Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                      to                     

Commission File Number 1-898

 

 

AMPCO-PITTSBURGH CORPORATION

 

 

 

Pennsylvania   25-1117717
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

600 Grant Street, Suite 4600

Pittsburgh, Pennsylvania 15219

(Address of principal executive offices)

(412)456-4400

(Registrant’s telephone number)

 

 

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

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

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

 

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

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

On August 2, 2013, 10,362,746 common shares were outstanding.

 

 

 


Table of Contents

AMPCO-PITTSBURGH CORPORATION

INDEX

 

            

Page

No.

 

Part I – Financial Information:

  
  Item 1 –  

Financial Statements (Unaudited)

  
   

Condensed Consolidated Balance Sheets – June 30, 2013 and December 31, 2012

     3   
   

Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2013 and 2012

     4   
   

Condensed Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2013 and 2012

     5   
   

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012

     6   
   

Notes to Condensed Consolidated Financial Statements

     7   
  Item 2 –  

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

     19   
  Item 3 –  

Quantitative and Qualitative Disclosures About Market Risk

     21   
  Item 4 –  

Controls and Procedures

     21   

Part II – Other Information:

  
  Item 1 –  

Legal Proceedings

     22   
  Item 1A –  

Risk Factors

     22   
  Item 6 –  

Exhibits

     22   
  Signatures      23   
  Exhibit Index      24   
  Exhibits     
   

Exhibit 31.1

  
   

Exhibit 31.2

  
   

Exhibit 32.1

  
   

Exhibit 32.2

  
   

Exhibit 101

  

 

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Table of Contents

PART I – FINANCIAL INFORMATION

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par value)

 

     June 30,
2013
    December 31,
2012
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 90,111      $ 78,889   

Receivables, less allowance for doubtful accounts of $549 in 2013 and $519 in 2012

     45,434        54,394   

Inventories

     70,636        70,669   

Insurance receivables – asbestos

     16,000        18,400   

Other current assets

     11,926        15,230   
  

 

 

   

 

 

 

Total current assets

     234,107        237,582   

Property, plant and equipment, net

     149,241        150,297   

Insurance receivables – asbestos

     89,358        99,715   

Deferred income tax assets

     25,965        25,800   

Investments in joint ventures

     12,525        13,319   

Other noncurrent assets

     6,978        6,466   
  

 

 

   

 

 

 
   $ 518,174      $ 533,179   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 15,299      $ 15,839   

Accrued payrolls and employee benefits

     8,654        9,301   

Industrial Revenue Bond debt

     13,311        13,311   

Asbestos liability – current portion

     21,000        23,500   

Other current liabilities

     22,646        24,473   
  

 

 

   

 

 

 

Total current liabilities

     80,910        86,424   

Employee benefit obligations

     96,407        96,100   

Asbestos liability

     149,568        157,522   

Other noncurrent liabilities

     1,190        1,040   
  

 

 

   

 

 

 

Total liabilities

     328,075        341,086   
  

 

 

   

 

 

 

Commitments and contingent liabilities (Note 6)

    

Shareholders’ equity:

    

Common stock – par value $1; authorized 20,000 shares; issued and outstanding 10,363 shares in 2013 and 10,346 shares in 2012

     10,363        10,346   

Additional paid-in capital

     125,120        124,464   

Retained earnings

     137,162        139,658   

Accumulated other comprehensive loss

     (82,546     (82,375
  

 

 

   

 

 

 

Total shareholders’ equity

     190,099        192,093   
  

 

 

   

 

 

 
   $ 518,174      $ 533,179   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net sales

   $ 69,938      $ 69,956      $ 139,562      $ 143,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Costs of products sold (excluding depreciation)

     55,310        54,302        110,400        110,538   

Selling and administrative

     9,298        9,973        19,156        20,400   

Depreciation

     2,914        2,754        5,885        5,579   

Loss (gain) on disposition of assets

     25        (1     19        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     67,547        67,028        135,460        136,516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,391        2,928        4,102        7,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Investment-related income

     11        18        24        34   

Interest expense

     (68     (61     (121     (116

Other – net

     (403     (226     (1,007     (463
  

 

 

   

 

 

   

 

 

   

 

 

 
     (460     (269     (1,104     (545
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and equity losses in Chinese joint venture

     1,931        2,659        2,998        6,500   

Income tax provision

     (581     (770     (901     (2,145

Equity losses in Chinese joint venture

     (244     (381     (865     (847
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,106      $ 1,508      $ 1,232      $ 3,508   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.11      $ 0.15      $ 0.12      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.11      $ 0.15      $ 0.12      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.18      $ 0.18      $ 0.36      $ 0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding:

        

Basic

     10,357        10,339        10,351        10,334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     10,407        10,387        10,403        10,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net income

   $ 1,106      $ 1,508      $ 1,232      $ 3,508   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Adjustments for changes in:

        

Foreign exchange translation

     148        (1,148     (2,750     594   

Unrealized holding (losses) gains on marketable securities

     (22     (70     193        40   

Fair value of cash flow hedges

     (236     (228     (429     (3

Reclassification adjustments for items included in net income:

        

Amortization of unrecognized employee benefit costs

     1,361        1,251        2,787        2,517   

Realized (gains) from sale of marketable securities

     (29     (6     (34     (27

Realized losses (gains) from settlement of cash flow hedges

     59        (29     62        94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,281        (230     (171     3,215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,387      $ 1,278      $ 1,061      $ 6,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Six Months Ended June 30,  
     2013     2012  

Net cash flows provided by operating activities

   $ 21,971      $ 14,210   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (6,730     (5,705

Purchases of long-term marketable securities

     (631     (316

Proceeds from sale of long-term marketable securities

     549        315   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (6,812     (5,706
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Dividends paid

     (3,724     (3,718

Proceeds from the issuance of common stock

     67        78   

Excess tax benefits from the exercise of stock options

     2        13   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (3,655     (3,627
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (282     319   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     11,222        5,196   

Cash and cash equivalents at beginning of period

     78,889        69,888   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 90,111      $ 75,084   
  

 

 

   

 

 

 

Supplemental information:

    

Income tax payments

   $ 176      $ 2,823   
  

 

 

   

 

 

 

Interest payments

   $ 121      $ 116   
  

 

 

   

 

 

 

Non-cash investing activities:

    

Purchases of property, plant and equipment included in accounts payable

   $ 656      $ 1,181   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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AMPCO-PITTSBURGH CORPORATION

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 June 30, 2013 and the condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2013 and 2012 and the condensed consolidated statement of cash flows for the six months ended June 30, 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 and six months ended June 30, 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.

In July 2013, the 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 becomes effective for reporting periods beginning on or after January 1, 2014. Currently, the Corporation records unrecognized tax benefits as a liability; accordingly, implementation of the guidance may affect balance sheet presentation but will not impact operating results or liquidity of the Corporation.

 

2. Inventories

At June 30, 2013 and December 31, 2012, approximately 66% and 68%, 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:

 

                                               
     June 30,
2013
     December 31,
2012
 

Raw materials

   $ 21,320       $ 22,514   

Work-in-process

     31,606         31,164   

Finished goods

     6,897         5,907   

Supplies

     10,813         11,084   
  

 

 

    

 

 

 
   $ 70,636       $ 70,669   
  

 

 

    

 

 

 

 

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3. Property, Plant and Equipment

Property, plant and equipment were comprised of the following:

 

     June 30,
2013
    December 31,
2012
 

Land and land improvements

   $ 5,006      $ 5,006   

Buildings

     44,702        43,411   

Machinery and equipment

     236,789        237,473   

Construction-in-progress

     11,196        7,493   

Other

     8,639        8,674   
  

 

 

   

 

 

 
     306,332        302,057   

Accumulated depreciation

     (157,091     (151,760
  

 

 

   

 

 

 
   $ 149,241      $ 150,297   
  

 

 

   

 

 

 

Land and buildings of Union Electric Steel UK Limited (UES-UK) equal to approximately $4,169 (£2,741) at June 30, 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:

 

                                             
     June 30,
2013
     December 31,
2012
 

Customer-related liabilities

   $ 11,965       $ 13,444   

Accrued sales commissions

     1,790         2,146   

Other

     8,891         8,883   
  

 

 

    

 

 

 
   $ 22,646       $ 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     Six Months  
     Ended June 30,     Ended June 30,  
     2013     2012     2013     2012  

Balance at beginning of the period

   $  6,409      $  5,472      $ 6,625      $ 5,498   

Satisfaction of warranty claims

     (669     (573     (1,214     (1,265

Provision for warranty claims

     687        642        1,262        1,231   

Other, primarily impact from changes in foreign currency exchange rates

     (2     (53     (248     24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of the period

   $ 6,425      $ 5,488      $ 6,425      $ 5,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

5. Pension and Other Postretirement Benefits

Contributions were as follows:

 

     Six Months Ended June 30,  
     2013      2012  

U.S. pension benefits plan

   $ 0       $ 0   

U.K. pension benefits plan

   $ 870       $ 888   

Other postretirement benefits (e.g., net payments)

   $ 281       $ 289   

U.K. defined contribution plan

   $ 146       $ 152   

 

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

U.S. Pension Benefits

        

Service cost

   $ 1,043      $ 1,151      $ 2,212      $ 1,972   

Interest cost

     2,016        2,063        4,036        4,257   

Expected return on plan assets

     (2,325     (2,395     (4,684     (4,778

Amortization of prior service cost

     154        167        320        334   

Amortization of actuarial loss

     1,764        1,512        3,572        3,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 2,652      $ 2,498      $ 5,456      $ 4,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

U.K. Pension Benefits

        

Interest cost

   $ 617      $ 622      $ 1,235      $ 1,245   

Expected return on plan assets

     (596     (522     (1,191     (1,044

Amortization of actuarial loss

     154        149        307        297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 175      $ 249      $ 351      $ 498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Postretirement Benefits

        

Service cost

   $ 271      $ 162      $ 472      $ 323   

Interest cost

     255        229        463        459   

Amortization of prior service cost

     22        21        43        43   

Amortization of actuarial loss

     36        103        120        206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

   $ 584      $ 515      $ 1,098      $ 1,031   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

6. Commitments and Contingent Liabilities

Outstanding standby and commercial letters of credit as of June 30, 2013 approximated $18,255, the majority of which serve as collateral for the Industrial Revenue Bond debt.

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

See Note 7 regarding foreign exchange contracts and commodities.

See Note 12 regarding litigation and Note 13 for environmental matters.

 

7. Derivative Instruments

Certain of the Corporation’s operations are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, 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 derivative’s 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).

 

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As of June 30, 2013, approximately $15,785 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 June 30, 2013 approximated $760. As of June 30, 2013, there were no cash flow contracts outstanding for future sales.

Additionally, certain of the Corporation’s 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 June 30, 2013, approximately 57% or $3,195 of anticipated copper purchases over the next nine months and 56% or $479 of anticipated aluminum purchases over the next six months are hedged. The fair value of assets held as collateral as of June 30, 2013 equaled $500.

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 June 30, 2013, the Corporation has purchase commitments covering 46% or $5,617 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 $(93) and $52 for the three months ended June 30, 2013 and 2012, respectively, and $(393) and $78 for the six months ended June 30, 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

   June 30,
2013
     December 31,
2012
 

Cash flow hedge contracts

   Other current assets    $ 0       $ 46   

Fair value hedge contracts

   Other current liabilities      555         0   
   Other current assets      0         218   

Fair value hedged items

   Receivables      95         (94
   Other current assets      431         0   
   Other current liabilities      0         223   

 

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Table of Contents

The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive income (loss). The fair value balances as of June 30, 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 June 30, 2013

   Comprehensive
Income (Loss)
Beginning of
the Period
    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

     287        0        5        282   

Futures contracts – copper and aluminum

     (159     (236     (64     (331
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 128      $ (236   $ (59   $ (49
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2012

                        

Foreign currency sales contracts – cash flow hedges

   $ 38      $ 43      $ 0      $ 81   

Foreign currency purchase contracts

     305        0        4        301   

Futures contracts – copper and aluminum

     114        (271     25        (182
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 457      $ (228   $ 29      $ 200   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012

                        

Foreign currency sales contracts – cash flow hedges

   $ 114      $ 17      $ 50      $ 81   

Foreign currency purchase contracts

     309        0        8        301   

Futures contracts – copper and aluminum

     (314     (20     (152     (182
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 109      $ (3   $ (94   $ 200   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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 June 30,      Six Months Ended June 30,  
    

of Operations

   Next 12 Months     2013     2012      2013     2012  

Foreign currency sales contracts - cash flow hedges

   Net sales    $ 0      $ 0      $ 0       $ 0      $ 79   

Foreign currency purchase contracts

   Depreciation      28        7        7         14        14   

Futures contracts – copper and aluminum

   Costs of products sold (excluding depreciation)      (532     (101     38         (115     (246

 

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 six months ended June 30, 2013 and 2012 is summarized below. 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

     (2,750     2,787        159         (367     (171
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2013

   $ (4,293   $ (78,996   $ 792       $ (49   $ (82,546
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at January 1, 2012

   $ (4,736   $ (75,225   $ 562       $ 109      $ (79,290

Net Change

     594        2,517        13         91        3,215   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

   $ (4,142   $ (72,708   $ 575       $ 200      $ (76,075
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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

 

     Three Months Ended June 30,     Six Months Ended June 30,      
     2013     2012     2013     2012    

Affected Line Item

Amortization of unrecognized employee benefit costs

   $ 1,380      $ 1,265      $ 2,820      $ 2,561      Costs of products sold (excluding depreciation)
     536        497        1,109        977      Selling and administrative
     214        190        433        385      Other income (expense)
  

 

 

   

 

 

   

 

 

   

 

 

   
     2,130        1,952        4,362        3,923      Total before income tax
     (769     (701     (1,575     (1,406   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 1,361      $ 1,251      $ 2,787      $ 2,517      Net of tax
  

 

 

   

 

 

   

 

 

   

 

 

   

Realized (gains) on sale of marketable securities

   $ (46   $ (10   $ (53   $ (42   Selling and administrative
     17        4        19        15      Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ (29   $ (6   $ (34   $ (27   Net of tax
  

 

 

   

 

 

   

 

 

   

 

 

   

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

          

Foreign currency sales contracts

   $ 0      $ 0      $ 0      $ (79   Net sales

Foreign currency purchase contracts

     (7     (7     (14     (14   Depreciation

Futures contracts – copper and aluminum

     101        (38     115        246      Costs of products sold (excluding depreciation)
  

 

 

   

 

 

   

 

 

   

 

 

   
     94        (45     101        153      Total before income tax
     (35     16        (39     (59   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 59      $ (29   $ 62      $ 94      Net of tax
  

 

 

   

 

 

   

 

 

   

 

 

   

The income tax expense (benefit) associated with the various components of other comprehensive income (loss) for the three and six months ended June 30, 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 June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Tax expense (benefit) associated with changes in:

        

Unrealized holding losses/gains on marketable securities

   $ 12      $ 37      $ (104   $ (22

Fair value of cash flow hedges

     142        137        258        0   

Tax expense (benefit) associated with reclassification adjustments:

        

Amortization of unrecognized employee benefit costs

     (769     (701     (1,575     (1,406

Realized gains from sale of marketable securities

     17        4        19        15   

Realized losses/gains from settlement of cash flow hedges

     (35     16        (39     (59

 

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Table of Contents
9. Stock-Based Compensation

In May 2011, the shareholders of the Corporation approved the adoption of the 2011 Omnibus Incentive Plan (Incentive Plan) which authorizes the issuance of up to 1,000,000 shares of the Corporation’s common stock for grants of equity-based compensation. Awards under the Incentive Plan may include incentive non-qualified stock options, stock appreciation rights, restricted shares and restricted stock units, performance awards, other stock-based awards or short-term cash incentive awards. 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 exercise price of $17.16 was equal to the closing price of the Corporation’s common stock on the New York Stock Exchange on the date of grant and the fair value of the options was $5.82 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 1.26%, an expected dividend yield of 4.20%, expected forfeiture rate of 5% and an expected volatility of 52.68%. The resultant stock-based compensation expense of $961 will be recognized over the requisite service period of three years.

The Incentive Plan also provides for annual grants of shares of the Corporation’s common stock to non-employee directors following the Corporation’s annual shareholder meeting. Each annual director award will be for a number of shares having a fair market value equal to $25 and will be fully vested as of the grant date. In May 2013, 11,656 shares of the Corporation’s common stock were issued to the non-employee directors.

Stock-based compensation expense for the three months ended June 30, 2013 and 2012 equaled $208 and $266, respectively. The related income tax benefit recognized in the condensed consolidated statement of operations for each of the periods was approximately $72 and $93, respectively. Stock-based compensation expense for the six months ended June 30, 2013 and 2012 equaled $504 and $665, respectively. The related income tax benefit recognized in the condensed consolidated statement of operations for each of the periods was approximately $176 and $233, respectively.

 

10. Fair Value

The Corporation’s financial assets and liabilities that are reported at fair value in the accompanying condensed consolidated balance sheets as of June 30, 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 June 30, 2013

           

Investments

           

Other noncurrent assets

   $ 3,690       $ 0       $ 0       $           3,690   

Foreign currency exchange contracts

           

Other current assets

     0         431         0         431   

Other current liabilities

     0         555         0         555   

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   

 

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Table of Contents
11. Business Segments

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net Sales:

        

Forged and Cast Rolls

   $ 45,386      $ 43,584      $ 90,499      $ 87,532   

Air and Liquid Processing

     24,552        26,372        49,063        56,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments

   $ 69,938      $ 69,956      $ 139,562      $ 143,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before Income Taxes:

        

Forged and Cast Rolls

   $ 2,611      $ 3,240      $ 4,674      $ 7,380   

Air and Liquid Processing

     2,078        2,234        4,288        4,708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments

     4,689        5,474        8,962        12,088   

Other expense, including corporate costs – net

     (2,758     (2,815     (5,964     (5,588
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,931      $ 2,659      $ 2,998      $ 6,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

12. Litigation (claims not in thousands)

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

Asbestos Litigation

Claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products of predecessors of the Corporation’s Air & Liquid 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:

 

     Six Months Ended June 30,  
     2013     2012  

Total claims pending at the beginning of the period

     8,007        8,145   

New claims served

     726        173   

Claims dismissed

     (250     (214

Claims settled

     (135     (131
  

 

 

   

 

 

 

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

     8,348        7,973   
  

 

 

   

 

 

 

Gross settlement and defense costs (in 000’s)

   $ 10,727      $ 9,609   
  

 

 

   

 

 

 

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

   $ 27.86      $ 27.85   
  

 

 

   

 

 

 

 

  (1) Included as “open claims” are approximately 1,633 and 1,657 claims as of June 30, 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.

 

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Table of Contents

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 Corporation’s inactive subsidiary in dissolution, numbering approximately 289 as of June 30, 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 Lloyd’s, London and certain London market insurance companies, and Howden. The lawsuit seeks a declaratory judgment regarding the respective rights and obligations of the parties under excess insurance policies that were issued to the Corporation from 1981 through 1984 as respects claims against the Corporation and its subsidiary for Asbestos Liability and as respects asbestos bodily-injury claims against Howden arising from the Products. The Corporation and Air & Liquid 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&A’s analysis has been periodically updated since that time. Most recently, the HR&A analysis was updated in 2012, and additional reserves were established by the Corporation as at December 31, 2012 for Asbestos Liability claims pending or projected to be asserted through 2022. The methodology used by HR&A in its projection in 2012 of the operating subsidiaries’ liability for pending and unasserted potential future claims for Asbestos Liability, which is substantially the same as the methodology employed by HR&A in prior estimates, relied upon and included the following factors:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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Table of Contents

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

Based on the analyses described above, the Corporation’s reserve at December 31, 2012 for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2022 was $181,022, of which approximately 73% was attributable to settlement costs for unasserted claims projected to be filed through 2022 and future defense costs. The reserve at June 30, 2013 was $170,568. While it is reasonably possible that the Corporation will incur additional charges for Asbestos Liability and defense costs in excess of the amounts currently reserved, the Corporation believes that there is too much uncertainty to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them beyond 2022. Accordingly, no reserve has been recorded for any costs that may be incurred after 2022.

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

The following table summarizes activity relating to insurance recoveries.

 

     Six Months Ended June 30,  
     2013     2012  

Insurance receivable – asbestos, beginning of the year

   $ 118,115      $ 126,206   

Settlement and defense costs paid by insurance carriers

     (12,757     (6,581
  

 

 

   

 

 

 

Insurance receivable – asbestos, end of the period

   $ 105,358      $ 119,625   
  

 

 

   

 

 

 

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.

 

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Table of Contents

The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently known facts and strategy. The Corporation’s actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Corporation’s or HR&A’s calculations vary significantly from actual results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, the average cost of disposing of each such new claim, average annual defense costs, 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 Corporation’s 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 Corporation’s estimate of its recorded Asbestos Liability and/or insurance receivables could be material to operating results for the periods in which the adjustments to the liability or receivable are recorded, and to the Corporation’s liquidity and consolidated financial position.

 

13. Environmental Matters

The Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned. Environmental exposures are difficult to assess and estimate for numerous reasons including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. In the opinion of management and in consideration of advice from the Corporation’s consultants, the potential liability for all environmental proceedings of approximately $1,100 at June 30, 2013 is considered adequate based on information known to date.

 

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Table of Contents

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in thousands, except share and per share amounts)

Executive Overview

The Corporation operates in two business segments – Forged and Cast Rolls and Air and Liquid Processing. The Forged and Cast Rolls segment produces and sells forged-hardened steel rolls and cast iron and steel rolls to manufacturers of steel and aluminum throughout the world. The Forged and Cast Rolls segment is being adversely affected by weak demand worldwide and competitive pricing. Lower steel and aluminum production levels of our customers, excess roll inventories in Asia, and the emergence of indigenous roll supply, particularly in China, are contributing to the falloff in demand and a reduction in export business. Margin erosion continues as global pricing pressure remains fierce from both traditional Western suppliers, who are working below capacity, and Chinese, Japanese, and Eastern European roll makers, who are discounting deeply to secure volume. Additionally, management expects a continuation of losses by its Chinese forged roll joint venture company (in which it has a 49% interest and accounts for on the equity method of accounting). While losses to date are largely the result of non-cash expense, if conditions deteriorate or other impairment indicators arise, future earnings of the Corporation may be adversely affected by an impairment charge.

For 2013 to date, demand for rolling mill rolls has recovered modestly including roll requirements for North America customers. Additionally, new mill projects in Asia have helped to offset the effects of lower demand associated with excess roll inventories and emerging indigenous supply in that region. European sales, however, remain generally weak as steel producers continue to rationalize capacity. Competitive pricing pressures continue globally as most roll producers operate well below capacity.

For the Air and Liquid Processing segment, spending on new construction by the institutional markets remains slow while continued strength in spending on upgrading fossil-fueled utility plants is encouraging.

Consolidated Results of Operations for the Three and Six Months Ended June 30, 2013 and 2012

Net Sales. Net sales for the three months ended June 30, 2013 and 2012 were $69,938 and $69,956, respectively, and $139,562 and $143,561, respectively, for the six months then ended. Backlog approximated $182,057 at June 30, 2013 versus $195,804 as of December 31, 2012 and $245,769 as of June 30, 2012. A discussion of sales and backlog for the Corporation’s two segments is included below.

Costs of Products Sold. Costs of products sold, excluding depreciation, as a percentage of net sales approximated 79.1% and 77.6% for the three months ended June 30, 2013 and 2012, respectively, and 79.1% and 77% for the six months ended June 30, 2013 and 2012, respectively. The increase is primarily attributable to reduced margins for the Forged and Cast Rolls segment.

Selling and Administrative. The decrease in selling and administrative expenses for the three and six months ended June 30, 2013 against the comparable prior year periods is primarily due to ongoing cost containment activities being implemented by each of the segments.

Depreciation. The increase in depreciation expense for the three and six months ended June 30, 2013 against the comparable prior year periods is attributable to additional depreciation associated with assets placed in service in the prior year.

Income from Operations. Income from operations for the three months ended June 30, 2013 and 2012 approximated $2,391 and $2,928, respectively, and $4,102 and $7,045, respectively, for the six months then ended. A discussion of operating results for the Corporation’s two segments is included below.

Forged and Cast Rolls. Although sales for each of the current year periods improved slightly when compared to the same periods of the prior year, operating income decreased. The additional volume contributed approximately $800 and $3,000 to earnings for the three and six months ended June 30, 2013, respectively; however, lower margins adversely affected operating income by approximately $1,400 and $6,300 for the same periods. Backlog approximated $140,772 at June 30, 2013 against $154,527 as of December 31, 2012 and $195,640 as of June 30, 2012. The decline, particularly from a year ago, is due to shipments outpacing new orders and lower profitability in backlog. Approximately $55,903 of the current backlog is expected to ship after 2013.

 

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Air and Liquid Processing. For the three and six months ended June 30, 2013, sales and operating results decreased against the same periods of the prior year. For Buffalo Pumps, sales improved for each of the current year periods; however, operating income remained relatively comparable due to differences in product mix (shipments included a larger portion of orders to U.S. Navy shipbuilders which have lower margins). For Aerofin, sales decreased for each of the current year periods. Operating income improved for the quarter, primarily due to changes in product mix; however, it is less than the prior year because of the lower volume of shipments. For Buffalo Air Handling, sales and operating results are less than the comparable prior year periods principally due to a weak construction market. Additionally, the prior year-to-date period includes the balance of a large order for a customer in medical research. Backlog at June 30, 2013 and December 31, 2012 were comparable at approximately $41,300 but below June 30, 2012 of $50,129. The decline in backlog from a year ago correlates to the decrease in customer demand for the group’s products. The majority of the backlog will ship in 2013.

Other Income (Expense). The fluctuation is primarily attributable to fluctuations in foreign exchange gains and losses.

Income Taxes. The decrease in the effective income tax rate for the six months ended June 30, 2013 versus the same period of 2012 is attributable to a higher proportion of beneficial permanent differences. The tax provision for an interim period is computed as the difference between the estimated tax provision for the year and the amounts reported for previous interim periods. Accordingly, the effective tax rate from quarter-to-quarter or between a quarter and the comparable prior year quarter includes an adjustment necessary to record the year-to-date tax provision at the estimated annual effective tax rate for that year.

Net Income and Earnings per Common Share. As a result of the above, the Corporation’s net income for the three months ended June 30, 2013 and 2012 equaled $1,106 or $0.11 per common share and $1,508 or $0.15 per common share, respectively, and $1,232 or $0.12 per common share and $3,508 or $0.34 per common share, respectively, for the six months ended June 30, 2013 and 2012.

Liquidity and Capital Resources

Net cash flows provided by operating activities increased for the six months ended June 30, 2013 when compared to the six months ended June 30, 2012. Net cash flows provided by operating activities for the prior year were adversely impacted by an increase in inventory levels from December 31, 2011, thereby reducing net cash flows provided by operating activities for the six months ended June 30, 2012, whereas inventory levels for the current year are comparable to December 31, 2012 thus having minimal impact on net cash flows provided by operating activities for the six months ended June 30, 2013. Additionally, net spend on asbestos-related costs for the six months ended June 30, 2013 was less than net spend on asbestos-related costs for the six months ended June 30, 2012. Due to a decline in sales, accounts receivable at June 30, 2013 decreased from December 31, 2012 and at June 30, 2012 from December 31, 2011 by similar amounts and, accordingly, did not have a significant impact on net cash flows provided by operating activities.

Net cash flows used in investing activities for the six months ended June 30, 2013 were higher than June 30, 2012 due to an increased level of capital expenditures for the Forged and Cast Rolls segment. As of June 30, 2013, future capital expenditures approximating $11,000, to be spent over the next 12-18 months, have been approved.

Net cash flows used in financing activities were comparable for each of the periods and represented primarily payment of dividends.

As a result of the above, cash and cash equivalents increased $11,222 in 2013 and ended the period at $90,111 (of which approximately $7,630 is held by foreign operations) in comparison to $78,889 at December 31, 2012. Repatriation of foreign funds may result in the Corporation accruing and paying additional income tax; however, the majority of such amounts is currently deemed to be permanently reinvested and no additional provision for income tax has been made.

Funds on hand and funds generated from future operations are expected to be sufficient to finance the operational and capital expenditure requirements of the Corporation. The Corporation also maintains short-term lines of credit and an overdraft facility in excess of the cash needs of its businesses. The total available at June 30, 2013 was approximately $9,100 (including £3,000 in the U.K. and €400 in Belgium).

Litigation and Environmental Matters

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

Critical Accounting Pronouncements

The Corporation’s critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2012, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

 

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Forward-Looking Statements

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Corporation’s exposure to market risk from December 31, 2012.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission (“SEC”) rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Corporation’s management, including the principal executive officer and principal financial officer, has concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2013.

(c) Changes in internal control over financial reporting. There were no changes in the Corporation’s internal control over financial reporting during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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PART II – OTHER INFORMATION

AMPCO-PITTSBURGH CORPORATION

 

Item 1 Legal Proceedings

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

 

Item 1A Risk Factors

There are no material changes to the Risk Factors contained in Item 1A to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Items 2-5 None

 

Item 6 Exhibits

 

    (3)   Articles of Incorporation and By-laws
  (a)    Articles of Incorporation
     Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1983, March 31, 1984, March 31, 1985, March 31, 1987 and September 30, 1998.
  (b)    By-laws
     Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended September 30, 1994, March 31, 1996, June 30, 2001 and June 30, 2004.
  (31.1)   Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  (31.2)   Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  (32.1)   Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  (32.2)   Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(101)   Interactive Data File (XBRL)

 

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SIGNATURES

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

 

      AMPCO-PITTSBURGH CORPORATION
DATE:  

August 9, 2013

    BY:  

/s/ Robert A. Paul

      Robert A. Paul
      Chairman and Chief Executive Officer
DATE:  

August 9, 2013

    BY:  

/s/ Marliss D. Johnson

      Marliss D. Johnson
      Chief Financial Officer and Treasurer

 

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AMPCO-PITTSBURGH CORPORATION

EXHIBIT INDEX

 

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

 

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