
67
|
|
|
|
258
|
|
Tax expense (benefit) associated with reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized employee benefit costs
|
|
|
(430
|
)
|
|
|
(769
|
)
|
|
|
(942
|
)
|
|
|
(1,575
|
)
|
Realized gains from sale of marketable securities
|
|
|
9
|
|
|
|
17
|
|
|
|
19
|
|
|
|
19
|
|
Realized losses from settlement of cash flow hedges
|
|
|
(30
|
)
|
|
|
(35
|
)
|
|
|
(41
|
)
|
|
|
(39
|
)
|
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. Unexercised portions of terminated or forfeited awards are available for new awards. The Incentive Plan is
administered by the Compensation Committee of the Board of Directors who has the authority to determine, within the limits of the express provisions of the Incentive Plan, the individuals to whom the awards will be granted; the nature, amount and
terms of such awards; and the objectives and conditions for earning such awards.
During the second quarter of 2014, the Compensation
Committee granted 176,000 non-qualified stock options to select employees. The options have a ten-year life and vest over a three-year period. The exercise price of $20.00 was equal to the closing price of the Corporations common stock on the
New York Stock Exchange on the date of grant and the fair value of the options was $7.40 per share. The fair value of the options as of the date of grant was calculated using the Black-Scholes option-pricing model based on an assumption for the
expected life of the options of six years, a risk-free interest rate of 1.98%, an expected dividend yield of 3.60%, expected forfeiture rate of 8% and an expected volatility of 53.02%. The resultant stock-based compensation expense of approximately
$1,200 will be recognized over the requisite service period of three years.
The Incentive Plan also provides for annual grants of shares
of the 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. During the second quarter, 12,500 shares of the Corporations common stock were awarded to the non-employee directors.
Stock-based compensation expense for the three months ended June 30, 2014 and 2013 equaled $247 and $208, respectively. The related income
tax benefit recognized in the condensed consolidated statements of operations for each of the periods was approximately $86 and $72, respectively. Stock-based compensation expense for the six months ended June 30, 2014 and 2013 equaled $598 and
$504, respectively. The related income tax benefit recognized in the condensed consolidated statements of operations for each of the periods was approximately $209 and $176, respectively.
13
The Corporations financial assets and liabilities that are reported at fair value in the condensed consolidated
balance sheets as of June 30, 2014 and December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Inputs
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
As of June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
4,411
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,411
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
417
|
|
|
|
0
|
|
|
|
417
|
|
Other current liabilities
|
|
|
0
|
|
|
|
354
|
|
|
|
0
|
|
|
|
354
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
4,092
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,092
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
426
|
|
|
|
0
|
|
|
|
426
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
17
|
|
|
|
0
|
|
|
|
17
|
|
Other current liabilities
|
|
|
0
|
|
|
|
488
|
|
|
|
0
|
|
|
|
488
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
40
|
|
|
|
0
|
|
|
|
40
|
|
The investments held as other noncurrent assets represent assets held in a Rabbi trust for the
purpose of providing benefits under a non-qualified defined benefit pension plan. The fair value of the investments is based on quoted prices of the investments in active markets. The fair value of foreign currency exchange contracts is determined
based on the fair value of similar contracts with similar terms and remaining maturities. The fair value of futures contracts is based on market quotations. The fair value of the variable-rate IRB debt approximates its carrying value. Additionally,
the fair value of trade receivables and trade payables approximates their carrying value.
Presented below are the net sales and income before income taxes for the Corporations two business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
45,466
|
|
|
$
|
45,386
|
|
|
$
|
85,032
|
|
|
$
|
90,499
|
|
Air and Liquid Processing
|
|
|
24,483
|
|
|
|
24,552
|
|
|
|
47,830
|
|
|
|
49,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
$
|
69,949
|
|
|
$
|
69,938
|
|
|
$
|
132,862
|
|
|
$
|
139,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Rolls
|
|
$
|
1,889
|
|
|
$
|
2,611
|
|
|
$
|
2,902
|
|
|
$
|
4,674
|
|
Air and Liquid Processing
|
|
|
2,698
|
|
|
|
2,078
|
|
|
|
4,809
|
|
|
|
4,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
4,587
|
|
|
|
4,689
|
|
|
|
7,711
|
|
|
|
8,962
|
|
Other expense, including corporate costs net
|
|
|
(2,657
|
)
|
|
|
(2,758
|
)
|
|
|
(4,886
|
)
|
|
|
(5,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,930
|
|
|
$
|
1,931
|
|
|
$
|
2,825
|
|
|
$
|
2,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
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 subsidiary (Asbestos Liability). Those subsidiaries, and in some cases the Corporation, are defendants (among a number of defendants, often in excess of 50) in cases filed in
various state and federal courts.
Asbestos Claims
The following table reflects approximate information about the claims for Asbestos Liability against the subsidiary and the Corporation. The
information in the table presented for 2013 includes certain asbestos claims asserted against an inactive subsidiary in dissolution.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Total claims pending at the beginning of the period
|
|
|
8,319
|
|
|
|
8,007
|
|
New claims served
|
|
|
675
|
|
|
|
726
|
|
Claims dismissed
|
|
|
(271
|
)
|
|
|
(250
|
)
|
Claims settled
|
|
|
(149
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
Total claims pending at the end of the period
(1)
|
|
|
8,574
|
|
|
|
8,348
|
|
|
|
|
|
|
|
|
|
|
Gross settlement and defense costs (in 000s)
|
|
$
|
11,648
|
|
|
$
|
10,727
|
|
|
|
|
|
|
|
|
|
|
Avg. gross settlement and defense costs per claim resolved (in 000s)
|
|
$
|
27.73
|
|
|
$
|
27.86
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included as open claims are approximately 1,633 claims as of June 30, 2014 and 2013 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 subsidiary are parties to a series of settlement agreements (Settlement Agreements)
with insurers that have coverage obligations for Asbestos Liability (the Settling Insurers). Under the Settlement Agreements, the Settling Insurers accept financial responsibility, subject to the terms and conditions of the respective
agreements, including overall coverage limits, for pending and future claims for Asbestos Liability. The Settlement Agreements encompass the substantial majority of insurance policies that provide coverage for claims for Asbestos Liability.
The Settlement Agreements include acknowledgements that Howden North America, Inc. (Howden) is entitled to coverage under policies
covering Asbestos Liability for claims arising out of the historical products manufactured or distributed by Buffalo Forge, a former subsidiary of the Corporation (the Products). The Settlement Agreements do not provide for any
prioritization on access to the applicable policies or any sublimits of liability as to Howden or the Corporation and Air & Liquid, and, accordingly, Howden may access the coverage afforded by the Settling Insurers for any covered claim
arising out of a Product. In general, access by Howden to the coverage afforded by the Settling Insurers for the Products will erode coverage under the Settlement Agreements available to the Corporation and Air & Liquid for Asbestos
Liability.
On February 24, 2011, the Corporation and Air & Liquid filed a lawsuit in the United States District Court for
the Western District of Pennsylvania against thirteen domestic insurance companies, certain underwriters at 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 have reached Settlement Agreements with all but two of the defendant insurers in the coverage action. Those Settlement Agreements specify the
terms and conditions upon which the insurer parties are to contribute to defense and indemnity costs for claims for Asbestos Liability. One of the Settlement Agreements entered into by the Corporation and Air & Liquid also provided for the
dismissal of claims, without prejudice, regarding two upper-level excess policies issued by one of the insurers. The Court has entered Orders dismissing all claims in the action filed against each other by the Corporation and Air & Liquid,
on the one hand, and by the settling insurers, on the
15
other. Howden also reached an agreement with eight domestic insurers addressing asbestos-related bodily injury claims arising from the Products, and claims as to those insurers and Howden have
been dismissed. Various counterclaims, cross claims and third party claims have been filed in the litigation and remain pending although only two domestic insurers and Howden remain in the litigation as to the Corporation and Air & Liquid.
On September 27, 2013, the Court issued a memorandum opinion and order granting in part and denying in part cross motions for summary judgment filed by the Corporation and Air & Liquid, Howden, and the insurer parties still in the
litigation. The September 27, 2013 ruling is not a final ruling for appellate purposes, but when final it could be appealed by the parties to the litigation.
Asbestos Valuations
In
2006, the Corporation retained Hamilton, Rabinovitz & Associates, Inc. (HR&A), a nationally recognized expert in the valuation of asbestos liabilities, to assist the Corporation in estimating the potential liability for
pending and unasserted future claims for Asbestos Liability. Based on this analysis, the Corporation recorded a reserve for Asbestos Liability claims pending or projected to be asserted through 2013 as at December 31, 2006. HR&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 included the Settlement Agreements then in effect, policy exclusions, policy limits, policy provisions regarding
coverage for defense costs, attachment points, prior impairment of policies and gaps in the coverage, policy exhaustions, insolvencies among certain of the insurance carriers, and the nature of the underlying claims for Asbestos Liability asserted
against the subsidiaries and the Corporation as reflected in the 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 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. The reserve at June 30, 2014 was $146,645. 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.
16
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 Corporation increased its receivable at September 30, 2013 by $16,340 to take into account
the effect of the Settlement Agreements reached in August 2013.
The following table summarizes activity relating to insurance recoveries.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Insurance receivable asbestos, beginning of the year
|
|
$
|
110,741
|
|
|
$
|
118,115
|
|
Settlement and defense costs paid by insurance carriers
|
|
|
(9,695
|
)
|
|
|
(12,757
|
)
|
|
|
|
|
|
|
|
|
|
Insurance receivable asbestos, end of the period
|
|
$
|
101,046
|
|
|
$
|
105,358
|
|
|
|
|
|
|
|
|
|
|
The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers or
carriers not party to a Settlement Agreement, and a substantial majority of the insurance recoveries deemed probable was from insurance companies rated A (excellent) or better by A.M. Best Corporation. There can be no assurance, however, that
there will not be further insolvencies among the relevant insurance carriers, or that the assumed percentage recoveries for certain carriers will prove correct. The difference between insurance recoveries and projected costs is not due to exhaustion
of all insurance coverage for Asbestos Liability. The Corporation and the subsidiaries have substantial additional insurance coverage which the Corporation expects to be available for Asbestos Liability claims and defense costs that the subsidiaries
and it may incur after 2022. However, this insurance coverage also can be expected to have gaps creating significant shortfalls of insurance recoveries as against claims expense, which could be material in future years.
The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently
known facts and strategy. The 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, compliance by relevant
parties with the terms of the Settlement Agreements, the resolution of remaining coverage issues with insurance carriers, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect the 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.
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 $226 at June 30, 2014 is considered adequate based on
information known to date.
17