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 September 30, 2017, and the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016, and condensed consolidated statements of cash
flows for the nine months ended September 30, 2017 and 2016, have been prepared by Ampco-Pittsburgh Corporation (the Corporation) without audit. In the opinion of management, all adjustments, consisting of only normal and recurring
adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made
.
The results of operations for the three and nine months ended September 30, 2017, 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 March 2016, the Financial Accounting Standards Board (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. 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. The amended guidance became effective for the Corporation January 1, 2017, and did not have a significant impact on its financial position, operating results or 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. 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 the last-in, first out (LIFO) method. The guidance became effective for the Corporation January 1, 2017, and did not
have a significant impact on its financial position, operating results or liquidity.
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging
, which amends and simplifies existing guidance to allow
companies to more accurately present the economic effects of risk management activities in the financial statements. The amended guidance will be effective for interim and annual periods beginning after December 15, 2018; however, early
adoption is permitted. The Corporation is currently evaluating the impact the guidance will have on its financial position and operating results. It will not, however, affect the Corporations liquidity.
In May 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting
, which provides guidance about which changes to the terms and
conditions of a share-based payment award require an entity to apply modification accounting. The amendment will be applied prospectively to an award modified on or after the adoption date. The amended guidance will be effective for interim and
annual periods beginning after December 15, 2017. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost
, which requires an employer who offers defined benefit and postretirement benefit plans to report the service cost component of net periodic benefit cost in the same line item or items as other compensation costs arising from
services rendered by employees during the period. The other components of net period benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations. The
amendment also allows only for the service cost component of net periodic benefit cost to be eligible for capitalization when applicable. The amended guidance does not change the amount of net periodic benefit cost to be recognized, only where it is
to be recognized in the income statement. The amended guidance becomes effective for interim and annual periods beginning after December 15, 2017, and must be applied retrospectively for the presentation of the service cost component and the
other components of net periodic pension and other postretirement costs in the income statement and prospectively for capitalization of the service cost component of net periodic benefit cost in inventory. A practical expedient is available
permitting employers to use the amounts disclosed in its pension and other postretirement benefit plan footnote (Note 7) as the estimate to apply retrospectively. The guidance will not affect the Corporations financial position or liquidity.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which clarifies guidance on
the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance will
7
be effective for interim and annual periods beginning after December 15, 2017. The Corporation is currently evaluating the impact the guidance will have on the presentation of its cash flow
statement. It will not, however, affect the Corporations financial position, operating results or liquidity.
In May 2016, April
2016, March 2016 and May 2014, the FASB issued ASUs 2016-12, 2016-10, 2016-08 and 2014-09, respectively,
Revenue from Contracts with Customers (Topic 606)
, 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 for interim and annual periods beginning after December 15, 2017, and can be implemented on either a full or modified retrospective basis. The Corporation currently anticipates it will use the
modified retrospective method (a cumulative adjustment to its January 1, 2018 retained earnings). Based on preliminary analysis, the Corporation has identified certain contracts which may require revenue to be recognized over time versus at a
point in time. The Corporation will continue its review of contracts and its assessment of the impact the guidance will have on its business processes, business and accounting systems and consolidated financial statements and disclosures. The
Corporation currently expects to complete its analysis, including implementing any necessary changes to existing business processes and systems to accommodate these new standards, during 2017.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, 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 for the Corporation
January 1, 2019. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
2.
|
Acquisitions and Investments in Joint Venture
|
Acquisition of Åkers
On March 3, 2016, the Corporation acquired 100% of the voting equity interest 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. The purchase price 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.
Acquisition of ASW
On November 1, 2016, the Corporation acquired 100% of the voting equity interest of ASW Steel Inc. (ASW) from CK Pearl Fund,
Ltd., CK Pearl Fund L.P. and White Oak Strategic Master Fund, L.P. The purchase price of $13,116 consisted of $3,500 in cash and $9,616 in the assumption of outstanding indebtedness.
Pro Forma Financial Information for the Åkers and ASW Acquisitions:
Operating results of Åkers and ASW are included in the Forged and Cast Engineered Products segment from their respective dates of
acquisition. The following financial information presents the combination of the results of operations of Ampco, Åkers and ASW as though the acquisition date for both of the business combinations had occurred as of January 1, 2016. Pro
forma adjustments have been made primarily to (1) include the net incremental depreciation and amortization expense associated with recording property, plant and equipment and definite-lived intangible assets at fair value and (2) remove
debt-related expenses associated with previous debt facilities not assumed by the Corporation. The following pro forma financial information is
8
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 2016:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
Net sales
|
|
$
|
93,335
|
|
|
$
|
298,804
|
|
Loss before income taxes (includes noncontrolling interest)
|
|
$
|
(7,803
|
)
|
|
$
|
(23,100
|
)
|
Net loss attributable to Ampco-Pittsburgh
|
|
$
|
(29,243
|
)
|
|
$
|
(43,555
|
)
|
Net loss per common share (basic) attributable to Ampco-Pittsburgh
|
|
$
|
(2.38
|
)
|
|
$
|
(3.56
|
)
|
Investment in Union Electric Steel MG Roll Co., Ltd (UES-MG):
In November 2016, in connection with an equity restructuring of UES-MG, UES transferred 16% of its equity interest in UES-MG to a Chinese
rollmaker for $2,400, payable in installments over the next three years. As of September 30, 2017, UES has received payments of $1,000.
At September 30, 2017, and December 31, 2016, approximately 40%
and 45%, respectively, of the inventories were valued using the LIFO method with the remaining inventories valued using the FIFO method. Inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
24,165
|
|
|
$
|
23,964
|
|
Work-in-process
|
|
|
44,087
|
|
|
|
29,198
|
|
Finished goods
|
|
|
18,893
|
|
|
|
20,046
|
|
Supplies
|
|
|
15,089
|
|
|
|
10,371
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
102,234
|
|
|
$
|
83,579
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Land and land improvements
|
|
$
|
12,199
|
|
|
$
|
11,747
|
|
Buildings
|
|
|
68,154
|
|
|
|
66,017
|
|
Machinery and equipment
|
|
|
332,841
|
|
|
|
323,684
|
|
Construction-in-process
|
|
|
7,369
|
|
|
|
2,595
|
|
Other
|
|
|
9,074
|
|
|
|
7,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429,637
|
|
|
|
411,538
|
|
Accumulated depreciation and amortization
|
|
|
(213,952
|
)
|
|
|
(197,130
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net
|
|
$
|
215,685
|
|
|
$
|
214,408
|
|
|
|
|
|
|
|
|
|
|
9
The majority of the assets of the Corporation, except real property, is pledged as collateral for
the Corporations Revolving Credit and Security Agreement (Note 8). Land and buildings of Union Electric Steel UK Limited (UES-UK), equal to approximately $2,810 (£2,098) at September 30, 2017, are held as collateral
by the trustees of the UES-UK defined benefit pension plan (Note 7). The gross value of assets under capital lease and the related accumulated amortization as of September 30, 2017, approximated $4,064 and $1,027, respectively, and at
December 31, 2016, approximated $3,610 and $691, respectively.
Intangible assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Customer relationships
|
|
$
|
6,537
|
|
|
$
|
6,244
|
|
Developed technology
|
|
|
4,427
|
|
|
|
4,248
|
|
Trade name
|
|
|
2,694
|
|
|
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,658
|
|
|
|
13,029
|
|
Accumulated amortization
|
|
|
(2,336
|
)
|
|
|
(1,428
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets net
|
|
$
|
11,322
|
|
|
$
|
11,601
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign currency exchange rates used to translate intangible assets from local currency to the U.S.
dollar changed the gross value of intangible assets between the periods. Amortization expense for the three months ended September 30, 2017, and 2016, was $309 and $267, respectively. Amortization for the nine months ended September 30,
2017, and 2016, was $908 and $866, respectively.
6.
|
Other Current Liabilities
|
Other current liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Customer-related liabilities
|
|
$
|
20,525
|
|
|
$
|
21,564
|
|
Accrued interest payable
|
|
|
2,621
|
|
|
|
2,274
|
|
Accrued sales commissions
|
|
|
1,787
|
|
|
|
1,693
|
|
Other
|
|
|
13,756
|
|
|
|
16,666
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
38,689
|
|
|
$
|
42,197
|
|
|
|
|
|
|
|
|
|
|
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 September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of the period
|
|
$
|
12,117
|
|
|
$
|
11,825
|
|
|
$
|
11,521
|
|
|
$
|
6,358
|
|
Åkers opening balance sheet liability for warranty claims
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,032
|
|
Satisfaction of warranty claims
|
|
|
(1,169
|
)
|
|
|
(1,324
|
)
|
|
|
(2,889
|
)
|
|
|
(3,029
|
)
|
Provision for warranty claims
|
|
|
1,011
|
|
|
|
1,855
|
|
|
|
2,964
|
|
|
|
3,372
|
|
Other, primarily impact from changes in foreign currency exchange rates
|
|
|
328
|
|
|
|
40
|
|
|
|
691
|
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
12,287
|
|
|
$
|
12,396
|
|
|
$
|
12,287
|
|
|
$
|
12,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
7.
|
Pension and Other Postretirement Benefits
|
Contributions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Foreign defined benefit pension plans
|
|
$
|
1,323
|
|
|
$
|
1,260
|
|
Other postretirement benefits (e.g., net payments)
|
|
|
852
|
|
|
|
1,092
|
|
U.K. defined contribution pension plan
|
|
|
223
|
|
|
|
182
|
|
U.S. defined contribution plan
|
|
|
1,788
|
|
|
|
1,792
|
|
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. Effective June 2016, the Corporation froze participation in one of the
U.S. defined benefit pension plans and replaced salary benefit accruals with employer non-elective contributions equaling 3% of compensation. The plan change resulted in a curtailment gain of $887 for the nine months ended September 30, 2016.
Net periodic pension and other postretirement costs include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
U.S. Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
417
|
|
|
$
|
453
|
|
|
$
|
1,238
|
|
|
$
|
1,264
|
|
Interest cost
|
|
|
2,113
|
|
|
|
2,606
|
|
|
|
6,310
|
|
|
|
7,380
|
|
Expected return on plan assets
|
|
|
(3,122
|
)
|
|
|
(3,508
|
)
|
|
|
(9,377
|
)
|
|
|
(9,928
|
)
|
Amortization of prior service cost
|
|
|
12
|
|
|
|
10
|
|
|
|
39
|
|
|
|
33
|
|
Amortization of actuarial loss
|
|
|
1,145
|
|
|
|
831
|
|
|
|
3,083
|
|
|
|
2,493
|
|
Curtailment credit
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
565
|
|
|
$
|
392
|
|
|
$
|
1,293
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
81
|
|
|
$
|
94
|
|
|
$
|
263
|
|
|
$
|
223
|
|
Interest cost
|
|
|
474
|
|
|
|
563
|
|
|
|
1,377
|
|
|
|
1,727
|
|
Expected return on plan assets
|
|
|
(568
|
)
|
|
|
(607
|
)
|
|
|
(1,662
|
)
|
|
|
(1,897
|
)
|
Amortization of actuarial loss
|
|
|
195
|
|
|
|
165
|
|
|
|
562
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
182
|
|
|
$
|
215
|
|
|
$
|
540
|
|
|
$
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
16
|
|
|
$
|
135
|
|
|
$
|
369
|
|
|
$
|
371
|
|
Interest cost
|
|
|
124
|
|
|
|
192
|
|
|
|
428
|
|
|
|
546
|
|
Amortization of prior service benefit
|
|
|
(401
|
)
|
|
|
(357
|
)
|
|
|
(1,205
|
)
|
|
|
(872
|
)
|
Amortization of actuarial (gain) loss
|
|
|
(6
|
)
|
|
|
9
|
|
|
|
(18
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit (income) cost
|
|
$
|
(267
|
)
|
|
$
|
(21
|
)
|
|
$
|
(426
|
)
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Borrowing Arrangements
|
The Corporation has a five-year Revolving Credit and Security
Agreement (the Agreement) with a syndicate of banks. The Agreement provides for a $100,000 senior secured asset-based revolving credit facility with an option to increase the credit facility by an additional $50,000 at the request of the
Corporation and with the approval of the banks. The Agreement includes sublimits for letters of credit, not to exceed $40,000, European borrowings not to exceed $15,000, and Canadian borrowings not to exceed $15,000.
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. As of
11
September 30, 2017, the Corporation had utilized a portion of the credit facility for letters of credit (Note 9) and had outstanding borrowings of $20,339 (including £1,000 of European
borrowings for its U.K. subsidiary). Interest accrues on the outstanding balance at an average of 2.68%. As of September 30, 2017, the Corporation had remaining availability of approximately $50,000.
The Agreement is collateralized by a first priority perfected security interest in substantially all of the assets of the Corporation and its
subsidiaries (other than real property). Additionally, the Agreement contains customary affirmative and negative covenants and certain limitations, including, but not limited to, investments in Excluded Subsidiaries (as defined in the Agreement),
payment of dividends, incurrence of additional indebtedness, upstreaming distributions from subsidiaries, and acquisitions and divestures.
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 ratio of not less than 1.00 to 1.00. The Corporation was in compliance with the applicable bank covenants as of September 30, 2017.
In March 2017, the Corporation repaid the debt assumed (term debt and credit facility) in connection with the acquisition of ASW, including
interest, fees and early termination costs. Accordingly, outstanding borrowings of the Corporation as of September 30, 2017, and December 31, 2016, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Industrial Revenue Bonds (IRB)
|
|
$
|
13,311
|
|
|
$
|
13,311
|
|
Promissory notes (and interest)
|
|
|
25,003
|
|
|
|
23,844
|
|
Revolving Credit and Security Agreement
|
|
|
20,339
|
|
|
|
0
|
|
Minority shareholder loans
|
|
|
5,645
|
|
|
|
4,990
|
|
Credit facility (ASW)
|
|
|
0
|
|
|
|
7,146
|
|
Term loan (ASW)
|
|
|
0
|
|
|
|
762
|
|
Capital leases
|
|
|
1,982
|
|
|
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,280
|
|
|
|
52,214
|
|
Current portion
|
|
|
(19,416
|
)
|
|
|
(26,825
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
46,864
|
|
|
$
|
25,389
|
|
|
|
|
|
|
|
|
|
|
9.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of
credit as of September 30, 2017, approximated $27,828, the majority of which serves as collateral for the IRB debt and foreign exchange contracts. 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 arrangement relating to pension commitments. The total amount covered by the surety bonds is approximately $4,000
(SEK 33,900).
See Note 10 for derivative instruments, Note 15 for litigation and Note 16 for environmental matters.
10.
|
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 September 30, 2017, the
Corporation covered approximately $21,108 of anticipated foreign-denominated sales with fair value contracts settling at various dates through October 2018. The fair value of assets held as collateral for the fair value contracts as of
September 30, 2017, approximated $5,670, including a $5,000 standby letter of credit.
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 September 30, 2017, approximately 57%, or $2,720, of anticipated copper purchases over the next 11 months and 56%, or $513, of anticipated aluminum purchases over the next six months were 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.
12
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.
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 $87 and $(385) for the
three months ended September 30, 2017, and 2016, respectively, and $(616) and $263 for the nine months ended September 30, 2017, and 2016, respectively.
The location and fair value of the foreign currency sales contracts recorded on the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
$
|
1,078
|
|
|
$
|
214
|
|
|
|
Other noncurrent assets
|
|
|
38
|
|
|
|
2
|
|
|
|
Other current liabilities
|
|
|
70
|
|
|
|
940
|
|
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
35
|
|
Fair value hedged items
|
|
Receivables
|
|
|
(332
|
)
|
|
|
121
|
|
|
|
Other current assets
|
|
|
100
|
|
|
|
808
|
|
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
45
|
|
|
|
Other current liabilities
|
|
|
812
|
|
|
|
233
|
|
|
|
Other noncurrent liabilities
|
|
|
92
|
|
|
|
5
|
|
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 September 30, 2017, and 2016, and the amount recognized as and reclassified from accumulated other comprehensive loss for each of the periods is summarized below. Amounts are after-tax, where applicable. Certain amounts
recognized as and reclassified from comprehensive income (loss) for 2017 have no tax effect due to the Corporation recording a valuation allowance against its deferred income tax assets in the related jurisdictions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
Beginning of
the Period
|
|
|
Plus
Recognized as
Comprehensive
Income (Loss)
|
|
|
Less
Gain (Loss) Reclassified
from Accumulated Other
Comprehensive Loss
|
|
|
Comprehensive
Income (Loss)
End of
the Period
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
203
|
|
|
|
0
|
|
|
|
11
|
|
|
|
192
|
|
Futures contracts copper and aluminum
|
|
|
265
|
|
|
|
217
|
|
|
|
139
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
468
|
|
|
$
|
217
|
|
|
$
|
150
|
|
|
$
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
0
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
233
|
|
|
|
0
|
|
|
|
12
|
|
|
|
221
|
|
Futures contracts copper and aluminum
|
|
|
32
|
|
|
|
68
|
|
|
|
(118
|
)
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265
|
|
|
$
|
71
|
|
|
$
|
(103
|
)
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
216
|
|
|
|
0
|
|
|
|
24
|
|
|
|
192
|
|
Futures contracts copper and aluminum
|
|
|
335
|
|
|
|
456
|
|
|
|
448
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
551
|
|
|
$
|
456
|
|
|
$
|
472
|
|
|
$
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
10
|
|
|
$
|
0
|
|
Foreign currency purchase contracts
|
|
|
241
|
|
|
|
0
|
|
|
|
20
|
|
|
|
221
|
|
Futures contracts copper and aluminum
|
|
|
(200
|
)
|
|
|
120
|
|
|
|
(298
|
)
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45
|
|
|
$
|
126
|
|
|
$
|
(268
|
)
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
of Operations
|
|
Next 12 Months
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Foreign currency sales contracts cash flow hedges
|
|
Sales
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10
|
|
Foreign currency purchase contracts
|
|
Depreciation and
amortization
|
|
|
27
|
|
|
|
11
|
|
|
|
6
|
|
|
|
24
|
|
|
|
20
|
|
Futures contracts copper and aluminum
|
|
Costs of products
sold (excluding
depreciation and
amortization)
|
|
|
343
|
|
|
|
139
|
|
|
|
(7
|
)
|
|
|
448
|
|
|
|
(298
|
)
|
11.
|
Accumulated Other Comprehensive Loss
|
Net change and ending balances for the various
components of accumulated other comprehensive loss as of and for the nine months ended September 30, 2017, and 2016, are 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, 2017
|
|
$
|
(22,973
|
)
|
|
$
|
(38,636
|
)
|
|
$
|
59
|
|
|
$
|
551
|
|
|
$
|
(60,999
|
)
|
Net Change
|
|
|
10,704
|
|
|
|
688
|
|
|
|
398
|
|
|
|
(16
|
)
|
|
|
11,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
(12,269
|
)
|
|
$
|
(37,948
|
)
|
|
$
|
457
|
|
|
$
|
535
|
|
|
$
|
(49,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
$
|
(8,393
|
)
|
|
$
|
(49,943
|
)
|
|
$
|
692
|
|
|
$
|
45
|
|
|
$
|
(57,599
|
)
|
Net Change
|
|
|
(8,623
|
)
|
|
|
9,540
|
|
|
|
314
|
|
|
|
394
|
|
|
|
1,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(17,016
|
)
|
|
$
|
(40,403
|
)
|
|
$
|
1,006
|
|
|
$
|
439
|
|
|
$
|
(55,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Amortization of unrecognized employee benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of products sold (excluding depreciation and amortization)
|
|
$
|
1,202
|
|
|
$
|
28
|
|
|
$
|
1,607
|
|
|
$
|
1,689
|
|
Selling and administrative
|
|
|
(304
|
)
|
|
|
179
|
|
|
|
703
|
|
|
|
109
|
|
Other income (expense)
|
|
|
47
|
|
|
|
451
|
|
|
|
151
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax
|
|
|
945
|
|
|
|
658
|
|
|
|
2,461
|
|
|
|
2,445
|
|
Income tax benefit (provision)
|
|
|
0
|
|
|
|
609
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
945
|
|
|
$
|
1,267
|
|
|
$
|
2,461
|
|
|
$
|
2,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains from sale of marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative
|
|
$
|
(19
|
)
|
|
$
|
(33
|
)
|
|
$
|
(25
|
)
|
|
$
|
(70
|
)
|
Income tax (benefit) provision
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
(19
|
)
|
|
$
|
(46
|
)
|
|
$
|
(25
|
)
|
|
$
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) losses from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (foreign currency sales contracts)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(10
|
)
|
Depreciation and amortization (foreign currency purchase contracts)
|
|
|
(11
|
)
|
|
|
(6
|
)
|
|
|
(24
|
)
|
|
|
(20
|
)
|
Costs of products sold (excluding depreciation and amortization) (futures
contracts copper and aluminum)
|
|
|
(139
|
)
|
|
|
7
|
|
|
|
(448
|
)
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax
|
|
|
(150
|
)
|
|
|
1
|
|
|
|
(472
|
)
|
|
|
268
|
|
Income tax benefit (provision)
|
|
|
0
|
|
|
|
102
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
$
|
(150
|
)
|
|
$
|
103
|
|
|
$
|
(472
|
)
|
|
$
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The income tax (benefit) expense associated with the various components of other comprehensive income for the
three and nine months ended September 30, 2017, and 2016, is summarized below. During the nine months ended September 30, 2016, the Corporation established valuation allowances against certain of the Corporations deferred income tax
assets. Accordingly, for 2017, and the nine months ended September 30, 2016, no income tax (benefit) expense has been recognized. The income tax (benefit) expense recognized for the three months ended September 30, 2016, represents a
reversal of income tax (benefit) expense recognized through June 30, 2016, prior to establishing the valuation allowances. 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Tax (benefit) expense associated with changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized employee benefit costs
|
|
$
|
0
|
|
|
$
|
(87
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Unrealized holding gains on marketable securities
|
|
|
0
|
|
|
|
117
|
|
|
|
0
|
|
|
|
0
|
|
Fair value of cash flow hedges
|
|
|
0
|
|
|
|
35
|
|
|
|
0
|
|
|
|
0
|
|
Tax (benefit) expense associated with reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized employee benefit costs
|
|
|
0
|
|
|
|
609
|
|
|
|
0
|
|
|
|
0
|
|
Realized gains from sale of marketable securities
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
0
|
|
Realized gains/losses from settlement of cash flow hedges
|
|
|
0
|
|
|
|
102
|
|
|
|
0
|
|
|
|
0
|
|
12.
|
Stock-Based Compensation
|
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. 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 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 per non-employee member. 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
2017, 50,000 shares of the Corporations common stock were granted to the non-employee directors.
Stock-based compensation expense
for the three months ended September 30, 2017, and 2016, equaled $644 and $444, respectively. Stock-based compensation expense for the nine months ended September 30, 2017, and 2016, equaled $1,980 and $1,647, respectively. There was no
income tax benefit for any of the periods, due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the jurisdiction where the expense is recognized.
15
The Corporations financial assets and liabilities that are reported
at fair value in the condensed consolidated balance sheets as of September 30, 2017, and December 31, 2016, 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 September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
4,086
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,086
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
1,178
|
|
|
|
0
|
|
|
|
1,178
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
38
|
|
|
|
0
|
|
|
|
38
|
|
Other current liabilities
|
|
|
0
|
|
|
|
882
|
|
|
|
0
|
|
|
|
882
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
92
|
|
|
|
0
|
|
|
|
92
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,863
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,863
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
1,022
|
|
|
|
0
|
|
|
|
1,022
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
47
|
|
|
|
0
|
|
|
|
47
|
|
Other current liabilities
|
|
|
0
|
|
|
|
1,173
|
|
|
|
0
|
|
|
|
1,173
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
40
|
|
|
|
0
|
|
|
|
40
|
|
The investments held as other noncurrent assets represent assets held in a Rabbi trust for the
purpose of providing benefits under a non-qualified defined benefit pension plan. The fair value of the investments is based on quoted prices of the investments in active markets. The fair value of foreign currency exchange contracts is determined
based on the fair value of similar contracts with similar terms and remaining maturities. The fair value of futures contracts is based on market quotations. The fair value of the variable-rate IRB debt approximates its carrying value. Additionally,
the fair value of trade receivables and trade payables approximates their carrying value.
Presented below are the net sales and (loss) income before income
taxes for the Corporations two business segments. Other expense, including corporate costs
,
for the nine months ended September 30
,
2017, includes higher interest expense of $1,181, and foreign exchange losses of $616 in the
current year compared to foreign exchange gains of $263 recorded in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
81,679
|
|
|
$
|
62,929
|
|
|
$
|
251,739
|
|
|
$
|
176,077
|
|
Air and Liquid Processing
|
|
|
22,207
|
|
|
|
19,932
|
|
|
|
66,213
|
|
|
|
63,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
$
|
103,886
|
|
|
$
|
82,861
|
|
|
$
|
317,952
|
|
|
$
|
239,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
(1,474
|
)
|
|
$
|
(3,363
|
)
|
|
$
|
(2,405
|
)
|
|
$
|
(9,385
|
)
|
Air and Liquid Processing
|
|
|
2,441
|
|
|
|
1,985
|
|
|
|
7,874
|
|
|
|
7,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
967
|
|
|
|
(1,378
|
)
|
|
|
5,469
|
|
|
|
(2,112
|
)
|
Other expense, including corporate costs net
|
|
|
(4,674
|
)
|
|
|
(4,564
|
)
|
|
|
(16,089
|
)
|
|
|
(13,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,707
|
)
|
|
$
|
(5,942
|
)
|
|
$
|
(10,620
|
)
|
|
$
|
(15,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
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. In February 2017, the Corporation, its indirect subsidiary Akers National Roll Company, as well as the Akers National Roll Company
Health & Welfare Benefits Plan were named as defendants in a class action complaint filed in the United States District Court for the Western District of Pennsylvania, where the plaintiffs (currently retired former employees of Akers
National Roll Company and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union, AFL-CIO) alleged that the defendants breached collective bargaining agreements and violated
the benefit plan by modifying medical benefits of the plaintiffs and similarly situated retirees. The defendants moved to dismiss the case, and plaintiffs petitioned the court to compel arbitration. On June 13, 2017, the District Court
compelled arbitration and denied the defendants motion to dismiss as moot. Defendants appealed this decision to the Third Circuit Court of Appeals on June 21, 2017. Defendants also filed a motion to stay arbitration pending the resolution
of the appeal, and that motion was granted on September 5, 2017. The Third Circuit Court of Appeals will next consider whether the District Court erred in compelling arbitration. While no assurance can be given as to the ultimate outcome of
this matter, the Corporation believes that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
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 (Asbestos Liability). Those subsidiaries, and in some cases the Corporation, are defendants (among a number of defendants) in cases filed in various state and federal courts.
Asbestos Claims
The
following table reflects information about the claims for Asbestos Liability against the subsidiaries and the Corporation for the nine months ended September 30, 2017, and 2016 (claims not in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Total claims pending at the beginning of the period
|
|
|
6,618
|
|
|
|
6,212
|
|
New claims served
|
|
|
1,037
|
|
|
|
1,105
|
|
Claims dismissed
|
|
|
(627
|
)
|
|
|
(649
|
)
|
Claims settled
|
|
|
(283
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
Total claims pending at the end of the period
(1)
|
|
|
6,745
|
|
|
|
6,465
|
|
|
|
|
|
|
|
|
|
|
Gross settlement and defense costs (in 000s)
|
|
$
|
16,518
|
|
|
$
|
13,762
|
|
|
|
|
|
|
|
|
|
|
Avg. gross settlement and defense costs per claim resolved (in 000s)
|
|
$
|
18.15
|
|
|
$
|
16.15
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included as open claims are approximately 480 and 415 claims as of September 30, 2017, and 2016, respectively, classified in various jurisdictions as inactive or transferred to a state or
federal judicial panel on multi-district litigation, commonly referred to as the MDL.
|
A substantial majority of the
settlement and defense costs reflected in the above table was reported and paid by insurers. Because claims are often filed and can be settled or dismissed in large groups, the amount and timing of settlements, as well as the number of open claims,
can fluctuate significantly from period to period.
Asbestos Insurance
The Corporation and its Air & Liquid Systems Corporation (Air & Liquid) subsidiary are parties to a series of
settlement agreements (Settlement Agreements) with insurers that have coverage obligations for Asbestos Liability (the Settling Insurers). 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.
17
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 of 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.
Asbestos Valuations
In 2006, the Corporation retained Hamilton, Rabinovitz & Associates, Inc. (HR&A), a nationally recognized expert in
the valuation of asbestos liabilities, to assist the Corporation in estimating the potential liability for pending and unasserted future claims for Asbestos Liability. Based on this analysis, the Corporation recorded a reserve for Asbestos Liability
claims pending or projected to be asserted through 2013 as of December 31, 2006. HR&As analysis has been periodically updated since that time. Most recently, the HR&A analysis was updated in 2016, and additional reserves were
established by the Corporation as of December 31, 2016, for Asbestos Liability claims pending or projected to be asserted through 2026. The methodology used by HR&A in its projection in 2016 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, 2014, to September 9, 2016;
|
|
|
|
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, 2014, to September 9, 2016, to determine the average settlement value of claims, by type of injury claimed and jurisdiction of filing; and
|
|
|
|
an adjustment for inflation in the future average settlement value of claims, at an annual inflation rate based on the Congressional Budget Offices ten year forecast of inflation.
|
Using this information, HR&A estimated in 2016 the number of future claims for Asbestos Liability that would be filed through the year
2026, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2026. 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 2026. 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.
18
Based on the analyses described above, the Corporations reserve at December 31, 2016,
for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2026 was $171,181, of which approximately 70% was attributable to settlement costs for unasserted claims projected to be filed
through 2026 and future defense costs. The reserve at September 30, 2017, was $154,663. 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 2026. Accordingly, no reserve has been
recorded for any costs that may be incurred after 2026.
The Corporations receivable at December 31, 2016, 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, 2016,
and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $115,945 ($103,891 at September 30, 2017).
The following table summarizes activity relating to insurance recoveries:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Insurance receivable asbestos, beginning of the year
|
|
$
|
115,945
|
|
|
$
|
125,423
|
|
Settlement and defense costs paid by insurance carriers
|
|
|
(12,054
|
)
|
|
|
(10,478
|
)
|
|
|
|
|
|
|
|
|
|
Insurance receivable asbestos, end of the period
|
|
$
|
103,891
|
|
|
$
|
114,945
|
|
|
|
|
|
|
|
|
|
|
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 2026. However,
this insurance coverage also can be expected to have gaps creating significant shortfalls of insurance recoveries against claims expense, which could be material in future years.
The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently
known facts and strategy. The Corporations actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Corporations or HR&As calculations vary significantly from
actual results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, the average cost of disposing of each such new claim, average annual defense costs, compliance by relevant
parties with the terms of the Settlement Agreements, the resolution of remaining coverage issues with insurance carriers, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect the Corporations
Asbestos Liability and ability to recover under its insurance policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, and the
passage of state or federal tort reform legislation.
The Corporation intends to evaluate its estimated Asbestos Liability and related
insurance receivables, as well as the underlying assumptions, on a regular basis to determine whether any adjustments to the estimates are required. Due to the uncertainties surrounding asbestos litigation and insurance, these regular reviews may
result in the Corporation incurring future charges; however, the Corporation is currently unable to estimate such future charges. Adjustments, if any, to the Corporations estimate of its recorded Asbestos Liability and/or insurance receivables
could be material to operating results for the periods in which the adjustments to the liability or receivable are recorded, and to the Corporations liquidity and consolidated financial position.
16.
|
Environmental Matters
|
The Corporation is currently performing certain remedial actions
in connection with the sale of real estate previously owned and periodically incurs costs to maintain compliance with environmental laws and regulations. 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, the potential liability for all environmental compliance measures
of approximately $952 at September 30, 2017, is considered adequate based on information known to date.
19