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, 2016 and the condensed consolidated statements of operations and comprehensive (loss) income for the three and six months ended June 30, 2016 and 2015 and condensed consolidated statements of cash flows for the
six months ended June 30, 2016 and 2015 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, 2016 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 April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03,
Simplifying the Presentation of Debt
Issuance Costs
, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. However, the guidance in ASU 2015-03 does not address
presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB subsequently issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements
, which permits an entity to defer and present debt issuance costs as an asset and amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. The amended guidance became effective January 1, 2016. See Note 7.
In September
2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments
, which requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period, including changes
in depreciation and amortization or other income effects, in the reporting period in which the adjustment amounts are determined. The amended guidance became effective January 1, 2016. See Note 2.
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, 2018. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
, which revises the measurement of inventory at
the lower of cost or market. Currently, market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. In accordance with ASU 2015-11, an entity will measure inventory at the lower of cost
and net realizable value which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The amendment does not apply to inventory that is measured
using last-in, first out (LIFO). The guidance becomes effective January 1, 2017 with earlier application permitted. The Corporation does not expect the guidance will have a significant impact on its financial position, operating results and
liquidity.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to recognize assets and liabilities on the
balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing generally accepted accounting principles. The guidance becomes effective January 1,
2019. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which requires all income tax
effects of awards to be recognized in the income statement when the awards vest or are settled and will be applied on a prospective basis. The guidance also requires presentation of excess tax benefits as an operating activity on the statement of
cash flows rather than as a financing activity, and can be applied retroactively or prospectively. The amended guidance will be effective for interim and annual periods beginning after December 15, 2016; however, early adoption is permitted if
all provisions are adopted in the same period. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
On March 3, 2016, the Corporation acquired the stock
of Åkers AB and certain of its affiliated companies, including Åkers ABs 60% equity interest in a Chinese joint venture company (collectively, Åkers) from Altor Fund II GP Limited (Altor). The purchase
price, after the post-closing purchase price adjustment made in accordance with the purchase agreement during the second quarter of $3,100, approximated $74,155 and was comprised of $29,399 in cash, $22,619 in the form of three-year promissory
notes, and 1,776,604 shares of common stock of the Corporation which, based on the closing price of the Corporations common stock as of the date of closing, had a fair value of $22,137. The notes bear interest at 6.5%, compounding annually,
with principal and interest payable at maturity on March 3, 2019.
7
The acquisition adds roll production facilities in Sweden, the United States, Slovenia, and
China; 14 sales offices; and a service capability in the United States. It enables cast roll production in the United States, forged roll production in Europe, and a low-cost product alternative for customers.
Operating results of the acquired entities are included in the Forged and Cast Engineered Products segment from the date of acquisition. For
the three months and six months ended June 30, 2016, net sales for Åkers approximated $40,441 and $53,024, respectively, and loss before income taxes including the effects of purchase accounting approximated $4,089 and $5,095,
respectively. Acquisition-related transaction costs of $200 and $2,000 for the three and six months ended June 30, 2016 relating principally to the purchase of Åkers are included in selling and administrative costs.
The Corporations financial position as of March 31, 2016 included the acquired assets and assumed liabilities of Åkers at their
provisional fair value estimates. During the second quarter, the previously-mentioned post-closing purchase price adjustment of approximately $3,100 was recorded as a reduction in the outstanding principal balance of the three-year promissory notes
and principally to goodwill. The Corporation also recorded an increase in property, plant and equipment of $2,742 with a corresponding decrease to goodwill. Neither of the adjustments had a material impact on the Corporations statements of
operations for the three or six months ended June 30, 2016. The resulting estimated fair value of assets acquired and liabilities assumed as of the date of acquisition is as follows:
|
|
|
|
|
Current assets (excluding inventories)
|
|
$
|
40,703
|
|
Inventories
|
|
|
29,863
|
|
Property, plant and equipment
|
|
|
70,882
|
|
Intangible assets
|
|
|
15,972
|
|
Other noncurrent assets
|
|
|
6,090
|
|
Current liabilities
|
|
|
(67,005
|
)
|
Noncurrent liabilities
|
|
|
(42,219
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
54,286
|
|
Noncontrolling interest
|
|
|
(11,666
|
)
|
Goodwill
|
|
|
31,535
|
|
|
|
|
|
|
Base purchase price
|
|
$
|
74,155
|
|
|
|
|
|
|
The estimated fair values primarily for intangible assets, noncontrolling interest, pre-acquisition
contingencies, deferred income taxes, and goodwill are provisional amounts based, in part, on third party valuations currently under review and continue to be subject to final adjustments. Intangible assets consist of $6,400 for developed
technology, $6,016 for customer relationships, and $3,556 for trade name. The economic life of the acquired intangible assets is estimated to be 5 years for developed technology, 10 years for customer relationships, and indefinite for the trade
name. Goodwill is not amortized for book purposes or deductible for tax purposes. Goodwill is assessed for impairment annually in connection with the Corporations strategic planning process or whenever events or circumstances indicate the
carrying amount of the asset may not be recoverable. Goodwill presented in the condensed consolidated balance sheet as of June 30, 2016 differs from goodwill recognized as of the acquisition date due to the efforts of foreign currency translation.
Included in current liabilities is a loan payable to the non-controlling shareholder of the Chinese joint venture company which, with
accrued interest, approximated $7,468 as of the date of acquisition. The interest rate is equal to the benchmark lending rate set by the Peoples Bank of China. Both the loan and interest were payable as of December 31, 2015
but remain unpaid.
Pro Forma Financial Information for the Åkers Acquisition (unaudited):
The financial information in the table below summarizes the combined results of operations of the Corporation and Åkers on a pro forma
basis, for the period in which the acquisition occurred as though the companies had been combined as of the beginning of that period. Pro forma adjustments have been made to (1) include amortization expense on the definite-lived intangible
assets identified in the acquisition and interest expense on the notes and (2) remove debt-related expenses associated with Åkers previous debt facilities not assumed by the Corporation. The following pro forma financial information
is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of the period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
93,301
|
|
|
$
|
98,855
|
|
|
$
|
178,429
|
|
|
$
|
205,465
|
|
Loss before income taxes (includes noncontrolling interest)
|
|
|
(3,264
|
)
|
|
|
(1,158
|
)
|
|
|
(13,042
|
)
|
|
|
(7,891
|
)
|
8
At June 30, 2016 and December 31, 2015, approximately 51% and
60% 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,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
20,618
|
|
|
$
|
18,314
|
|
Work-in-process
|
|
|
31,463
|
|
|
|
21,583
|
|
Finished goods
|
|
|
23,887
|
|
|
|
9,897
|
|
Supplies
|
|
|
12,072
|
|
|
|
9,940
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,040
|
|
|
$
|
59,734
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Land and land improvements
|
|
$
|
10,181
|
|
|
$
|
5,223
|
|
Buildings
|
|
|
64,298
|
|
|
|
44,570
|
|
Machinery and equipment
|
|
|
310,571
|
|
|
|
266,358
|
|
Construction-in-progress
|
|
|
7,855
|
|
|
|
3,566
|
|
Other
|
|
|
6,827
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399,732
|
|
|
|
327,491
|
|
Accumulated depreciation
|
|
|
(188,098
|
)
|
|
|
(180,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,634
|
|
|
$
|
146,913
|
|
|
|
|
|
|
|
|
|
|
Land and buildings of Union Electric Steel UK Limited (UES-UK) equal to approximately $2,708
(£2,022) at June 30, 2016 are held as collateral by the trustees of the UES-UK defined benefit pension plan (see Note 6). Substantially all of the remaining assets are held as collateral for the Corporations Revolving Credit
and Security Agreement (see Note 7).
5.
|
Other Current Liabilities
|
Other current liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Customer-related liabilities
|
|
$
|
31,792
|
|
|
$
|
12,195
|
|
Accrued interest payable
|
|
|
2,243
|
|
|
|
3
|
|
Accrued sales commissions
|
|
|
1,371
|
|
|
|
1,506
|
|
Income taxes payable
|
|
|
183
|
|
|
|
3,256
|
|
Other
|
|
|
8,677
|
|
|
|
6,920
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,266
|
|
|
$
|
23,880
|
|
|
|
|
|
|
|
|
|
|
9
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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of the period
|
|
$
|
12,580
|
|
|
$
|
6,936
|
|
|
$
|
6,358
|
|
|
$
|
6,672
|
|
Akersopening balance sheet liability for warranty claims
|
|
|
0
|
|
|
|
0
|
|
|
|
6,032
|
|
|
|
0
|
|
Satisfaction of warranty claims
|
|
|
(1,147
|
)
|
|
|
(674
|
)
|
|
|
(1,705
|
)
|
|
|
(1,005
|
)
|
Provision for warranty claims
|
|
|
904
|
|
|
|
825
|
|
|
|
1,517
|
|
|
|
1,573
|
|
Other, primarily impact from changes in foreign currency exchange rates
|
|
|
(512
|
)
|
|
|
183
|
|
|
|
(377
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
11,825
|
|
|
$
|
7,270
|
|
|
$
|
11,825
|
|
|
$
|
7,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Pension and Other Postretirement Benefits
|
Contributions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Foreign defined benefit pension plans
|
|
$
|
896
|
|
|
$
|
860
|
|
Other postretirement benefits (e.g. net payments)
|
|
$
|
664
|
|
|
$
|
305
|
|
U.K. defined contribution pension plan
|
|
$
|
135
|
|
|
$
|
201
|
|
U.S. defined contribution plan
|
|
$
|
1,201
|
|
|
$
|
0
|
|
In 2015, the U.S. Defined Benefit Plan was amended to freeze benefit accruals and participation in the plan
for non-union hourly and salaried participants and, effective January 1, 2016, for employees of the Union Electric Steel Carnegie Steelworkers Location. Benefits under the plan were replaced with employer contributions equaling a 3% base
contribution and a matching contribution of up to 4% to the defined contribution plan. The plan changes resulted in a curtailment loss of $1,217 for the three months ended March 31, 2015.
As part of the Åkers acquisition, the Corporation assumed the obligations for two U.S. defined benefit pension plans, two foreign
retirement benefit plans and two other postretirement benefit plans. None of the acquired benefit plans were fully funded as of the acquisition date. In April 2016, the Corporation elected to freeze participation in one of the U.S. defined benefit
pension plans, effective June 1, 2016, and replace salary benefit accruals with employer non-elective contributions equaling 3% of compensation. The plan change resulted in a reduction in the plan liability of approximately $1,135 and a
curtailment gain of $887. See also Note 16.
10
Net periodic pension and other postretirement costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
U.S. Defined Benefit Pension Plan
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
465
|
|
|
$
|
540
|
|
|
$
|
811
|
|
|
$
|
1,670
|
|
Interest cost
|
|
|
2,516
|
|
|
|
1,978
|
|
|
|
4,774
|
|
|
|
4,048
|
|
Expected return on plan assets
|
|
|
(3,409
|
)
|
|
|
(2,751
|
)
|
|
|
(6,420
|
)
|
|
|
(5,492
|
)
|
Amortization of prior service (benefit) cost
|
|
|
(82
|
)
|
|
|
77
|
|
|
|
23
|
|
|
|
215
|
|
Amortization of actuarial loss
|
|
|
534
|
|
|
|
1,346
|
|
|
|
1,662
|
|
|
|
2,809
|
|
Curtailment (credit) charge
|
|
|
(887
|
)
|
|
|
0
|
|
|
|
(887
|
)
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit (income) cost
|
|
$
|
(863
|
)
|
|
$
|
1,190
|
|
|
$
|
(37
|
)
|
|
$
|
4,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Defined Benefit Pension Plan
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
98
|
|
|
$
|
0
|
|
|
$
|
129
|
|
|
$
|
0
|
|
Interest cost
|
|
|
596
|
|
|
$
|
604
|
|
|
|
1,164
|
|
|
$
|
1,201
|
|
Expected return on plan assets
|
|
|
(643
|
)
|
|
|
(677
|
)
|
|
|
(1,290
|
)
|
|
|
(1,345
|
)
|
Amortization of actuarial loss
|
|
|
175
|
|
|
|
214
|
|
|
|
351
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
226
|
|
|
$
|
141
|
|
|
$
|
354
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plan
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
78
|
|
|
$
|
117
|
|
|
$
|
236
|
|
|
$
|
192
|
|
Interest cost
|
|
|
154
|
|
|
|
125
|
|
|
|
354
|
|
|
|
237
|
|
Amortization of prior service cost
|
|
|
(257
|
)
|
|
|
(168
|
)
|
|
|
(515
|
)
|
|
|
(336
|
)
|
Amortization of actuarial (gain) loss
|
|
|
(19
|
)
|
|
|
(45
|
)
|
|
|
18
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit (income) cost
|
|
$
|
(44
|
)
|
|
$
|
29
|
|
|
$
|
93
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Revolving Credit and Security Agreement
|
In May 2016, the Corporation entered into a
new five-year Revolving Credit and Security Agreement (the Agreement) with a syndicate of banks. The Agreement provides for a senior secured asset based revolving credit facility that replaces the Corporations existing line of
credit and letter of credit facilities. The Agreement provides for initial borrowings not to exceed $100,000 with an option to increase the credit facility by an additional $50,000. The Agreement also includes sublimits for letters of credit, not to
exceed $40,000, and European borrowings, not to exceed $25,000.
Availability under the Agreement is based on eligible accounts receivable,
inventory and fixed assets. Amounts outstanding under the credit facility bear interest at the Corporations option at either (1) LIBOR plus an applicable margin ranging between 1.25% to 1.75% based on the quarterly average excess
availability or (2) the Base Rate plus an applicable margin ranging between 0.25% to 0.75% based on the quarterly average excess availability. Additionally, the Corporation is required to pay a commitment fee ranging between 0.25% and 0.375%
based on the daily unused portion of the credit facility. The Agreement contains customary affirmative and negative covenants and is collateralized by a first priority perfected security interest in substantially all of the assets of the Corporation
and its subsidiaries. The Corporation must also maintain a certain level of excess availability. If excess availability falls below the established threshold, or in an event of default, the Corporation will be required to maintain a minimum fixed
charge coverage of not less than 1.00 to 1.00.
In connection with the credit facility, the Corporation paid deferred financing fees of
approximately $1,000 which are being amortized over the life of the Agreement. Unamortized deferred financing fees are included as a noncurrent asset in the accompanying condensed consolidated balance sheet.
8.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of
credit as of June 30, 2016 approximated $27,067, of which approximately half serves as collateral for the Industrial Revenue Bond (IRB) debt. In addition, in connection with the acquisition of Åkers, the Corporation issued two
surety bonds to PRI Pensionsgaranti, guaranteeing certain obligations of Åkers Sweden AB and Åkers AB under a credit insurance policy relating to pension commitments. The total amount covered by the surety bonds is approximately $4,000
(SEK 33,900).
See Note 9 for derivative instruments, Note 14 for litigation and Note 15 for environmental matters.
11
9.
|
Derivative Instruments
|
Certain of the Corporations operations are subject to
risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, foreign currency sales contracts are entered into which are designated as cash flow or fair value hedges. As of June 30, 2016,
approximately $16,453 of anticipated foreign-denominated sales has been hedged which are covered by fair value contracts settling at various dates through July 2017. The fair value of assets held as collateral for the fair value contracts as of
June 30, 2016 approximated $670.
Additionally, certain of the 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, 2016, approximately 41% or
$2,616 of anticipated copper purchases over the next 17 months and 56% or $392 of anticipated aluminum purchases over the next six months are hedged.
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, 2016, the Corporation has purchase commitments covering 40% or $1,624 of anticipated natural gas usage through 2017 at one of
its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheet. Purchases of natural gas under previously existing commitments approximated $346 and $542 for the three
months ended June 30, 2016 and 2015 and $1,169 and $1,323 for the six months then ended, respectively.
The Corporation does not enter
into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
(Losses) gains
on foreign exchange transactions included in other (expense) income approximated $(525) and $174 for the three months ended June 30, 2016 and 2015 and $648 and $(206) for the six months ended June 30, 2016 and 2015, 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,
2016
|
|
|
December 31,
2015
|
|
Cash flow hedge contracts
|
|
Other current assets
|
|
$
|
0
|
|
|
$
|
10
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
|
0
|
|
|
|
113
|
|
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
0
|
|
|
|
Other current liabilities
|
|
|
1,528
|
|
|
|
258
|
|
|
|
Other noncurrent liabilities
|
|
|
18
|
|
|
|
49
|
|
Fair value hedged items
|
|
Receivables
|
|
|
443
|
|
|
|
27
|
|
|
|
Other current assets
|
|
|
1,300
|
|
|
|
255
|
|
|
|
Other noncurrent assets
|
|
|
23
|
|
|
|
39
|
|
|
|
Other current liabilities
|
|
|
0
|
|
|
|
116
|
|
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
0
|
|
12
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, 2016 and 2015 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, 2016
|
|
Comprehensive
Income (Loss)
Beginning of
the Year
|
|
|
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
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
237
|
|
|
|
0
|
|
|
|
4
|
|
|
|
233
|
|
Futures contracts copper and aluminum
|
|
|
(39
|
)
|
|
|
37
|
|
|
|
(34
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
198
|
|
|
$
|
37
|
|
|
$
|
(30
|
)
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
(2
|
)
|
|
$
|
10
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Foreign currency purchase contracts
|
|
|
253
|
|
|
|
0
|
|
|
|
4
|
|
|
|
249
|
|
Futures contracts copper and aluminum
|
|
|
(136
|
)
|
|
|
(77
|
)
|
|
|
(108
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115
|
|
|
$
|
(67
|
)
|
|
$
|
(100
|
)
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
7
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
241
|
|
|
|
0
|
|
|
|
8
|
|
|
|
233
|
|
Futures contracts copper and aluminum
|
|
|
(200
|
)
|
|
|
52
|
|
|
|
(180
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
|
$
|
55
|
|
|
$
|
(165
|
)
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
0
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
4
|
|
Foreign currency purchase contracts
|
|
|
258
|
|
|
|
0
|
|
|
|
9
|
|
|
|
249
|
|
Futures contracts copper and aluminum
|
|
|
(173
|
)
|
|
|
(160
|
)
|
|
|
(228
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85
|
|
|
$
|
(152
|
)
|
|
$
|
(215
|
)
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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
|
|
Estimated to be
Reclassified in the
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
of Operations
|
|
Next 12 Months
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Foreign currency sales contractscash flow hedges
|
|
Sales
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
7
|
|
Foreign currency purchase contracts
|
|
Depreciation
|
|
|
27
|
|
|
|
7
|
|
|
|
6
|
|
|
|
14
|
|
|
|
13
|
|
Futures contracts copper and aluminum
|
|
Costs of products
sold (excluding
depreciation)
|
|
|
38
|
|
|
|
(55
|
)
|
|
|
(176
|
)
|
|
|
(291
|
)
|
|
|
(370
|
)
|
10.
|
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, 2016 and 2015 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, 2016
|
|
$
|
(8,393
|
)
|
|
$
|
(49,943
|
)
|
|
$
|
692
|
|
|
$
|
45
|
|
|
$
|
(57,599
|
)
|
Net Change
|
|
|
(6,404
|
)
|
|
|
3,128
|
|
|
|
193
|
|
|
|
220
|
|
|
|
(2,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
(14,797
|
)
|
|
$
|
(46,815
|
)
|
|
$
|
885
|
|
|
$
|
265
|
|
|
$
|
(60,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
(4,426
|
)
|
|
$
|
(65,396
|
)
|
|
$
|
984
|
|
|
$
|
85
|
|
|
$
|
(68,753
|
)
|
Net Change
|
|
|
152
|
|
|
|
6,779
|
|
|
|
(65
|
)
|
|
|
63
|
|
|
|
6,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2015
|
|
$
|
(4,274
|
)
|
|
$
|
(58,617
|
)
|
|
$
|
919
|
|
|
$
|
148
|
|
|
$
|
(61,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
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 net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Amortization of unrecognized employee benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold (excluding depreciation and amortization)
|
|
$
|
936
|
|
|
$
|
498
|
|
|
$
|
1,661
|
|
|
$
|
1,779
|
|
Selling and administrative
|
|
|
(393
|
)
|
|
|
798
|
|
|
|
(70
|
)
|
|
|
2,393
|
|
Other (expense) income
|
|
|
56
|
|
|
|
128
|
|
|
|
196
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax
|
|
|
599
|
|
|
|
1,424
|
|
|
|
1,787
|
|
|
|
4,342
|
|
Income tax (provision) benefit
|
|
|
(206
|
)
|
|
|
(462
|
)
|
|
|
(609
|
)
|
|
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
393
|
|
|
$
|
962
|
|
|
$
|
1,178
|
|
|
$
|
2,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses (gains) on sale of marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative
|
|
$
|
9
|
|
|
$
|
(2
|
)
|
|
$
|
(37
|
)
|
|
$
|
(2
|
)
|
Income tax (provision) benefit
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
13
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
(24
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses (gains) from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (foreign currency sales contracts)
|
|
$
|
0
|
|
|
$
|
(7
|
)
|
|
$
|
(10
|
)
|
|
$
|
(7
|
)
|
Depreciation (foreign currency purchase contracts)
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(14
|
)
|
|
|
(13
|
)
|
Costs of products sold (excluding depreciation and amortization) (futures
contracts copper and aluminum)
|
|
|
55
|
|
|
|
176
|
|
|
|
291
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax
|
|
|
48
|
|
|
|
163
|
|
|
|
267
|
|
|
|
350
|
|
Income tax (provision) benefit
|
|
|
(18
|
)
|
|
|
(63
|
)
|
|
|
(102
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
30
|
|
|
$
|
100
|
|
|
$
|
165
|
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) associated with the various components of other comprehensive income for the
three and six months ended June 30, 2016 and 2015 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Tax expense (benefit) associated with changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized employee benefit costs
|
|
$
|
87
|
|
|
$
|
0
|
|
|
$
|
87
|
|
|
$
|
(2,429
|
)
|
Unrealized holding losses/gains on marketable securities
|
|
|
(40
|
)
|
|
|
36
|
|
|
|
(117
|
)
|
|
|
34
|
|
Fair value of cash flow hedges
|
|
|
(26
|
)
|
|
|
43
|
|
|
|
(35
|
)
|
|
|
93
|
|
Tax expense (benefit) associated with reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized employee benefit costs
|
|
|
(206
|
)
|
|
|
(462
|
)
|
|
|
(609
|
)
|
|
|
(1,506
|
)
|
Realized losses/gains from sale of marketable securities
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
13
|
|
|
|
1
|
|
Realized losses/gains from settlement of cash flow hedges
|
|
|
(18
|
)
|
|
|
(63
|
)
|
|
|
(102
|
)
|
|
|
(135
|
)
|
11.
|
Stock-Based Compensation
|
In May 2011, the shareholders of the Corporation approved the
adoption of the Ampco-Pittsburgh Corporation 2011 Omnibus Incentive Plan (the Predecessor Plan) which authorized the issuance of up to 1,000,000 shares of the Corporations common stock for grants of equity-based compensation under
the plan. In May 2016, the shareholders of the Corporation approved the adoption of the Ampco-Pittsburgh Corporation 2016 Omnibus Incentive Plan (the Incentive Plan), which authorizes the issuance of up to 1,100,000 shares of the
Corporations common stock for awards under the Incentive Plan. The Incentive Plan replaces the Predecessor Plan and no new awards will be granted under the Predecessor Plan. Any awards outstanding under the Predecessor Plan will remain subject
to and be paid under the Predecessor Plan, and any shares subject to outstanding awards under the Predecessor Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically
become available for issuance under the Incentive Plan.
15
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. If any award is canceled, terminates, expires or lapses for any reason prior to the issuance of
shares, or if shares are issued under the Incentive Plan and thereafter are forfeited to the Corporation, the shares subject to such awards and the forfeited shares will not count against the aggregate number of shares available under the Incentive
Plan. Shares tendered or withheld to pay the option exercise price or tax withholding will continue to count against the aggregate number of shares of common stock available for grant under the Incentive Plan. Any shares repurchased by the
Corporation with cash proceeds from the exercise of options will not be added back to the pool of shares available for grant under the Incentive Plan.
The Incentive Plan may be administered by the Board of Directors or the Compensation Committee of the Board of Directors. The Compensation
Committee 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 and the nature, amount and terms of such awards.
The Incentive Plan also provides for equity-based awards during any one year to non-employee members of the Board of Directors, based on the
grant date fair value, not to exceed $200. The limit does not apply to shares received by a non-employee director at his or her election in lieu of all or a portion of the directors retainer for board service. In May 2016, 32,090 shares of the
Corporations common stock were granted to the non-employee directors.
Stock-based compensation expense for the three months ended
June 30, 2016 and 2015 equaled $874 and $353, respectively. The related income tax benefit recognized in the condensed consolidated statements of operations for each of the periods was approximately $306 and $123, respectively. Stock-based
compensation expense for the six months ended June 30, 2016 and 2015 equaled $1,203 and $578, respectively. The related income tax benefit recognized in the condensed consolidated statements of operations for each of the periods was
approximately $421 and $202, respectively.
The Corporations financial assets and liabilities that are reported
at fair value in the condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015 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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,890
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,890
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
1,300
|
|
Other noncurrent assets
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Other current liabilities
|
|
|
|
|
|
|
1,528
|
|
|
|
|
|
|
|
1,528
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,663
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,663
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
378
|
|
|
|
0
|
|
|
|
378
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
39
|
|
|
|
0
|
|
|
|
39
|
|
Other current liabilities
|
|
|
0
|
|
|
|
374
|
|
|
|
0
|
|
|
|
374
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
49
|
|
|
|
0
|
|
|
|
49
|
|
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.
16
Presented below are the net sales and (loss) income before income
taxes for the Corporations two business segments.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
71,621
|
|
|
$
|
37,533
|
|
|
$
|
113,148
|
|
|
$
|
80,306
|
|
Air and Liquid Processing
|
|
|
21,680
|
|
|
|
22,440
|
|
|
|
43,731
|
|
|
|
44,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
$
|
93,301
|
|
|
$
|
59,973
|
|
|
$
|
156,879
|
|
|
$
|
125,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
(3,552
|
)
|
|
$
|
(613
|
)
|
|
$
|
(6,022
|
)
|
|
$
|
1,014
|
|
Air and Liquid Processing
|
|
|
2,654
|
|
|
|
2,889
|
|
|
|
5,288
|
|
|
|
4,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
(898
|
)
|
|
|
2,276
|
|
|
|
(734
|
)
|
|
|
5,976
|
|
Other expense, including corporate costs net
|
|
|
(4,559
|
)
|
|
|
(2,911
|
)
|
|
|
(8,719
|
)
|
|
|
(6,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,457
|
)
|
|
$
|
(635
|
)
|
|
$
|
(9,453
|
)
|
|
$
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Litigation (claims not in thousands)
|
The Corporation and its subsidiaries are involved
in various claims and lawsuits incidental to their businesses and are 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 Air & Liquid Systems Corporation (Air & Liquid), a subsidiary of the Corporation (Asbestos Liability). Air & Liquid and, in some cases, the Corporation are
defendants (among numerous 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 Air & Liquid and the
Corporation for the six months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Total claims pending at the beginning of the period
|
|
|
6,212
|
|
|
|
8,457
|
|
New claims served
|
|
|
751
|
|
|
|
739
|
|
Claims dismissed
|
|
|
(227
|
)
|
|
|
(462
|
)
|
Claims settled
|
|
|
(142
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Total claims pending at the end of the period
(1)
|
|
|
6,594
|
|
|
|
8,565
|
|
|
|
|
|
|
|
|
|
|
Gross settlement and defense costs (in 000s)
|
|
$
|
8,751
|
|
|
$
|
8,711
|
|
|
|
|
|
|
|
|
|
|
Avg. gross settlement and defense costs per claim resolved (in 000s)
|
|
$
|
23.72
|
|
|
$
|
13.81
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included as open claims are approximately 427 and 1,645 claims as of June 30, 2016 and 2015, 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.
17
Asbestos Insurance
The Corporation and Air & Liquid 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 Company, 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 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. On February 26, 2015, the Court issued final judgment. One insurer filed a notice of appeal from the judgment to the U.S. Court of Appeals to the Third Circuit; as a result, several other insurers, Howden, the Corporation, and
Air & Liquid filed notices of case appeal. The appeals are presently pending, and the parties have been involved in a mediation through the Third Circuits mediators office.
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 of December 31, 2006. HR&As analysis has been periodically updated since that time. Most recently, the HR&A analysis
was updated in 2014, and additional reserves were established by the Corporation as of December 31, 2014 for Asbestos Liability claims pending or projected to be asserted through 2024. The methodology used by HR&A in its projection in 2014
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, 2012 to December 8, 2014;
|
|
|
|
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, 2012 to December 8, 2014 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.
|
18
Using this information, HR&A estimated in 2014 the number of future claims for Asbestos
Liability that would be filed through the year 2024, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2024. 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 2024. 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, 2014 for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2024 was $189,048 of which approximately 64% was attributable to settlement
costs for unasserted claims projected to be filed through 2024 and future defense costs. The reserve at June 30, 2016 was $161,098. 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
2024. Accordingly, no reserve has been recorded for any costs that may be incurred after 2024.
The Corporations receivable at
December 31, 2014 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, 2014, and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $140,651 ($119,246 at June 30, 2016).
The following table summarizes activity relating to insurance recoveries.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Insurance receivable asbestos, beginning of the year
|
|
$
|
125,423
|
|
|
$
|
140,651
|
|
Settlement and defense costs paid by insurance carriers
|
|
|
(6,177
|
)
|
|
|
(6,743
|
)
|
|
|
|
|
|
|
|
|
|
Insurance receivable asbestos, end of the period
|
|
$
|
119,246
|
|
|
$
|
133,908
|
|
|
|
|
|
|
|
|
|
|
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 that the subsidiaries and it may incur after 2024. 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
19
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.
15.
|
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 $285
recorded at June 30, 2016 is considered adequate based on information known to date.
In July 2016, the Corporation notified retirees (or surviving spouses
of retirees) of Åkers National Roll Company that the Postretirement Benefits Plan will be modified. Effective January 1, 2017, retiree health benefits for those individuals
pre-Medicare
eligible
will be replaced with a monthly stipend for up to a five year period. The Corporation is currently evaluating the financial statement effects of this modification.
20