Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2013

Commission File Number 1-898

AMPCO-PITTSBURGH CORPORATION

 

Pennsylvania  
(State of Incorporation)   25-1117717

 

600 Grant Street, Suite 4600

  I.R.S. Employer ID No.
Pittsburgh, PA 15219  
(Address of principal executive offices)   (412) 456-4400
  (Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:  
Title of each class   Name of each exchange on which registered
Common stock, $1 par value   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes         No    ü   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes         No    ü   

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes   ü    No        

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]

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

Large Accelerated Filer         Accelerated Filer    ü    Non-accelerated Filer         Smaller reporting company        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes         No    ü   

The aggregate market value of the voting stock of Ampco-Pittsburgh Corporation held by non-affiliates on June 28, 2013 (based upon the closing price of the Registrant’s Common Stock on the New York Stock Exchange on that date) was approximately $154 million.

As of March 7, 2014, 10,373,080 common shares were outstanding.

Documents Incorporated by Reference: Part III of this report incorporates by reference certain information from the Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

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– PART I –

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Ampco-Pittsburgh Corporation (the “Corporation”) was incorporated in Pennsylvania in 1929. The Corporation, individually or together with its consolidated subsidiaries, is also referred to herein as the “Registrant”.

The Corporation classifies its businesses in two segments: Forged and Cast Rolls and Air and Liquid Processing.

FINANCIAL INFORMATION ABOUT SEGMENTS

The sales and operating profit of the Corporation’s two segments and the identifiable assets attributable to both segments for the three years ended December 31, 2013 are set forth in Note 19 (Business Segments) on page 54 of this Annual Report on Form 10-K.

NARRATIVE DESCRIPTION OF BUSINESS

Forged and Cast Rolls Segment

Union Electric Steel Corporation produces forged hardened steel rolls used in cold rolling by producers of steel, aluminum and other metals throughout the world. It is headquartered in Carnegie, Pennsylvania with three manufacturing facilities in Pennsylvania and one in Indiana. Union Electric Steel Corporation is one of the largest producers of forged hardened steel rolls in the world. In addition to several domestic competitors, several major European, South American and Asian manufacturers also compete in both the domestic and foreign markets. In 2007, a subsidiary became a 49% partner in a joint venture in China to manufacture large forged backup rolls principally in weight and size larger than those which can be made in the subsidiary’s facilities in the United States. Limited production continued in 2013.

Union Electric Steel UK Limited produces cast rolls for hot and cold strip mills, medium/heavy section mills and plate mills in a variety of iron and steel qualities. It is located in Gateshead, England and is a major supplier of cast rolls to the metalworking industry worldwide. It primarily competes with European, Asian and North and South American companies in both the domestic and foreign markets. Union Electric Steel UK is a 25% partner in a Chinese joint venture which produces cast rolls.

Air and Liquid Processing Segment

Aerofin Division of Air & Liquid Systems Corporation produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including fossil fuel and nuclear power generation, automotive, industrial process and HVAC, and is located in Lynchburg, Virginia.

Buffalo Air Handling Division of Air & Liquid Systems Corporation produces large custom air handling systems used in commercial, institutional and industrial buildings and is located in Amherst, Virginia.

Buffalo Pumps Division of Air & Liquid Systems Corporation manufactures a line of centrifugal pumps for the refrigeration, power generation and marine defense industries and is located in North Tonawanda, New York.

All three of the divisions in this segment are principally represented by a common independent sales organization and have several major competitors.

In both segments, the products are dependent on engineering, principally custom designed, and are sold to sophisticated commercial and industrial users located throughout the world.

The Forged and Cast Rolls segment has two international customers which constituted approximately 26% of its sales in 2013. The loss of both of these customers could have a material adverse effect on the segment.

For additional information on the products produced and financial information about each segment, see page 4 and Note 19 (Business Segments) on page 54 of this Annual Report on Form 10-K.

Raw Materials

Raw materials used in both segments are generally available from many sources and the Corporation is not dependent upon any single supplier for any raw material. Substantial volumes of raw materials used by the Corporation are subject to significant variations in price. The Corporation generally does not purchase or commit for the purchase of a major portion of raw materials significantly in advance of the time it requires such materials but does make forward commitments for the supply of natural gas.

Patents

While the Corporation holds some patents, trademarks and licenses, in the opinion of management they are not material to either segment of the Corporation’s business, other than in protecting the goodwill associated with the names under which products are sold.

 

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Backlog

The backlog of orders at December 31, 2013 was approximately $197 million compared to a backlog of $196 million at year-end 2012. Approximately 13% of the backlog is expected to be released after 2014.

Competition

The Corporation faces considerable competition from a large number of companies in both segments. The Corporation believes, however, that it is a significant factor in each of the niche markets which it serves. Competition in both segments is based on quality, service, price and delivery. For additional information, see “Narrative Description of Business” on page 6 of this Annual Report on Form 10-K.

Research and Development

As part of an overall strategy to develop new markets and maintain leadership in each of the industry niches served, the Corporation’s businesses in both segments incur expenditures for research and development. The activities that are undertaken are designed to develop new products, improve existing products and processes, enhance product quality, adapt products to meet customer specifications and reduce manufacturing costs. In the aggregate, these expenditures approximated $1.41 million in 2013, $1.48 million in 2012 and $1.70 million in 2011.

Environmental Protection Compliance Costs

Expenditures for environmental control matters were not material to either segment in 2013 and such expenditures are not expected to be material in 2014.

Employees

On December 31, 2013, the Corporation had 1,109 active employees.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

The Forged and Cast Rolls segment has a manufacturing operation in England and a small European sales and engineering support group in Belgium. For financial information relating to foreign and domestic operations see Note 19 (Business Segments) on page 54 of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

The Corporation files annual, quarterly and current reports, amendments to those reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may access and read the Corporation’s filings without charge through the SEC’s website at www.sec.gov. You may also read and copy any document the Corporation files at the SEC’s Public Reference Room located at 100 F. Street, N.E., Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.

The Corporation’s Internet address is www.ampcopittsburgh.com. The Corporation makes available, free of charge on its Internet website, access to these reports as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. The information on the Corporation’s website is not part of this Annual Report on Form 10-K.

EXECUTIVE OFFICERS

The name, age, position with the Corporation(1) and business experience for the past five years of the Executive Officers of the Corporation are as follows:

Robert A. Paul (age 76). Mr. Paul was elected Chairman and Chief Executive Officer of the Corporation in 2004. Prior to that, he was President and Chief Executive Officer of the Corporation for more than five years. He has been a Director since 1970 and his current term expires in 2015. He is also Chairman and a director of The Louis Berkman Investment Company. Mr. Paul has been a shareholder, officer and director of the Corporation for more than forty years.

Rose Hoover (age 58). Ms. Hoover has been employed by the Corporation for more than thirty years. She has served as Executive Vice President and Chief Administrative Officer of the Corporation since May 2011; Senior Vice President of the Corporation since April 2009 and prior to that served as Vice President Administration of the Corporation since 2006. She has also served as Secretary of the Corporation for more than five years.

Marliss D. Johnson (age 49). Ms. Johnson has been Chief Financial Officer and Treasurer of the Corporation since May 2013. Prior to that, she was Vice President, Controller and Treasurer of the Corporation for more than ten years. Ms. Johnson is a Certified Public Accountant with fourteen years of experience with a major accounting firm prior to joining the Corporation.

 

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Robert G. Carothers (age 64). Mr. Carothers has been employed by Union Electric Steel, a subsidiary of the Corporation, for more than forty years. He has served as Chairman, Chief Executive Officer, and President of the Corporation’s Forged and Cast Roll Segment since April 2009 and prior to that served as President of Union Electric Steel since 1998.

Terrence W. Kenny (age 54). Mr. Kenny has been employed by the Corporation for almost thirty years. He has served as President of the Air and Liquid Processing Group since April 2009 and prior to that served as Group Vice-President of the Corporation for more than five years.

 

  (1) Officers serve at the discretion of the Board of Directors and none of the listed individuals serves as a director of a public company, except that Mr. Paul is a director of the Corporation.

ITEM 1A. RISK FACTORS

From time to time, important factors may cause actual results to differ materially from any future expected results based on performance expressed or implied by any forward-looking statements made by us, including known and unknown risks, uncertainties and other factors, many of which are not possible to predict or control. Several of these factors are described from time to time in our filings with the Securities and Exchange Commission, but the factors described in filings are not the only risks that are faced.

Cyclical Demand for Products/Economic Downturns

A significant portion of our sales consists of rolling mill rolls to customers in the global steel industry which can be periodically impacted by economic or cyclical downturns. Such downturns, the timing and length of which are difficult to predict, may reduce the demand for, and sales of, our forged and cast steel rolls both in the United States and the rest of the world. Lower demand for rolls may also adversely impact profitability as other roll producers, which compete with us, lower selling prices in the market place in order to fill their manufacturing capacity. Cancellation of orders or deferral of delivery of rolls may occur and produce an adverse impact on financial results.

Steel Industry Consolidation

Globally, the steel industry has undergone structural change by way of consolidation and mergers. In certain markets, the resultant reduction in the number of steel plants and the increased buying power of the enlarged steel producing companies may put pressure on the selling prices and profit margins of rolls.

Export Sales

Exports are a significant proportion of our sales. Historically, changes in foreign exchange rates, particularly in respect of the U.S. dollar and the euro, have impacted the export of our products and may do so again in the future. Other factors which may adversely impact export sales and operating results include political and economic instability, export controls, changes in tax laws and tariffs and new indigenous producers in overseas markets. A reduction in the level of export sales may have an adverse impact on our financial results. In addition, exchange rate changes may allow foreign roll suppliers to compete in our home markets.

Capital Spending

Each of our businesses is susceptible to the general level of economic activity, particularly as it impacts industrial and construction capital spending. A downturn in capital spending in the United States and elsewhere may reduce demand for and sales of our air handling, power generation and refrigeration equipment, and rolling mill rolls. Lower demand may also reduce profit margins due to our competitors and us striving to maximize manufacturing capacity by lowering prices.

Prices and Availability of Commodities

We use certain commodities in the manufacture of our products. These include steel scrap, ferroalloys and energy. Any sudden price increase may cause a reduction in profit margins or losses where fixed-priced contracts have been accepted or increases cannot be obtained in future selling prices. In addition, there may be curtailment in electricity or gas supply which would adversely impact production. Shortage of critical materials while driving up costs may be of such severity as to disrupt production, all of which may impact sales and profitability.

Labor Agreements

We have several key operations which are subject to multi-year collective bargaining agreements with our hourly work force. While we believe we have excellent relations with our unions, there is the risk of industrial action at the expiration of an agreement if contract negotiations break down, which may disrupt manufacturing and impact results of operations.

Dependence on Certain Equipment

Our principal business relies on certain unique equipment such as an electric arc furnace and a spin cast work roll machine. Although a comprehensive critical spare inventory of key components for this equipment is maintained, if any such unique equipment is out of operation for an extended period, it may result in a significant reduction in our sales and earnings.

 

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Asbestos Litigation

Our subsidiaries, and in some cases, we, are defendants in numerous claims alleging personal injury from exposure to asbestos-containing components historically used in certain products of our subsidiaries. Through year-end 2013, our insurance has covered a substantial majority of our settlement and defense costs. We believe that the estimated costs net of anticipated insurance recoveries of our pending and future asbestos legal proceedings for the next ten years will not have a material adverse effect on our consolidated financial condition or liquidity. However, there can be no assurance that our subsidiaries or we will not be subject to significant additional claims in the future or that our subsidiaries’ ultimate liability with respect to asbestos claims will not present significantly greater and longer lasting financial exposure than provided for in our consolidated financial statements. Similarly, although the Corporation believes that the assumptions employed in valuing its insurance coverage were reasonable, there are other assumptions that could have been employed that would have resulted in materially lower insurance recovery projections. The ultimate net liability with respect to such pending and any unasserted claims is subject to various uncertainties, including the following:

 

 

the number of claims that are brought in the future;

 

 

the costs of defending and settling these claims;

 

 

insolvencies among our insurance carriers and the risk of future insolvencies;

 

 

the possibility that adverse jury verdicts could require damage payments in amounts greater than the amounts for which we have historically settled claims;

 

 

possible changes in the litigation environment or federal and state law governing the compensation of asbestos claimants;

 

 

the risk that the bankruptcies of other asbestos defendants may increase our costs; and

 

 

the risk that our insurance will not cover as much of our asbestos liabilities as anticipated.

Because of the uncertainties related to such claims, it is possible that the ultimate liability could have a material adverse effect on our consolidated financial condition or liquidity in the future.

Environmental Matters

We are subject to various domestic and international environmental laws and regulations that govern the discharge of pollutants and disposal of wastes and which may require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. We could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations or liabilities under these laws or non-compliance with environmental permits required at our facilities.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

The Corporation has no unresolved staff comments.

 

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ITEM 2. PROPERTIES

The location and general character of the principal locations in each segment, all of which are owned unless otherwise noted, are as follows:

 

Company and Location    Principal Use   

Approximate

Square Footage

   Type of Construction
FORGED AND CAST ROLLS SEGMENT

Union Electric Steel Corporation Route 18

Burgettstown, PA 15021

  

 

Manufacturing facilities

  

 

296,800 on 55 acres

  

 

Metal and steel

726 Bell Avenue

Carnegie, PA 15106

   Manufacturing facilities and offices    165,900 on 8.7 acres    Metal and steel

U.S. Highway 30

Valparaiso, IN 46383

   Manufacturing facilities    88,000 on 20 acres    Metal and steel

1712 Greengarden Road

Erie, PA 16501

   Manufacturing facilities    40,000*    Metal and steel

Bosstraat 54

3560 Lummen

Belgium

   Sales and engineering    4,500*    Cement block

Union Electric Steel UK Limited Coulthards Lane

Gateshead, England

   Manufacturing facilities and offices    274,000 on 10 acres    Steel framed, metal and brick

 

AIR AND LIQUID PROCESSING SEGMENT

  
Air & Liquid Systems Corporation      

 

Aerofin Division

4621 Murray Place

Lynchburg, VA 24506

  

 

Manufacturing facilities and offices

  

 

146,000 on 15.3 acres

  

 

Brick, concrete and steel

Buffalo Air Handling Division

        

Zane Snead Drive

Amherst, VA 24531

   Manufacturing facilities and offices    89,000 on 19.5 acres    Metal and steel
Buffalo Pump Division         

874 Oliver Street

N. Tonawanda, NY 14120

   Manufacturing facilities and offices    94,000 on 9 acres    Metal, brick and cement block

 

* Facility is leased.

The Corporation’s office space and the Air & Liquid Systems headquarter’s office space are leased. All of the owned facilities are adequate and suitable for their respective purposes.

The Forged and Cast Rolls segment’s facilities were operated within 70% to 75% of their normal capacity during 2013. The facilities of the Air and Liquid Processing segment were operated within 60% to 70% of their normal capacity. Normal capacity is defined as capacity under approximately normal conditions with allowances made for unavoidable interruptions, such as lost time for repairs, maintenance, breakdowns, set-up, failure, supply delays, labor shortages and absences, Sundays, holidays, vacation, inventory taking, etc. The number of work shifts is also taken into consideration.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

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

 

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Asbestos Litigation

Claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products of predecessors of the Corporation’s Air & Liquid Systems Corporation subsidiary (“Asbestos Liability”) and of an inactive subsidiary in dissolution. During 2013, all pending claims against the inactive subsidiary in dissolution were settled, dismissed or barred, and the dissolution court issued a final order thereby concluding the dissolution proceedings. Those subsidiaries, and in some cases the Corporation, are defendants (among a number of defendants, often in excess of 50) in cases filed in various state and federal courts.

Asbestos Claims

The following table reflects approximate information about the claims for Asbestos Liability against the subsidiaries and the Corporation, along with certain asbestos claims asserted against the inactive subsidiary in dissolution for the two years ended December 31, 2013 and 2012:

 

      2013     2012       

Total claims pending at the beginning of the period

     8,007        8,145     

New claims served

     1,432        1,538     

Claims dismissed

     (803     (1,420  

Claims settled

     (317     (256    

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

     8,319        8,007       

Gross settlement and defense costs (in 000’s)

   $ 22,618      $ 23,589       

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

   $ 20.19      $ 14.07       

 

  (1) Included as “open claims” are approximately 1,636 claims and 1,632 claims in 2013 and 2012, respectively, classified in various jurisdictions as “inactive” or transferred to a state or federal judicial panel on multi-district litigation, commonly referred to as the MDL.

A substantial majority of the settlement and defense costs reflected in the above table was reported and paid by insurers. Because claims are often filed and can be settled or dismissed in large groups, the amount and timing of settlements, as well as the number of open claims, can fluctuate significantly from period to period.

Asbestos Insurance

The Corporation and its Air & Liquid Systems Corporation (“Air & Liquid”) subsidiary are parties to a series of settlement agreements (“Settlement Agreements”) with insurers that have coverage obligations for Asbestos Liability (the “Settling Insurers”). Under the Settlement Agreements, the Settling Insurers accept financial responsibility, subject to the terms and conditions of the respective agreements, including overall coverage limits, for pending and future claims for Asbestos Liability. The Settlement Agreements encompass the substantial majority of insurance policies that provide coverage for claims for Asbestos Liability.

The Settlement Agreements include acknowledgements that Howden North America, Inc. (“Howden”) is entitled to coverage under policies covering Asbestos Liability for claims arising out of the historical products manufactured or distributed by Buffalo Forge, a former subsidiary of the Corporation (the “Products”). The Settlement Agreements do not provide for any prioritization on access to the applicable policies or any sublimits of liability as to Howden or the Corporation and Air & Liquid, and, accordingly, Howden may access the coverage afforded by the Settling Insurers for any covered claim arising out of a Product. In general, access by Howden to the coverage afforded by the Settling Insurers for the Products will erode coverage under the Settlement Agreements available to the Corporation and Air & Liquid for Asbestos Liability.

On February 24, 2011, the Corporation and Air & Liquid filed a lawsuit in the United States District Court for the Western District of Pennsylvania against thirteen domestic insurance companies, certain underwriters at Lloyd’s, London and certain London market insurance companies, and Howden. The lawsuit seeks a declaratory judgment regarding the respective rights and obligations of the parties under excess insurance policies that were issued to the Corporation from 1981 through 1984 as respects claims against the Corporation and its subsidiary for Asbestos Liability and as respects asbestos bodily-injury claims against Howden arising from the Products. The Corporation and Air & Liquid 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

 

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only two domestic insurers and Howden remain in the litigation as to the Corporation and Air & Liquid. On September 27, 2013, the Court issued a memorandum opinion and order granting in part and denying in part cross motions for summary judgment filed by the Corporation and Air & Liquid, Howden, and the insurer parties still in the litigation. The September 27, 2013 ruling is not a final ruling for appellate purposes, but when final it could be appealed by the parties to the litigation.

Asbestos Valuations

In 2006, the Corporation retained Hamilton, Rabinovitz & Associates, Inc. (“HR&A”), a nationally recognized expert in the valuation of asbestos liabilities, to assist the Corporation in estimating the potential liability for pending and unasserted future claims for Asbestos Liability. HR&A was not requested to estimate asbestos claims against the inactive subsidiary in dissolution, which the Corporation believes are immaterial. Based on this analysis, the Corporation recorded a reserve for Asbestos Liability claims pending or projected to be asserted through 2013 as at December 31, 2006. HR&A’s analysis has been periodically updated since that time. Most recently, the HR&A analysis was updated in 2012, and additional reserves were established by the Corporation as at December 31, 2012 for Asbestos Liability claims pending or projected to be asserted through 2022. The methodology used by HR&A in its projection in 2012 of the operating subsidiaries’ liability for pending and unasserted potential future claims for Asbestos Liability, which is substantially the same as the methodology employed by HR&A in prior estimates, relied upon and included the following factors:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

Using this information, HR&A estimated in 2012 the number of future claims for Asbestos Liability that would be filed through the year 2022, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2022. This methodology has been accepted by numerous courts.

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

Based on the analyses described above, the Corporation’s reserve at December 31, 2012 for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2022 was $181 million, of which approximately 73% was attributable to settlement costs for unasserted claims projected to be filed through 2022 and future defense costs. The reserve at December 31, 2013 was $158 million. While it is reasonably possible that the Corporation will incur additional charges for Asbestos Liability and defense costs in excess of the amounts currently reserved, the Corporation believes that there is too much uncertainty to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them beyond 2022. Accordingly, no reserve has been recorded for any costs that may be incurred after 2022.

 

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The Corporation’s receivable at December 31, 2012 for insurance recoveries attributable to the claims for which the Corporation’s Asbestos Liability reserve has been established, including the portion of incurred defense costs covered by the Settlement Agreements in effect through December 31, 2012, and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $118 million. The Corporation updated its receivable at September 30, 2013 to take into account the effect of the Settlement Agreements reached in August 2013. The effect of these Settlement Agreements was to increase the Corporation’s receivable for insurance recoveries attributable to claims for which the Corporation’s Asbestos Liability reserve has been established by $16 million.

The following table summarizes activity relating to insurance recoveries for each of the years ended December 31, 2013 and 2012 (in 000’s).

 

      2013     2012       

Insurance receivable – asbestos, beginning of the year

   $ 118,115      $ 126,206     

Settlement and defense costs paid by insurance carriers

     (23,714     (15,468  

Changes in estimated coverage

     16,340        7,377       

Insurance receivable – asbestos, end of the year

   $ 110,741      $ 118,115       

The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers, or carriers not party to a Settlement Agreement, and a substantial majority of the insurance recoveries deemed probable was from insurance companies rated A – (excellent) or better by A.M. Best Corporation. There can be no assurance, however, that there will not be further insolvencies among the relevant insurance carriers, or that the assumed percentage recoveries for certain carriers will prove correct. The difference between insurance recoveries and projected costs is not due to exhaustion of all insurance coverage for Asbestos Liability. The Corporation and the subsidiaries have substantial additional insurance coverage which the Corporation expects to be available for Asbestos Liability claims and defense costs that the subsidiaries and it may incur after 2022. However, this insurance coverage also can be expected to have gaps creating significant shortfalls of insurance recoveries as against claims expense, which could be material in future years.

The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently known facts and strategy. The Corporation’s actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the Corporation’s or HR&A’s calculations vary significantly from actual results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, the average cost of disposing of each such new claim, average annual defense costs, 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 Corporation’s Asbestos Liability and ability to recover under its insurance policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, and the passage of state or federal tort reform legislation.

The Corporation intends to evaluate its estimated Asbestos Liability and related insurance receivables as well as the underlying assumptions on a regular basis to determine whether any adjustments to the estimates are required. Due to the uncertainties surrounding asbestos litigation and insurance, these regular reviews may result in the Corporation incurring future charges; however, the Corporation is currently unable to estimate such future charges. Adjustments, if any, to the Corporation’s estimate of its recorded Asbestos Liability and/or insurance receivables could be material to operating results for the periods in which the adjustments to the liability or receivable are recorded, and to the Corporation’s liquidity and consolidated financial position.

ENVIRONMENTAL

The Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned.

 

13


– PART II –

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The shares of common stock of Ampco-Pittsburgh Corporation are traded on the New York Stock Exchange (symbol AP). Cash dividends have been paid on common shares in every year since 1965.

 

          2013 Per Share         2012 Per Share
          

        Common Stock Price        

                 

        Common Stock Price        

    
Quarter          High    Low          Dividends
Declared
         High    Low    Dividends
Declared

First

      $    21.00    $    17.55       $    0.18       $    23.71    $    19.30    $    0.18

Second

      19.31    16.99       0.18       20.22    15.20    0.18

Third

      20.69    16.24       0.18       19.86    15.65    0.18

Fourth

      19.70    17.10       0.18       19.90    16.14    0.18

Year

        21.00    16.24         0.72         23.71    15.20    0.72

The number of registered shareholders at December 31, 2013 and 2012 equaled 423 and 454, respectively.

 

14


STOCK PERFORMANCE GRAPH

Comparison of FiveYear Cumulative Total Return

Standard & Poors 500, NYSE Composite and Morningstar’s Steel Industry

(Performance results through December 31, 2013)

COMPARISON OF CUMULATIVE TOTAL RETURN*

 

LOGO

Assumes $100 invested at the close of trading on the last trading day preceding January 1, 2008 in Ampco-Pittsburgh Corporation common stock, Standard & Poors 500 Index, NYSE Composite Index and Morningstar’s Steel Industry group.

*Cumulative total return assumes reinvestment of dividends.

In the above graph, the Corporation has used Morningstar’s Steel Industry group for its peer comparison. The diversity of products produced by subsidiaries of the Corporation makes it difficult to match to any one product-based peer group. Although not totally comparable, the Steel Industry group was chosen because the largest percentage of the Corporation’s sales is to the global steel industry.

Historical stock price performance shown on the above graph is not necessarily indicative of future price performance.

 

15


ITEM 6. SELECTED FINANCIAL DATA

 

     Year Ended December 31,  

(dollars, except per share amounts, and shares

outstanding in thousands)

     2013         2012         2011         2010         2009   

Net sales

     $    281,050         $    292,905         $    344,816         $    326,886         $    299,177   

Net income(1)

     12,437         8,355         21,309         15,456         27,677   

Total assets

     502,673         533,179         531,632         526,963         471,825   

Shareholders’ equity

     234,995         192,093         192,872         196,777         179,202   

Net income per common share:

              

Basic(1)

     1.20         0.81         2.07         1.51         2.71   

Diluted

     1.20         0.80         2.05         1.50         2.71   

Per common share:

              

Cash dividends declared

     0.72         0.72         0.72         0.72         0.72   

Shareholders’ equity

     22.65         18.57         18.68         19.10         17.49   

Market price at year end

     19.45         19.98         19.34         28.05         31.53   

Weighted average common shares outstanding

     10,358         10,338         10,319         10,254         10,200   

Number of registered shareholders

     423         454         487         507         545   

Number of employees

     1,109         1,178         1,240         1,264         1,231   
  (1) Net income includes:

2013 – An after-tax credit of $10,621 or $1.03 per common share for estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers (see Note 17 to Consolidated Financial Statements) offset by an after-tax charge of $4,165 or $0.40 per common share to recognize an other-than-temporary impairment of our investment in a forged roll joint venture company (see Note 2 to Consolidated Financial Statements) for a net increase to net income of $6,456 or $0.63 per common share.

2010 – An after-tax charge of $12,931 or $1.26 per common share for estimated costs of asbestos-related litigation through 2020 net of estimated insurance recoveries (see Note 17 to Consolidated Financial Statements).

2009 – An after-tax charge of $2,831 or $0.28 per common share associated with the write-off of goodwill deemed to be impaired at one of the divisions of the Air and Liquid Processing segment and a reduction in the effective state income tax rate for which certain net deferred income tax assets will be realized.

 

16


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

(in thousands, except per share amounts)

EXECUTIVE OVERVIEW

Ampco-Pittsburgh Corporation operates in two business segments – the Forged and Cast Rolls segment and the Air and Liquid Processing segment. The Forged and Cast Rolls segment consists of Union Electric Steel Corporation (“Union Electric Steel” or “UES”) and Union Electric Steel UK Limited (“UES-UK”). Union Electric Steel is one of the world’s largest manufacturers of forged hardened steel rolls with principal operations in Pennsylvania and Indiana whereas UES-UK produces cast iron and steel rolls in England. Rolls are supplied to manufacturers of steel and aluminum throughout the world. The Air and Liquid Processing segment includes Aerofin, Buffalo Air Handling and Buffalo Pumps, all divisions of Air & Liquid Systems Corporation (“Air and Liquid”), a wholly-owned subsidiary of the Corporation. Aerofin produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including fossil fuel and nuclear power generation, automotive, industrial process and HVAC. Buffalo Air Handling produces large custom-designed air handling systems for commercial, institutional and industrial building markets. Buffalo Pumps manufactures centrifugal pumps for the marine defense, refrigeration and power generation industries. The segment has operations in Virginia and New York with headquarters in Pennsylvania. The segment distributes a significant portion of its products through a common independent group of sales offices located throughout the United States and Canada.

For 2013, operating results for our Forged and Cast Rolls group were negatively impacted by ongoing pricing pressures from customers worldwide. Servicing a struggling global steel industry customer base required further price discounting to maintain market share causing an ongoing compression of margins when compared to 2012. Generally, demand for our roll product was weak in most world regions with the exception of Asia where sales increased significantly to the aluminum sector as a result of new mill construction. Demand was stagnant in North America and Europe due to continued depressed operating levels of the steel industry in these regions. Emerging indigenous roll suppliers in China and Korea gained significant market share in their home markets and made inroads in export markets through extraordinarily low price offerings. Additionally, aggressive global pricing was offered by traditional Western world and Japanese roll producers as most were operating well below their production capacity. For 2014, a modest increase in demand is expected; however, margins are expected to remain depressed. Efforts began in 2013 for the sale of non-roll products and services to utilize available production capacity of the segment. These initiatives will continue in 2014.

Union Electric Steel MG Roll Co., Ltd (“UES-MG”), the Chinese joint venture company in which a subsidiary of UES holds a 49% interest, principally manufactures and sells forged backup rolling mill rolls of a size and weight currently not able to be produced by UES. The joint venture has been adversely impacted by the global economic slow-down, reduced demand and excess roll inventories of its potential customer base in China. Losses have been incurred since 2009, for which we have recognized our share (or 49%) in our consolidated statements of operations, and are expected to continue in 2014. Additionally, the overall financial strength of the joint venture continues to deteriorate with a greater reliance on the 51% partner or entities controlled by the 51% partner to provide financing and working capital. In the fourth quarter of 2013, we, with the help of outside consultants and appraisers, concluded that the estimated fair value of our investment in UES-MG was less than our carrying amount and that the decline was “other than temporary”. Accordingly, we recognized an impairment charge reducing the carrying amount of our investment to its estimated fair value. We will continue to monitor the carrying value of this investment to determine if future charges are necessary.

For our Air and Liquid Processing segment, a decrease in spending on new construction projects by institutional markets negatively impacted our custom air handling and heat exchange coil businesses. This decrease was partially offset by increases in sales of heat exchange coils to the fossil fueled utility market and centrifugal pumps to U.S. Navy shipbuilders. The focus for this segment is to continue to develop new product lines and to strengthen the sales distribution networks.

 

17


CONSOLIDATED RESULTS OF OPERATIONS OVERVIEW

The Corporation

 

      2013              2012              2011          

Net Sales:

                 

Forged and Cast Rolls

   $     187,286         67%       $     189,470         65%       $     248,380         72%   

Air and Liquid Processing

     93,764         33%         103,435         35%         96,436         28%   

Consolidated

   $ 281,050         100%       $ 292,905         100%       $ 344,816         100%   

Income (Loss) from Operations:

                 

Forged and Cast Rolls

   $ 13,936          $ 18,415          $ 38,761      

Air and Liquid Processing(1)

     24,945            7,267            8,155      

Corporate costs

     (9,914)                  (9,390)                  (10,442)            

Consolidated

   $ 28,967                $ 16,292                $ 36,474            

Backlog:

                 

Forged and Cast Rolls

   $ 159,344         81%       $ 154,527         79%       $ 214,449         82%   

Air and Liquid Processing

     38,117         19%         41,277         21%         45,552         18%   

Consolidated

   $ 197,461         100%       $ 195,804         100%       $ 260,001         100%   

 

(1) Income (loss) from operations for the Air and Liquid Processing segment for 2013 includes a pre-tax credit of $16,340 for estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers (see Note 17 to Consolidated Financial Statements).

Consolidated net sales for 2013 decreased when compared to 2012 principally due to a decline in new construction spending by the institutional markets for the Air and Liquid Processing group. Operating income improved, however, as a result of a pre-tax credit of $16,340 for estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers in 2013. The benefit to operating income was offset primarily by lower margins for the Forged and Cast Rolls segment. Consolidated net sales and operating income for 2012 decreased when compared to 2011 principally due to a lower volume of shipments, weaker pricing, reduced margins and differences in product mix for the Forged and Cast Rolls group. A more detailed review by segment is included below. The variance in corporate costs between the years is primarily attributable to stock-based compensation costs and legal and professional fees.

Gross margin, excluding depreciation, as a percentage of net sales, was 22.7%, 22.9% and 25.7% for 2013, 2012 and 2011, respectively, and decreased from 2011 primarily as a result of price discounting which was necessary to remain competitive.

Selling and administrative expenses totaled $39,682 (14.1% of net sales), $40,530 (13.8% of net sales) and $41,887 (12.1% of net sales) for 2013, 2012 and 2011, respectively. The decrease in 2013 from 2012 is primarily attributable to lower uninsured legal and case management costs and valuation expenses associated with asbestos litigation of $1,088. The decrease in 2012 from 2011 is principally attributable to lower commission expense of $2,283 for the Forged and Cast Rolls group as a result of the falloff in sales and lower stock-based compensation costs of $696 offset by higher uninsured legal and case management costs and valuation expenses associated with asbestos litigation of $819.

The credit for asbestos litigation in 2013 represents the estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers in 2013. The credit for asbestos litigation in 2012 represents an adjustment to previously-provided charges for asbestos-related litigation net of estimated insurance recoveries. The claims result from alleged personal injury from exposure to asbestos-containing components historically used in some products manufactured by certain of our former subsidiary companies (now operated as divisions of the Air and Liquid Processing segment). See Note 17 to Consolidated Financial Statements.

Other income (expense) fluctuated primarily as a result of changes in foreign exchange gains and losses and charges related to operations discontinued years ago. Gains (losses) on foreign exchange transactions approximated $(227), $107 and $(371) for 2013, 2012 and 2011, respectively, and charges related to operations discontinued years ago equaled $(1,412), $(1,054) and $(1,219), respectively.

Our statutory income tax rate equals 35% which compares to an effective income tax rate of 21.4%, 34.4%, and 37.2% for 2013, 2012 and 2011, respectively. The effective income tax rate for 2013 was lower due to beneficial permanent differences for our domestic operations and tax benefit related to the impairment charge recognized on our investment in a forged roll joint venture company. The effective income tax rate for 2011 was adversely impacted by the revaluation of net deferred income tax assets associated with a reduction in the statutory income tax rate for the U.K. operations and adjustments to deferred income tax assets, partially offset by beneficial permanent differences for our domestic operations and changes in uncertain tax positions.

Equity losses in Chinese joint venture represent Union Electric Steel’s share (49%) of the losses of UES-MG and the impairment charge we recognized in 2013 on our investment in the joint venture company (see Note 2 to Consolidated Financial Statements).

 

18


As a result of the above, we earned $12,437 or $1.20 per common share for 2013, $8,355 or $0.81 per common share for 2012, and $21,309 or $2.07 per common share for 2011. Net income for 2013 includes an after-tax credit of $10,621 or $1.03 per common share for estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers (see Note 17 to Consolidated Financial Statements) offset by an after-tax charge of $4,165 or $0.40 per common share to recognize an other-than-temporary impairment of our investment in a forged roll joint venture company (see Note 2 to Consolidated Financial Statements) for a net increase to net income of $6,456 or $0.63 per common share.

Forged and Cast Rolls

 

     2013      2012      2011  

Net sales

   $     187,286       $     189,470       $     248,380   

Operating income

   $ 13,936       $ 18,415       $ 38,761   

Backlog

   $ 159,344       $ 154,527       $ 214,449   

Net sales for 2013 decreased slightly when compared to 2012 due to a further decline in selling prices offset by a higher level of shipments. The lower selling prices adversely impacted operating income by approximately $12,500; however, the additional volume improved operating income by approximately $4,500. Operating income for 2013 also benefited from receipt of $1,505 of insurance proceeds for lost margin on in-transit inventory damaged by Hurricane Sandy in the prior year and improved quality resulting in a reduction of warranty-related provisions.

For 2012, the decrease in net sales from 2011 was due to a reduction in the level of shipments and selling prices which impacted operating results by approximately $12,500 and $9,000, respectively. Lower freight and commission expense offset the effect to operating income.

Backlog at the end of 2013 and 2012 decreased from 2011 due to the falloff in demand as customers worked below capacity and through excess inventories. Year-end backlog is more in line with historical levels, prior to the surge in steel production and the perceived shortage of roll supply which caused customers to place orders out several years. As of December 31, 2013, approximately $25,338 of the backlog is expected to be released after 2014.

Air and Liquid Processing

 

     2013      2012      2011  

Net sales

   $     93,764       $     103,435       $     96,436   

Operating income

   $ 24,945       $ 7,267       $ 8,155   

Backlog

   $ 38,117       $ 41,277       $ 45,552   

For 2013, sales for the segment decreased principally as a result of reduced demand for custom air handling equipment by universities and research facilities combined with excess capacity in the industry. Operating income for 2013 includes a pre-tax credit of $16,340 for the estimated additional insurance recoveries expected to be available to satisfy asbestos liabilities through 2022 resulting from settlement agreements reached with various insurance carriers during the year. By comparison, operating income for 2012 includes a pre-tax credit of $540 representing an adjustment to previously-provided charges for asbestos-related litigation net of estimated insurance recoveries, (see Note 17 to Consolidated Financial Statements). Uninsured legal and case management and valuation costs associated with asbestos litigation for each of the years approximated $649, $1,737 and $918, respectively.

For Buffalo Pumps, although sales increased for each of the years when compared to the previous year, operating income remained comparable. Contribution from the higher volume of shipments was offset primarily by differences in product mix. Specifically, for 2013, Buffalo Pumps benefited from an increase in business activity with U.S. Navy shipbuilders and, in 2012, from a higher level of shipments to its power generation customers. Operating income, however, was unfavorably impacted by lower margins on certain projects for U.S. Navy shipbuilders.

During 2013, both Aerofin and Buffalo Air Handling were affected by lower spending on new construction projects. For Aerofin, the decrease was partially offset by additional orders for heat exchange coils for the industrial and nuclear markets. For Buffalo Air Handling, completion of a large order for a customer in medical research in 2012, which began in 2011, further impacted operating results in the current year when compared to the two previous years.

The decline in backlog at December 31, 2013 from 2012 is primarily attributable to fewer pumps orders for U.S. Navy shipbuilders and a drop in orders from the fossil fueled utility market. The decrease at December 31, 2012 from 2011 is principally due to shipment of the large order for a customer in medical research which was outstanding at December 31, 2011. The majority of the year-end backlog is scheduled to ship in 2014.

 

19


LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities for 2013 equaled $37,774 compared to $25,444 and $22,287 for 2012 and 2011, respectively. While the credit for asbestos litigation recorded in 2013 and 2012 improved earnings, it did not affect cash flows by the same amount. Instead, the asbestos liability, net of insurance recoveries, will be paid over a number of years and will generate tax benefits. Net asbestos-related payments, including reimbursement of past costs, equaled $(985), $7,932 and $5,061 in 2013, 2012 and 2011, respectively, and are expected to approximate $2,500 in 2014. Net cash flows provided by operating activities also benefited in 2013 from a reduction in inventory associated with the lower operating levels of our businesses. Contributions to our pension and other postretirement plans approximated $7,400 in 2013 (of which $5,000 were voluntary contributions), $2,500 in 2012 and $9,400 in 2011 (of which $7,000 were voluntary contributions). As a result of voluntary contributions and relief provided by Moving Ahead for Progress in the 21st Century (“MAP-21”), which reduces funding requirements for single-employer defined benefit plans, no minimum contributions are required for 2014. Additional voluntary contributions may be made however.

Net cash flows used in investing activities were $11,926, $9,369 and $15,372 in 2013, 2012 and 2011, respectively, the majority of which represents capital expenditures for the Forged and Cast Rolls group. In 2010, UES-UK was awarded a government grant of up to $1,325 (£850) toward the purchase and installation of certain machinery and equipment of which $1,083 (£680) has been received to date. The final portion is expected to be received in 2014. As of December 31, 2013, anticipated future capital expenditures are expected to approximate $8,087, the majority of which will be spent in 2014.

Net cash outflows from financing activities represent primarily the payment of dividends of $0.72 per common share. Additionally, stock options were exercised resulting in proceeds from the issuance of common stock and excess tax benefits.

The effect of exchange rate changes on cash and cash equivalents is primarily attributable to the fluctuation of the British pound against the U.S. dollar.

As a result of the above, cash and cash equivalents increased by $19,021 in 2013 and ended the year at $97,910 (of which approximately $8,100 is held by foreign operations) in comparison to $78,889 and $69,888 at December 31, 2012 and 2011, respectively. Repatriation of foreign funds may result in the Corporation accruing and paying additional income tax; however, the majority of foreign funds is currently deemed to be permanently reinvested and no additional provision for income tax has been made. Funds on hand and funds generated from future operations are expected to be sufficient to finance our operational and capital expenditure requirements. We also maintain short-term lines of credit in excess of the cash needs of our businesses. The total available at December 31, 2013 was approximately $9,500 (including £3,000 in the United Kingdom and €400 in Belgium).

We had the following contractual obligations outstanding as of December 31, 2013:

 

     Payments Due by Period  
      Total      <1 year      1–3 years      3–5 years      >5 years      Other  

Industrial Revenue Bonds(1)

   $   13,311       $ 0       $ 0       $ 0       $ 13,311       $ 0   

Operating Lease Obligations

     1,621         842         681         98         0         0   

Capital Expenditures

     8,087         8,087         0         0         0         0   

Pension and Other Postretirement

                 

Benefit Obligations(2)

     43,087         2,694         19,706         8,439         12,248         0   

Purchase Obligations(3)

     4,938         2,506         2,432         0         0         0   

Unrecognized Tax Benefits(4)

     270         91         0         0         0         179   

Total

   $ 71,314       $   14,220       $   22,819       $   8,537       $   25,559       $   179   

 

  (1) Represents principal only. Interest is not included since it is variable; interest rates averaged less than 1% in the current year. The Industrial Revenue Bonds begin to mature in 2020; however, if the bonds are unable to be remarketed they will be refinanced under a separate facility. See Note 6 to Consolidated Financial Statements.

 

  (2) Represents estimated contributions to our pension and other postretirement plans. Actual required contributions are contingent on a number of variables including future investment performance of the plans’ assets and may differ from these estimates. See Note 7 to Consolidated Financial Statements. Contributions to the U.S. defined benefit plan are based on the projected funded status of the plan including anticipated normal costs, amortization of unfunded liabilities and an 8% expected return on plan assets. With respect to the U.K. defined benefit plan, the Trustees and UES-UK have agreed to a recovery plan that estimates the amount of employer contributions, based on U.K. regulations, necessary to eliminate the funding deficit of the plan over an agreed period.

 

  (3) Represents primarily commitments by one of our Forged and Cast Rolls subsidiaries for the purchase of natural gas through 2015 covering approximately 53% of anticipated needs to meet orders in backlog. See Note 11 to Consolidated Financial Statements.

 

  (4) Represents uncertain tax positions. Amount included as “Other” represents portion for which the period of cash settlement cannot be reasonably estimated. See Note 13 to Consolidated Financial Statements.

 

20


With respect to environmental matters, we are 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 the identification of new sites. However, we believe the potential liability for all environmental proceedings of approximately $823 accrued at December 31, 2013 is considered adequate based on information known to date (see Note 18 to Consolidated Financial Statements).

The nature and scope of our business brings us into regular contact with a variety of persons, businesses and government agencies in the ordinary course of business. Consequently, we and certain of our subsidiaries from time to time are named in various legal actions. Generally, we do not anticipate that our financial condition or liquidity will be materially affected by the costs of known, pending or threatened litigation. However, claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products and there can be no assurance that future claims will not present significantly greater and longer lasting financial exposure than presently contemplated (see Note 17 to Consolidated Financial Statements).

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements include operating leases, capital expenditures and purchase obligations disclosed in the contractual obligations table and the letters of credit unrelated to the Industrial Revenue Bonds as discussed in Note 8 to the Consolidated Financial Statements.

EFFECTS OF INFLATION

While inflationary and market pressures on costs are likely to be experienced, it is anticipated that ongoing improvements in manufacturing efficiencies and cost savings efforts will mitigate the effects of inflation on 2014 operating results. The ability to pass on increases in the price of commodities to the customer is contingent upon current market conditions with us potentially having to absorb some portion of the increase. Product pricing for the Forged and Cast Rolls segment is reflective of current costs with a majority of orders subject to a variable-index surcharge program which helps to protect the segment and its customers against the volatility in the cost of certain raw materials. Additionally, long-term labor agreements exist at each of the key locations. Although certain of these agreements expire in 2014, we, as is consistent with past practice, are negotiating with the intent to secure mutually beneficial arrangements covering multiple years (see Note 8 to Consolidated Financial Statements). Finally, commitments have been executed for natural gas usage and certain commodities (copper and aluminum) to cover a portion of orders in the backlog (see Note 11 to Consolidated Financial Statements).

APPLICATION OF CRITICAL ACCOUNTING POLICIES

We have identified critical accounting policies that are important to the presentation of our financial condition, changes in financial condition and results of operations and involve the most complex or subjective assessments. Critical accounting policies relate to accounting for pension and other postretirement benefits, assessing recoverability of long-lived assets, litigation, income taxes and stock-based compensation.

Accounting for pension and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, input from our actuary is evaluated and extensive use is made of assumptions about inflation, long-term rate of return on plan assets, mortality, rates of increases in compensation, employee turnover and discount rates.

The expected long-term rate of return on plan assets is an estimate of average rates of earnings expected to be earned on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. Since these benefits will be paid over many years, the expected long-term rate of return is reflective of current investment returns and investment returns over a longer period. Also, consideration is given to target and actual asset allocations, inflation and real risk-free return. We believe the expected long-term rate of return of 8% for our domestic plan and 6.50% for our foreign plan to be reasonable. Actual returns on plan assets for 2013 and 2012, respectively, approximated 19.22% and 10.98% for our domestic plan and 12.42% and 9.61% for our foreign plan.

The discount rates used in determining future pension obligations and other postretirement benefits for each of our plans are based on rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension and other postretirement benefits. High-quality fixed-income investments are defined as those investments which have received one of the two highest ratings given by a recognized rating agency with maturities of 10+ years. We believe the assumed discount rates of 5.00% and 4.50% as of December 31, 2013 for our domestic and foreign plans, respectively, to be reasonable.

We believe that the amounts recorded in the accompanying consolidated financial statements related to pension and other postretirement benefits are based on appropriate assumptions although actual outcomes could differ. A percentage point decrease in the expected long-term rate of return would increase annual pension expense by approximately $1,600. A 1/4 percentage point decrease in the discount rate would increase projected and accumulated benefit obligations by approximately $7,700. Conversely, an increase in the expected long-term rate of return would decrease annual pension expense and an increase in the discount rate would decrease projected and accumulated benefit obligations (see Note 7 to Consolidated Financial Statements).

 

21


Property, plant and equipment are reviewed for recoverability whenever events or circumstances indicate the carrying amount of the long-lived assets may not be recoverable. If the undiscounted cash flows generated from the use and eventual disposition of the assets are less than their carrying value, then the asset value may not be fully recoverable potentially resulting in a write-down of the asset value. Estimates of future cash flows are based on expected market conditions over the remaining useful life of the primary asset(s). Accordingly, assumptions are made about pricing, volume and asset-resale values. Actual results may differ from these assumptions.

We believe the amounts recorded in the accompanying consolidated financial statements for property, plant and equipment are recoverable and are not impaired as of December 31, 2013.

Litigation and loss contingency accruals are made when it is determined that it is probable that a liability has been incurred and the amount can be reasonably estimated. Specifically, we and certain of our subsidiaries are involved in various claims and lawsuits incidental to their businesses. In addition, claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products manufactured by certain of our former subsidiary companies (now operated as divisions of Air & Liquid Systems). To assist us in determining whether an estimate could be made of the potential liability for pending and unasserted future claims for Asbestos Liability along with applicable insurance coverage, and the amounts of any estimates, we hired a nationally-recognized asbestos-liability expert and insurance consultant. Based on their analyses, reserves for probable and reasonably estimable costs of Asbestos Liabilities including defense costs and receivables for the insurance recoveries that are deemed probable have been established. These amounts relied on assumptions which were based on currently known facts and strategy.

In 2012, we undertook another review of our Asbestos Liability claims, defense costs and the likelihood for insurance recoveries. Key variables in these assumptions are summarized in Note 17 to the Consolidated Financial Statements and include the number and type of new claims to be filed each year, the average cost of disposing of each new claim, average annual defense costs, the resolution of coverage issues with insurance carriers, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect our Asbestos Liability and ability to recover under our 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. Actual expenses or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in the calculations vary significantly from actual results.

We intend to evaluate our 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 incurrence of future charges; however, we are currently unable to estimate such future charges. Adjustments, if any, to our estimate of our recorded Asbestos Liability and/or insurance receivables could be material to our operating results for the periods in which the adjustments to the liability or receivable are recorded, and to our liquidity and consolidated financial position.

Accounting for income taxes includes our evaluation of the underlying accounts, permanent and temporary differences, our tax filing positions and interpretations of existing tax law. A valuation allowance is recorded against deferred income tax assets to reduce them to the amount that is “more likely than not” to be realized. In doing so, assumptions are made about the future profitability of our operations and the nature of that profitability. Actual results may differ from these assumptions. If we determined we would not be able to realize all or part of the deferred income tax assets in the future, an adjustment to the valuation allowance would be established resulting in a charge to net income. Likewise, if we determined we would be able to realize deferred income tax assets in excess of the net amount recorded, we would release a portion of the existing valuation allowance resulting in an increase in net income. As of December 31, 2013, we have deferred income tax assets approximating $49,474 and a valuation allowance of $2,639.

We do not recognize a tax benefit in the financial statements related to a tax position taken or expected to be taken in a tax return unless it is “more likely than not” that the tax authorities will sustain the tax position solely on the basis of the position’s technical merits. Consideration is given primarily to legislation and statutes, legislative intent, regulations, rulings and case law as well as their applicability to the facts and circumstances of the tax position when assessing the sustainability of the tax position. In the event a tax position no longer meets the “more likely than not” criteria, we would reverse the tax benefit by recognizing a liability and recording a charge to earnings. Conversely, if we subsequently determined that a tax position meets the “more likely than not” criteria, we would recognize the tax benefit by reducing the liability and recording a credit to earnings. As of December 31, 2013, based on information known to date, we believe the amount of unrecognized tax benefits of $270 for tax positions taken or expected to be taken in a tax return which may be challenged by the tax authorities is adequate.

See Note 13 to the Consolidated Financial Statements.

Accounting for stock-based compensation is based on the fair value of the stock options on the date of grant. The fair value is affected by our stock price and various assumptions including assumptions about the expected term of the options, forfeitures, volatility, dividends and the risk-free interest rate. If the fair value of granted stock options was re-determined, on a date other than the date of grant, the resulting fair value would differ. Accordingly, the fair value of stock options granted to date is not indicative of the fair value of stock options to be granted in the future (see Note 9 to Consolidated Financial Statements).

 

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RECENTLY IMPLEMENTED ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires expanded disclosures, including gross and net information, about financial and derivative instruments that are either offset in the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. The guidance became effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively. The new guidance affects disclosures only and did not impact our operating results, financial position or liquidity.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. Information may be reported either on the face of the income statement or in the footnotes to the financial statements. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other required disclosures. The guidance became effective for reporting periods beginning on or after January 1, 2013. The guidance affects disclosures only. It does not change whether items are reported in net income or other comprehensive income or when items in other comprehensive income are reclassified to net income; accordingly, ASU 2013-02 did not impact our operating results, financial position or liquidity. See Note 10 to the Consolidated Financial Statements for required disclosures.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires, under certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance becomes effective for reporting periods beginning on or after January 1, 2014. Currently, we record unrecognized tax benefits as a liability; accordingly, implementation of the guidance may affect balance sheet presentation but will not impact our operating results or liquidity.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on our behalf. Management’s Discussion and Analysis of Financial Condition and Results of Operation and other sections of the Annual Report on Form 10-K as well as the consolidated financial statements and notes thereto contain forward-looking statements that reflect our current views with respect to future events and financial performance.

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

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We view our primary market risk exposures to be changes in foreign currency exchange rates and commodity prices. To manage certain foreign currency exchange exposures, our policy is to hedge a portion of our foreign currency denominated sales and receivables, primarily U.S. sales denominated in euros and U.K. sales denominated in U.S. dollars and euros. Although strengthening of the U.S. dollar could result in a lower volume of exports from the United States and at reduced margins, exports of our foreign operation may increase and gross margins might improve. Additionally, strengthening of the British pound could result in a lower volume of exports from the United Kingdom and at reduced margins; however, exports for our domestic operations may increase and gross margins might improve. A weakening of the euro, as compared to the U.S. dollar and British pound, could result in a lower volume of exports and at reduced margins.

To reduce the effect of price changes for certain of our raw materials and energy, we enter into contracts for particular commodities (copper and aluminum) and purchase a portion of our energy usage in advance. Based on estimated annual purchases, a 10% fluctuation in commodity prices (including electricity, natural gas, steel scrap and ferroalloys) would have impacted 2013 and 2012 by approximately $8,500 and $9,500, respectively. There is no guarantee that fluctuations in commodity prices will be limited to 10%. The ability to pass on increases in the price of commodities to the customer is contingent upon current market conditions with us potentially having to absorb some portion of such increase. However, a sales price surcharge mechanism is in place with a majority of the customers of the Forged and Cast Rolls segment which helps to protect us against the volatility in the cost of certain raw materials.

See also Note 11 to the Consolidated Financial Statements.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

 

             December 31,  

(in thousands, except par value)

     2013           2012   

Assets

       

Current assets:

       

Cash and cash equivalents

   $ 97,910         $ 78,889   

Receivables, less allowance for doubtful accounts of $551 in 2013 and $519 in 2012

     50,279           54,394   

Inventories

     64,129           70,669   

Insurance receivable – asbestos

     24,500           18,400   

Other current assets

     9,968           15,230   

Total current assets

     246,786           237,582   

Property, plant and equipment, net

     151,288           150,297   

Insurance receivable – asbestos

     86,241           99,715   

Deferred income tax assets

     6,832           25,800   

Investments in joint ventures

     5,010           13,319   

Other noncurrent assets

     6,516           6,466   
     $   502,673         $   533,179   

Liabilities and Shareholders’ Equity

       

Current liabilities:

       

Accounts payable

   $ 15,768         $ 15,839   

Accrued payrolls and employee benefits

     8,875           9,301   

Industrial Revenue Bond debt

     13,311           13,311   

Asbestos liability – current portion

     27,000           23,500   

Other current liabilities

     21,720           24,473   

Total current liabilities

     86,674           86,424   

Employee benefit obligations

     49,146           96,100   

Asbestos liability

     131,293           157,522   

Other noncurrent liabilities

     565           1,040   

Total liabilities

     267,678           341,086   

Commitments and contingent liabilities (Note 8)

       

Shareholders’ equity:

       

Common stock – par value $1; authorized 20,000 shares; issued and outstanding 10,373 shares in 2013 and 10,346 shares in 2012

     10,373           10,346   

Additional paid-in capital

     125,852           124,464   

Retained earnings

     144,635           139,658   

Accumulated other comprehensive loss

     (45,865        (82,375

Total shareholders’ equity

     234,995           192,093   
     $ 502,673         $ 533,179   

See Notes to Consolidated Financial Statements.

 

25


CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For The Year Ended December 31,  

(in thousands, except per share amounts)

     2013           2012           2011   

Net sales

   $ 281,050         $ 292,905         $ 344,816   

Operating costs and expenses:

            

Costs of products sold (excluding depreciation)

     217,342           225,906           256,030   

Selling and administrative

     39,682           40,530           41,887   

Depreciation

     11,342           10,661           10,153   

Credit for asbestos litigation

     (16,340        (540        0   

Loss on disposition of assets

     57           56           272   
       252,083           276,613           308,342   

 

Income from operations

     28,967           16,292           36,474   

Other income (expense):

            

Investment-related income

     89           63           146   

Interest expense

     (245        (246        (315

Other – net

     (1,631        (942        (1,578
       (1,787        (1,125        (1,747

Income before income taxes and equity losses in Chinese joint venture

     27,180           15,167           34,727   

Income tax provision

     (5,813        (5,218        (12,916

Equity losses in Chinese joint venture (including an impairment charge of $6,407 in 2013)

     (8,930        (1,594        (502

Net income

   $ 12,437         $ 8,355         $ 21,309   

Net income per common share:

            

Basic

   $ 1.20         $ 0.81         $ 2.07   

Diluted

     1.20           0.80           2.05   

Weighted average number of common shares outstanding:

            

Basic

     10,358           10,338           10,319   

Diluted

     10,406           10,390           10,393   

See Notes to Consolidated Financial Statements.

 

26


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     For The Year Ended December 31,  
(in thousands)    2013     2012     2011  

 

Net income

   $         12,437      $         8,355      $         21,309   

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

      

Adjustments for changes in:

      

Foreign exchange translation

     1,820        3,193        653   

Unrecognized employee benefit costs

     28,678        (10,520     (23,028

Unrealized holding gains (losses) on marketable securities

     431        149        (28

Fair value of cash flow hedges

     (251     102        (707

Reclassification adjustments for items included in net income:

      

Amortization of unrecognized employee benefit costs

     5,643        3,962        3,664   

Realized (gains) losses from sale of marketable securities

     (57     (78     13   

Realized (gains) losses from settlement of cash flow hedges

     246        107        (383

Other comprehensive income (loss)

     36,510        (3,085     (19,816

 

Comprehensive income

   $ 48,947      $ 5,270      $ 1,493   

See Notes to Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

(in thousands, except per share amounts)    Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
     Total  

Balance January 1, 2011

   $     10,305       $     121,074       $     124,872        $      (59,474)       $ 196,777   

Stock-based compensation

        1,636              1,636   

Comprehensive income:

             

Net income

           21,309           21,309   

Other comprehensive loss

             (19,816)         (19,816
             

 

 

 

Comprehensive income

                1,493   

Issuance of common stock including excess tax benefits of $47

     21         378              399   

Cash dividends ($0.72 per share)

                       (7,433              (7,433

Balance December 31, 2011

     10,326         123,088         138,748        (79,290)         192,872   

Stock-based compensation

        1,058              1,058   

Comprehensive income:

             

Net income

           8,355           8,355   

Other comprehensive loss

             (3,085)         (3,085
             

 

 

 

Comprehensive income

                5,270   

Issuance of common stock including excess tax benefits of $16

     20         318              338   

Cash dividends ($0.72 per share)

                       (7,445              (7,445

Balance December 31, 2012

     10,346         124,464         139,658        (82,375)         192,093   

Stock-based compensation

        996              996   

Comprehensive income:

             

Net income

           12,437           12,437   

Other comprehensive income

             36,510         36,510   
             

 

 

 

Comprehensive income

                48,947   

Issuance of common stock including excess tax benefits of $5

     27         392              419   

Cash dividends ($0.72 per share)

                       (7,460              (7,460

Balance December 31, 2013

   $ 10,373       $ 125,852       $ 144,635        $      (45,865)       $ 234,995   

See Notes to Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

                 For The Year Ended December 31,  
(in thousands)    2013     2012     2011  

Cash flows from operating activities:

      

Net income

   $ 12,437      $ 8,355      $ 21,309   

Adjustments to reconcile net income to net cash flows from operating activities:

      

Depreciation

     11,342        10,661        10,153   

Credit for asbestos litigation

     (16,340     (540     0   

Deferred income tax provision

     111        2,545        5,975   

Pension and other postretirement benefits – expense in excess of contributions

     6,491        10,074        607   

Stock-based compensation

     1,196        1,258        1,954   

Equity losses in Chinese joint venture (including an impairment charge of $6,407 in 2013)

     8,930        1,594        502   

Provisions for bad debts and inventories

     155        346        (24

Provision for warranties net of settlements

     204        988        396   

Excess tax benefits from the exercise of stock options

     (5     (16     (47

Provision for environmental liabilities

     0        0        303   

Other – net

     108        (13     438   

Changes in assets/liabilities:

      

Receivables

     4,196        5,188        (12,852

Inventories

     7,060        (1,101     301   

Other assets, including insurance receivable – asbestos

     28,179        10,507        16,544   

Accounts payable

     (183     (3,894     (732

Accrued payrolls and employee benefits

     (2,045     (1,209     (582

Other liabilities, including asbestos liability

     (24,062     (19,299     (21,958

Net cash flows provided by operating activities

     37,774        25,444        22,287   

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (11,805     (9,668     (15,780

Purchases of long-term marketable securities

     (921     (770     (857

Proceeds from the sale of long-term marketable securities

     782        694        776   

Proceeds from government grant

     0        373        484   

Other

     18        2        5   

Net cash flows used in investing activities

     (11,926     (9,369     (15,372

Cash flows from financing activities:

      

Dividends paid

     (7,455     (7,442     (7,429

Proceeds from the issuance of common stock

     214        123        167   

Excess tax benefits from the exercise of stock options

     5        16        47   

Net cash flows used in financing activities

     (7,236     (7,303     (7,215

Effect of exchange rate changes on cash and cash equivalents

     409        229        167   

Net increase (decrease) in cash and cash equivalents

     19,021        9,001        (133

Cash and cash equivalents at beginning of year

     78,889        69,888        70,021   

Cash and cash equivalents at end of year

   $ 97,910      $ 78,889      $ 69,888   

Supplemental disclosures of cash flow information:

      

Income tax payments

   $ 2,905      $ 4,462      $ 5,711   

Interest payments

     246        246        316   

Non-cash investing activities:

      

Purchases of property, plant and equipment in accounts payable

   $ 884      $ 710      $ 2,418   

See Notes to Consolidated Financial Statements.

 

29


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

Description of Business

Ampco-Pittsburgh Corporation (the “Corporation”) operates in two business segments. The Forged and Cast Rolls segment consists of Union Electric Steel Corporation (“Union Electric Steel” or “UES”) and Union Electric Steel UK Limited (“UES-UK”). Union Electric Steel is one of the world’s largest manufacturers of forged hardened steel rolls with principal operations in Pennsylvania and Indiana whereas UES-UK produces cast iron and steel rolls in England. Rolls are supplied to manufacturers of steel and aluminum throughout the world. The Air and Liquid Processing segment includes Aerofin, Buffalo Air Handling and Buffalo Pumps, all divisions of Air & Liquid Systems Corporation (“Air and Liquid”), a wholly-owned subsidiary of the Corporation. Aerofin produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including fossil fuel and nuclear power generation, automotive, industrial process and HVAC. Buffalo Air Handling produces large custom-designed air handling systems for commercial, institutional and industrial building markets. Buffalo Pumps manufactures centrifugal pumps for the marine defense, refrigeration and power generation industries. The segment has operations in Virginia and New York with headquarters in Pennsylvania. The segment distributes a significant portion of its products through a common independent group of sales offices located throughout the United States and Canada.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The Corporation’s accounting policies conform to accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include valuing the assets and obligations related to employee benefit plans, assessing the carrying value of long-lived assets, accounting for loss contingencies associated with claims and lawsuits, accounting for income taxes and estimating the fair value of stock options granted. Actual results could differ from those estimates. A summary of the significant accounting policies followed by the Corporation is presented below.

Consolidation

All subsidiaries are wholly owned and are included in the consolidated financial statements of the Corporation. Intercompany accounts and transactions are eliminated. Investments in joint ventures whereby the Corporation owns 20% to 50% of the voting stock and has the ability to exercise significant influence over the operating and financial policies of the joint venture are accounted for using the equity method of accounting. Investments in joint ventures whereby the Corporation does not have the ability to exercise significant influence over the operating and financial policies of the joint venture are accounted for using the cost method of accounting. Investments in joint ventures are reviewed for impairment whenever events or circumstances indicate the carrying amount of the investment may not be recoverable. If the estimated fair value of the investment is less than the carrying amount and such decline is determined to be “other than temporary,” then the investment may not be fully recoverable potentially resulting in a write-down of the investment value.

Cash and Cash Equivalents

Securities with purchased original maturities of three months or less are considered to be cash equivalents. The Corporation maintains cash and cash equivalents at various financial institutions which may exceed federally insured amounts.

Inventories

Inventories are valued at the lower of cost or market. Cost includes the cost of raw materials, direct labor and overhead for those items manufactured but not yet sold or for which title has not yet transferred. Fixed production overhead is allocated to inventories based on normal capacity of the production facilities. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to inventories is not increased as a consequence of abnormally low production or idle plant. Costs for abnormal amounts of spoilage, handling costs and freight costs are charged to expense when incurred. Cost of domestic raw materials, work-in-process and finished goods inventories is primarily determined by the last-in, first-out (LIFO) method. Cost of domestic supplies and foreign inventories is determined primarily by the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost with depreciation computed using the straight-line method over the following estimated useful lives: land improvements – 15 to 20 years, buildings – 25 to 50 years and machinery and equipment – 3 to 25 years. Expenditures that extend economic useful lives are capitalized. Routine maintenance is charged to expense. Gains or losses are recognized on retirements or disposals. Property, plant and equipment are reviewed for impairment whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. If the undiscounted cash flows generated from the use and eventual disposition of the assets are less than their carrying value, then the asset value may not be fully recoverable potentially resulting in a write-down of the asset value. Estimates of future cash flows are based on expected market conditions over the remaining useful life of the primary asset(s). Proceeds from government grants are recorded as a reduction in the purchase price of the underlying assets and amortized against depreciation over the lives of the related assets.

 

30


Product Warranty

Provisions for product warranties are recognized at the time the underlying sale is recorded. The provision is based on historical experience as a percentage of sales adjusted for potential claims when a liability is probable and for known claims.

Employee Benefit Plans

Funded Status

If the fair value of the plan assets exceeds the projected benefit obligation, the over-funded projected benefit obligation is recognized as an asset (prepaid pensions) on the consolidated balance sheet. Conversely, if the projected benefit obligation exceeds the fair value of plan assets, the under-funded projected benefit obligation is recognized as a liability (employee benefit obligations) on the consolidated balance sheet. Gains and losses arising from the difference between actuarial assumptions and actual experience and unamortized prior service costs are recorded as a separate component of accumulated other comprehensive income (loss) and presented net of income tax.

Net Periodic Pension and Other Postretirement Costs

Net periodic pension and other postretirement costs includes service cost, interest cost, expected rate of return on the market-related value of plan assets, amortization of prior service costs and recognized actuarial gains or losses. When actuarial gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are amortized to net periodic pension and other postretirement costs over the average remaining service period of employees expected to receive benefits under the plans. When the gains or losses are less than 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are included in net periodic pension and other postretirement costs indirectly as a result of lower/higher interest costs arising from a decrease/increase in the projected benefit obligation. The market-related value of plan assets is determined using a five-year moving average which recognizes 20% of unrealized gains and losses each year.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes changes in assets and liabilities from non-owner sources including foreign currency translation adjustments, unamortized prior service costs and unrecognized actuarial gains and losses associated with employee benefit plans, unrealized holding gains and losses on securities designated as available for sale and changes in the fair value of derivatives designated and effective as cash flow hedges. Certain components of other comprehensive income (loss) are presented net of income tax. Foreign currency translation adjustments exclude the effect of income tax since earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.

Reclassification adjustments are amounts which are realized during the year and, accordingly, are deducted from other comprehensive income (loss) in the period in which they are included in net income or when a transaction no longer qualifies as a cash flow hedge. Foreign currency translation adjustments are included in net income upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. Unamortized prior service costs and unrecognized actuarial gains and losses associated with employee benefit plans are included in net income either over the average remaining service period of employees expected to receive benefits under the plans or indirectly as a result of lower/higher interest costs arising from a decrease/increase in the projected benefit obligation. Unrealized holding gains and losses on securities are included in net income when the underlying security is sold. Changes in the fair value of derivatives are included in net income when the projected sale occurs or, if a foreign currency purchase contract, over the estimated useful life of the underlying asset.

Revenue Recognition

Revenue from sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Persuasive evidence of an arrangement identifies the final understanding between the parties as to the specific nature and terms of the agreed-upon transaction that creates enforceable obligations. It can be in the form of an executed purchase order from the customer, sales agreement issued by the Corporation or a similar arrangement deemed to be normal and customary business practice for that particular customer or class of customer (collectively, a sales agreement).

Delivery and performance is considered to have occurred when the customer has taken title and assumed the risks and rewards of ownership of the product. Typically this occurs when the product is shipped to the customer (i.e., FOB shipping point), delivered to the customer (i.e., FOB destination), or, for foreign sales, in accordance with trading guidelines known as Incoterms. Incoterms are standard trade definitions used in international contracts and are developed, maintained and promoted by the ICC Commission on Commercial Law and Practice.

The sales price required to be paid by the customer is fixed or determinable from the sales agreement. It is not subject to refund or adjustment except for a variable-index surcharge provision which increases or decreases, as applicable, the selling price of a rolling mill roll for corresponding changes in the published index cost of certain raw materials. The variable-index surcharge is recognized as revenue when the corresponding revenue for the inventory is recognized. Likelihood of collectability is assessed prior to acceptance of an order. There are no customer-acceptance provisions other than customer inspection and testing prior to shipment. Post-shipment obligations are insignificant.

 

31


Amounts billed to the customer for shipping and handling are recorded within net sales and the related costs are recorded within costs of products sold (excluding depreciation). Amounts billed for taxes assessed by various government authorities (e.g. sales tax, value-added tax, etc.) are excluded from the determination of net income and instead are recorded as a liability until remitted to the government authority.

Foreign Currency Translation

Assets and liabilities of the Corporation’s foreign operations are translated at year-end exchange rates and the statements of operations are translated at the average exchange rates for the year. Gains or losses resulting from translating foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive income (loss) until the entity is sold or substantially liquidated.

Derivative Instruments

Derivative instruments which include forward exchange (for foreign currency sales and purchases) and futures contracts are recorded on the consolidated balance sheet as either an asset or a liability measured at their fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. To the extent that a derivative is designated and effective as a cash flow hedge of an exposure to future changes in value, the change in the fair value of the derivative is deferred in accumulated other comprehensive income (loss). Any portion considered to be ineffective, including that arising from the unlikelihood of an anticipated transaction to occur, is reported as a component of earnings (other income/expense) immediately.

Upon occurrence of the anticipated sale, the foreign currency sales contract designated and effective as a cash flow hedge is de-designated as a fair value hedge and the change in fair value previously deferred in accumulated other comprehensive income (loss) is reclassified to earnings (net sales) with subsequent changes in fair value recorded as a component of earnings (other income/expense). Upon occurrence of the anticipated purchase, the foreign currency purchase contract is settled and the change in fair value deferred in accumulated other comprehensive income (loss) is reclassified to earnings (depreciation expense) over the life of the underlying assets. Upon settlement of a futures contract, the change in fair value deferred in accumulated other comprehensive income (loss) is reclassified to earnings (costs of products sold, excluding depreciation) when the corresponding inventory is sold and revenue is recognized. To the extent that a derivative is designated and effective as a hedge of an exposure to changes in fair value, the change in the derivative’s fair value will be offset in the statement of operations by the change in the fair value of the item being hedged and is recorded as a component of earnings (other income/expense). Cash flows associated with the derivative instruments are recorded as a component of operating activities on the consolidated statement of cash flows.

The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy of inputs is used to determine fair value measurements with three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities and are considered the most reliable evidence of fair value. Level 2 inputs are observable prices that are not quoted on active exchanges. Level 3 inputs are unobservable inputs used for measuring the fair value of assets or liabilities.

Stock-Based Compensation

Compensation expense is recognized for stock-based compensation awards over the requisite service period based on the estimated fair value of the award as of the date of grant calculated using the Black-Scholes option-pricing model. Fair value is affected by the Corporation’s stock price and various assumptions including assumptions about the expected term of the options, forfeitures, volatility, dividends and the risk-free interest rate. The expected life of the options is estimated by considering the historical exercise experience of the employee group and the vesting period of the awards. The expected forfeiture rate is estimated based on the historical forfeiture rate of the employee group. The expected volatility is based on the historical prices of the Corporation’s stock and dividend amounts over the expected life of the stock options. The expected dividend yield is based on a dividend amount giving consideration to the Corporation’s past pattern and future expectations of dividends over the expected life of the options. The risk-free interest rate is equal to the yield available on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the options.

Legal Costs

Legal costs expected to be incurred in connection with loss contingencies are accrued when such costs are probable and estimable.

 

32


Income Taxes

Income taxes are recognized during the year in which transactions enter into the determination of financial statement income. Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book carrying amount and the tax basis of assets and liabilities including net operating loss carryforwards. Unremitted earnings of the Corporation’s non-US subsidiaries and affiliates are deemed to be permanently reinvested and, accordingly, no deferred income tax liability is recorded. A valuation allowance is provided against a deferred income tax asset when it is “more likely than not” the asset will not be realized. Similarly, if a determination is made that it is “more likely than not” the deferred income tax asset will be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded. Penalties and interest are recognized as a component of the income tax provision.

Tax benefits are recognized in the financial statements for tax positions taken or expected to be taken in a tax return when it is “more likely than not” that the tax authorities will sustain the tax position solely on the basis of the position’s technical merits. Consideration is given primarily to legislation and statutes, legislative intent, regulations, rulings and case law as well as their applicability to the facts and circumstances of the tax position when assessing the sustainability of the tax position. In the event a tax position no longer meets the “more likely than not” criteria, the tax benefit is reversed by recognizing a liability and recording a charge to earnings. Conversely, if a tax position subsequently meets the “more likely than not” criteria, a tax benefit would be recognized by reducing the liability and recording a credit to earnings.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per common share is similar to basic earnings per common share except that the denominator is increased to include the dilutive effect of the net additional common shares that would have been outstanding assuming exercise of outstanding stock options, calculated using the treasury stock method. The weighted average number of common shares outstanding assuming exercise of the stock options was 10,406,478 for 2013, 10,389,678 for 2012 and 10,393,159 for 2011. Weighted-average outstanding stock options excluded from the diluted earnings per common share calculation, since the effect would have been antidilutive, were 781,325 for 2013, 671,977 for 2012 and 544,342 for 2011.

Recently Implemented Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires expanded disclosures, including gross and net information, about financial and derivative instruments that are either offset in the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. The guidance became effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively. The new guidance affects disclosures only and did not impact operating results, financial position or liquidity of the Corporation.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. Information may be reported either on the face of the income statement or in the footnotes to the financial statements. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other required disclosures. The guidance became effective for reporting periods beginning on or after January 1, 2013. The guidance affects disclosures only. It does not change whether items are reported in net income or other comprehensive income or when items in other comprehensive income are reclassified to net income; accordingly, ASU 2013-02 did not impact the operating results, financial position or liquidity of the Corporation. (See Note 10.)

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires, under certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance becomes effective for reporting periods beginning on or after January 1, 2014. Currently, the Corporation records unrecognized tax benefits as a liability; accordingly, implementation of the guidance may affect balance sheet presentation but will not impact operating results or liquidity of the Corporation.

 

33


NOTE 2 – INVESTMENTS IN JOINT VENTURES:

In 2007, a subsidiary of UES entered into an agreement with Maanshan Iron & Steel Company Limited (Maanshan) to form a joint venture company in China. UES owns 49% of the joint venture company and Maanshan owns 51%. Both companies contributed cash for their respective interests (which equated to $14,700 for UES). The joint venture company principally manufactures and sells forged backup rolling mill rolls of a size and weight currently not able to be produced by UES. A significant portion of its sales have been to Maanshan or entities controlled by Maanshan. Additionally, the majority of its raw materials are purchased from Maanshan or entities controlled by Maanshan. UES has exclusive marketing and sales rights and earned commissions of $74 and $191 during 2012 and 2011, respectively. Approximately $14 was outstanding as of December 31, 2012. UES has not guaranteed any of the obligations of the joint venture; accordingly, its maximum exposure of loss is limited to its investment. Since UES is the minority shareholder and allocation of earnings and voting rights are proportional to ownership interests, UES is not considered the primary beneficiary and, accordingly, accounts for its 49% interest in the joint venture under the equity method of accounting.

Losses of the joint venture approximated $(4,203), $(3,254) and $(1,024) for the twelve month period ended September 30, 2013, 2012 and 2011, respectively, of which the Corporation has recognized its share (or 49%) in its consolidated statements of operations. Losses are expected to continue in 2014. The joint venture has been adversely impacted by the global economic slow-down, reduced demand and excess roll inventories of its potential customer base in China, including Maanshan. Additionally, the overall financial strength of the joint venture continues to deteriorate with a greater reliance on Maanshan or entities controlled by Maanshan to provide financing and working capital. In the fourth quarter of 2013, the Corporation, with the help of outside consultants and appraisers, concluded that the estimated fair value of its investment was less than its carrying amount and that the decline was “other than temporary.” Accordingly, the Corporation recognized an impairment charge of $6,407 reducing the carrying amount of its investment to $3,670. The Corporation will continue to monitor the carrying value of this investment to determine if future charges will be necessary.

Assets, liabilities and shareholders’ equity of the joint venture as of September 30, 2013 and 2012 are summarized below. The remaining difference between the carrying amount of the investment and the value of the underlying equity in the net assets of the joint venture relates primarily to the elimination of 49% of the profit (“intercompany profit”) for the sale of technology from UES to the joint venture in earlier years. The intercompany profit will be recognized when realized outside of the controlled group.

 

      2013      2012  

Assets:

     

Current assets (includes receivables from related parties of $636 and $271, respectively)

   $ 9,431       $ 17,356   

Noncurrent assets

     36,840         39,455   
     $         46,271       $         56,811   

Liabilities and Shareholders’ Equity:

     

Current liabilities (include liabilities to related parties of $19,278 and $18,534, respectively)

   $ 22,498       $ 18,621   

Noncurrent liabilities

     0         10,850   

Shareholders’ equity

     23,773         27,340   
     $ 46,271       $ 56,811   

The Corporation also has a 25% investment in a Chinese cast roll joint venture company which is recorded at cost, or $1,340. The Corporation does not participate in the management or daily operation of the joint venture company, has not guaranteed any of its obligations and has no ongoing responsibilities to it. Dividends may be declared by the Board of Directors of the joint venture company after allocation of after-tax profits to various “funds” equal to the minimum amount required under Chinese law. No dividends were declared or received in 2013, 2012 or 2011.

NOTE 3 – INVENTORIES:

 

      2013      2012  

Raw materials

   $       17,411       $       22,514   

Work-in-progress

     29,322         31,164   

Finished goods

     5,894         5,907   

Supplies

     11,502         11,084   
     $ 64,129       $ 70,669   

 

 

34


At December 31, 2013 and 2012, approximately 56% and 68%, respectively, of the inventories was valued using the LIFO method. The LIFO reserve approximated $(26,404) and $(27,911) at December 31, 2013 and 2012, respectively. During each of the years, inventory quantities decreased resulting in a liquidation of LIFO layers which were at lower costs. The effect of the liquidations was to decrease costs of products sold (excluding depreciation) by approximately $1,803, $277 and $1,127 for 2013, 2012 and 2011, respectively, which increased net income by approximately $1,172 or $0.11 per common share for 2013, $180 or $0.02 per common share for 2012 and $733 or $0.07 per common share for 2011.

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT:

 

      2013     2012  

Land and land improvements

   $ 5,122      $ 5,006   

Buildings

     44,116        43,411   

Machinery and equipment

     250,936        237,473   

Construction-in-process

     5,315        7,493   

Other

     8,711        8,674   
     314,200        302,057   

Accumulated depreciation

     (162,912     (151,760
     $     151,288      $     150,297   

Land and buildings of UES-UK equal to approximately $3,268 (£1,974) at December 31, 2013 are held as collateral by the trustees of the UES-UK contributory defined benefit pension plan (see Note 7).

NOTE 5 – OTHER CURRENT LIABILITIES:

 

      2013      2012  

Customer-related liabilities

   $ 10,610       $ 13,444   

Income taxes payable

     1,063         70   

Accrued sales commissions

     1,648         2,146   

Other

     8,399         8,813   
     $       21,720       $       24,473   

Customer-related liabilities include liabilities for product warranty claims and deposits received on future orders. The following summarizes changes in the liability for product warranty claims for the year ended December 31:

 

      2013     2012     2011  

Balance at the beginning of the year

   $       6,625      $       5,498      $       5,113   

Satisfaction of warranty claims

     (1,908     (2,411     (2,691

Provision for warranty claims

     2,112        3,399        3,087   

Other, primarily impact from changes in foreign currency exchange rates

     70        139        (11

Balance at the end of the year

   $ 6,899      $ 6,625      $ 5,498   

NOTE 6 – BORROWING ARRANGEMENTS:

The Corporation maintains short-term lines of credit of approximately $9,500 (including £3,000 in the United Kingdom and €400 in Belgium). No amounts were outstanding under these lines of credit as of December 31, 2013 and 2012.

As of December 31, 2013, the Corporation had the following Industrial Revenue Bonds (IRBs) outstanding: (1) $4,120 tax-exempt IRB maturing in 2020, interest at a floating rate which averaged 0.16% during the current year; (2) $7,116 taxable IRB maturing in 2027, interest at a floating rate which averaged 0.20% during the current year and (3) $2,075 tax-exempt IRB maturing in 2029, interest at a floating rate which averaged 0.18% during the current year. The IRBs are remarketed periodically at which time interest rates are reset. The IRBs are secured by letters of credit of equivalent amounts. The letter of credit agreements require, among other things, maintenance of a minimum net worth and prohibit a leverage ratio in excess of a stipulated amount. The Corporation was in compliance with the applicable bank covenants as of December 31, 2013.

Despite principal not beginning to become due until 2020, the IRBs can be put back to the Corporation on short notice if, although considered remote by the Corporation and its bankers, the bonds cannot be remarketed. At that time, the bondholders can seek reimbursement from the letters of credit. As provided by a separate agreement with the Corporation’s bank, funding of the letters of credit, if so drawn against, would be satisfied with equal and immediate borrowings under a separate IRB Standby Letter of Credit facility (the “Facility”). The Facility expires on August 1, 2015 and is expected to be renewed annually to provide for a continual term of greater than one year. However, the Facility includes language regarding “material adverse change” to the Corporation’s business which could result in it being called or cancelled at the bank’s discretion; accordingly, the IRBs remain classified as a current liability. The availability under the Facility is $13,566, equal to the letters of credit, and as of December 31, 2013 no amounts were outstanding.

 

35


NOTE 7 – PENSION AND OTHER POSTRETIREMENT BENEFITS:

Pension Plans

The Corporation has a qualified defined benefit pension plan covering substantially all of its U.S. employees. Generally, benefits are based on years of service multiplied by either a fixed amount or a percentage of compensation. For its U.S. pension plan covered by the Employee Retirement Income Security Act of 1974 (“ERISA”), the Corporation’s policy is to fund at least the minimum actuarially computed annual contribution required under ERISA. Although no minimum contributions were required for any of the three years, voluntary contributions of $5,000 and $7,000 were made in 2013 and 2011, respectively. Additionally, due to voluntary contributions and relief provided by Moving Ahead for Progress in the 21st Century (“MAP-21”), which reduces funding requirements for single-employer defined benefit plans, no minimum contributions are required for 2014; however, voluntary contributions may be made. Estimated benefit payments for subsequent years are $8,746 for 2014, $9,220 for 2015, $9,666 for 2016, $10,125 for 2017, $10,603 for 2018 and $59,563 for 2019 – 2023. The fair value of the plan’s assets as of December 31, 2013 and 2012 approximated $164,085 and $140,218, respectively, in comparison to accumulated benefit obligations of $167,723 and $180,737 for the same periods.

Employees of UES-UK participate in a contributory defined benefit pension plan that was curtailed effective December 31, 2004 and replaced with a defined contribution pension plan. The UES-UK plans are non-U.S. plans and therefore are not covered by ERISA. Instead, the Trustees and UES-UK have agreed to a recovery plan that estimates the amount of employer contributions, based on U.K. regulations, necessary to eliminate the funding deficit of the plan over an agreed period with such estimates subject to change based on the future investment performance of the plan’s assets. Employer contributions to the contributory defined benefit pension plan approximated $1,764, $1,786 and $1,693 in 2013, 2012 and 2011, respectively, and are expected to approximate $1,859 in 2014. The fair value of the plan’s assets as of December 31, 2013 and 2012 approximated $48,536 (£29,315) and $41,875 (£25,774), respectively, in comparison to accumulated benefit obligations of $60,830 (£36,740) and $59,210 (£36,443) for the same periods. Estimated benefit payments for subsequent years are $1,193 for 2014, $1,565 for 2015, $1,475 for 2016, $2,178 for 2017, $1,593 for 2018 and $13,598 for 2019 – 2023. Contributions to the defined contribution pension plan approximated $316, $311 and $415 in 2013, 2012 and 2011, respectively, and are expected to approximate $403 in 2014.

The Corporation also maintains a nonqualified defined benefit pension plan to provide supplemental retirement benefits for selected executives in addition to benefits provided under the Corporate-sponsored pension plans. The assets are held in a grantor tax trust known as a “Rabbi” trust; accordingly, the assets are subject to claims of the Corporation’s creditors, but otherwise must be used only for purposes of providing benefits under the plan. No contributions were made to the trust in 2011–2013 and none are expected in 2014. The fair market value of the trust at December 31, 2013 and 2012, which is included in other noncurrent assets, was $4,092 and $3,358, respectively. Changes in the fair market value of the trust are recorded as a component of other comprehensive income (loss). The plan is treated as a non-funded pension plan for financial reporting purposes. Accumulated benefit obligations approximated $2,794 and $2,082 at December 31, 2013 and 2012, respectively. Estimated benefit payments for subsequent years, which would represent employer contributions, are approximately $52 for 2014, $72 for 2015, $90 for 2016, $112 for 2017, $330 for 2018 and $1,729 for 2019–2023.

Employees at one location participate in a multi-employer plan, I.A.M. National Pension Fund, in lieu of the Corporation’s defined benefit pension plan. A multi-employer plan generally receives contributions from two or more unrelated employers pursuant to one or more collective-bargaining agreements. The assets contributed by one employer may be used to fund the benefits provided to employees of other employers in the plan because the plan assets, once contributed, are not restricted to individual employers. The latest report of summary plan information (for the 2012 plan year) provided by I.A.M. National Pension Fund indicates:

 

   

More than 1,750 employer locations contribute to the plan

   

In excess of 250,000 employees participate in the plan

   

Assets of nearly $9.3 billion and a funded status in excess of 100%.

Less than 100 of the Corporation’s employees participate in the plan and contributions are based on a rate per hour. The Corporation’s contributions to the plan equaled $230, $241 and $246 in 2013, 2012 and 2011, respectively, and represent less than five percent of total contributions to the plan by all contributing employers. Contributions are expected to approximate $261 in 2014.

Other Postretirement Benefits

The Corporation provides postretirement health care benefits principally to the bargaining groups of one subsidiary. The plan covers participants and their spouses and/or dependents who retire under the existing pension plan on other than a deferred vested basis and at the time of retirement have also rendered 15 or more years of continuous service irrespective of age. Other health care benefits are provided to retirees under plans no longer being offered by the Corporation. Retiree life insurance is provided to substantially all retirees. Postretirement benefits with respect to health care are subject to certain Medicare offsets. The Corporation also provides health care and life insurance benefits to former employees of certain discontinued operations. This obligation had been estimated and provided for at the time of disposal. The Corporation’s postretirement health care and life insurance plans are not funded or subject to any minimum regulatory funding requirements. Estimated benefit payments for subsequent years, which would represent employer

 

36


contributions, are approximately $783 for 2014, $809 for 2015, $817 for 2016, $824 for 2017, $854 for 2018, and $5,251 for 2019 – 2023.

Reconciliations

The following provides a reconciliation of projected benefit obligations, plan assets, the funded status of the plans and the amounts recognized in the consolidated balance sheets for the Corporation’s defined benefit plans calculated using a measurement date as of the end of the respective years.

   

U.S. Pension

Benefits(a)

    Foreign Pension
Benefits
    Other Postretirement
Benefits
 
      2013        2012        2013        2012        2013        2012   

Change in projected benefit obligations:

           

Projected benefit obligations at January 1

  $     197,057      $     174,814      $     59,210      $     50,698      $     22,806      $     22,348   

Service cost

    4,424        3,943        0        0        943        804   

Interest cost

    8,070        8,514        2,551        2,506        926        919   

Plan amendments

    681        (42     0        0        0        0   

Foreign currency exchange rate changes

    0        0        1,154        2,434        0        0   

Actuarial (gain) loss

    (20,806     17,289        (823     5,239        (3,949     (623

Participant contributions

    0        0        0        0        423        428   

Benefits paid from plan assets

    (7,812     (7,425     (1,262     (1,667     0        0   

Benefits paid by the Corporation

    (8     (36     0        0        (1,020     (1,070

Projected benefit obligations at December 31

  $ 181,606      $ 197,057      $ 60,830      $ 59,210      $ 20,129      $ 22,806   

Change in plan assets:

           

Fair value of plan assets at January 1

  $ 140,218      $ 133,403      $ 41,875      $ 36,436      $ 0      $ 0   

Actual return on plan assets

    26,679        14,240        5,061        3,586        0        0   

Foreign currency exchange rate changes

    0        0        1,098        1,734        0        0   

Corporate contributions

    5,008        36        1,764        1,786        597        642   

Participant contributions

    0        0        0        0        423        428   

Gross benefits paid

    (7,820     (7,461     (1,262     (1,667     (1,020     (1,070

Fair value of plan assets at December 31

  $ 164,085      $ 140,218      $ 48,536      $ 41,875      $ 0      $ 0   

Funded status of the plans:

           

Fair value of plan assets

  $ 164,085      $ 140,218      $ 48,536      $ 41,875      $ 0      $ 0   

Less benefit obligations

    181,606        197,057        60,830        59,210        20,129        22,806   

Funded status at December 31

  $ (17,521   $ (56,839   $ (12,294   $ (17,335   $ (20,129   $ (22,806

(a)    Includes the nonqualified defined benefit pension plan.

 

       

     
    U.S. Pension
Benefits
    Foreign Pension
Benefits
    Other Postretirement
Benefits
 
      2013        2012        2013        2012        2013        2012   

Amounts recognized in the balance sheets:

           

Employee benefit obligations:

           

Accrued payrolls and employee benefits (current)

  $ (51   $ (25   $ 0      $ (152   $ (752   $ (738

Employee benefit obligations (noncurrent)

    (17,470     (56,814     (12,294     (17,183     (19,377     (22,068
    $ (17,521   $ (56,839   $ (12,294   $ (17,335   $ (20,129   $ (22,806

Accumulated other comprehensive loss (pre-tax):

           

Net actuarial loss

  $     39,562      $     84,825      $     24,386      $     28,155      $     2,213      $     6,403   

Prior service cost

    2,154        2,113        0        0        142        227   

Total (pre-tax)

  $ 41,716      $ 86,938      $ 24,386      $ 28,155      $ 2,355      $ 6,630   

 

 

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Amounts included in accumulated other comprehensive loss as of December 31, 2013 expected to be recognized in net periodic pension and other postretirement costs in 2014 include:

 

      U.S. Pension
Benefits
   Foreign Pension
Benefits
   Other Postretirement
Benefits

Net actuarial loss

   $    4,156    $    602    $      17

Prior service cost

           826              0            19
     $    4,982    $    602    $      36

Investment Policies and Strategies

The investment policies and strategies are determined and monitored by the Investment Committee of the Board of Directors for the U.S. pension plan and by the Trustees (as appointed by UES-UK and the employees of UES-UK) for the foreign pension plan, each of whom employ their own investment managers to manage the plan’s assets in accordance with the policy guidelines. Pension assets are invested with the objective of maximizing long-term returns while minimizing material losses to meet future benefit obligations as they become due. Investments in equity securities are primarily in common stocks of publicly-traded U.S. and international companies across a broad spectrum of industry sectors. Investments in fixed-income securities are principally A-rated or better bonds with maturities of less than ten years, preferred stocks and convertible bonds. The Corporation believes there are no significant concentrations of risk associated with the Plans’ assets.

Attempts to minimize risk include allowing temporary changes to the allocation mix in response to market conditions, diversifying investments among asset categories (e.g., equity securities, fixed-income securities, alternative investments, cash and cash equivalents) and within these asset categories (e.g., economic sector, industry, geographic distribution, size) and consulting with independent financial and legal counsels to assure that the investments and their expected returns and risks are consistent with the goals of the Investment Committee or Trustees.

With respect to the U.S. pension plan, the following investments are prohibited unless otherwise approved by the Investment Committee: stock of the Corporation, futures and options except for hedging purposes, unregistered or restricted stock, warrants, margin trading, short-selling, real estate excluding public or real estate partnerships, and commodities including art, jewelry and gold. The foreign pension plan invests in specific funds. Any investments other than those specifically identified would be considered prohibited.

The following summarizes target asset allocations (within +/-5% considered acceptable) and major asset categories. Certain investments are classified differently for target asset allocation purposes and external reporting purposes.

 

     U.S. Pension Benefits   Foreign Pension Benefits
     

 

Target
Allocation

 

 

Percentage of Plan
Assets

 

 

Target
Allocation

 

 

Percentage of Plan
Assets

   Dec. 31, 2013   2013   2012   Dec. 31, 2013   2013   2012

Equity Securities

   65%   65%   66%   44%   46%   44%

Fixed-Income Securities

   15%   19%   18%   35%   31%   34%

Alternative Investments

   15%   15%   12%   21%   23%   22%

Other (primarily cash and cash equivalents)

   5%   1%   4%   0%   0%   0%

Fair Value Measurement of Plan Assets

Equity securities and mutual funds are actively traded on exchanges and price quotes for these investments are readily available. Similarly, corporate debt and preferred securities consist of fixed-income securities of U.S. and U.K. corporations and price quotes for these investments are readily available. Common collective trust and commingled funds are not traded publicly, but the underlying assets (such as stocks and bonds) held in these funds are traded on active markets and the prices for the underlying assets are readily observable. For securities not actively traded, the fair value may be based on third-party appraisals, discounted cash flow analysis, benchmark yields and inputs that are currently observable in markets for similar securities.

 

38


Investment Strategies

The significant investment strategies of the various funds are summarized below.

 

     
Fund    Investment Strategy    Primary Investment Objective

Temporary

Investment Funds

   Invests primarily in a diversified portfolio of investment grade money market instruments.    Achieve a high level of current income while maintaining stability of principal and liquidity.

Various Equity

Funds

   Each fund maintains a diversified holding in common stock of applicable companies (e.g. common stock of small capitalization companies if a small-cap fund, common stock of medium capitalization companies if a mid-cap fund, common stock of foreign corporations if an international fund, etc.).    Outperform the fund’s related index.
Pooled Funds    Invests primarily in common stocks and other equity securities of issuers organized or conducting business in countries other than the United States.    Exceed the return of the corresponding Morgan Stanley Index.

Various Growth and

Value Funds

   Invests primarily in common stocks and other equity securities generally traded on a major U.S. exchange or the NASDAQ Stock Market.    Exceed the return of the Russell 2500 Growth Index or Value Index, as applicable, over a market cycle.
Return Fund    Invests at least 65% of its assets in a diversified portfolio of fixed-income securities of varying maturities.    Outperform the Barclays Capital U.S. Aggregate Index.

Alternative

Investments –

Managed Funds

   Invests in equities and equity-like asset classes and strategies, (such as public equities, venture capital, private equity, real estate, natural resources and hedged strategies) and fixed-income securities.    Generate a minimum annual inflation adjusted return of 5% and outperform a traditional 70/30 equities/bond portfolio.

Alternative

Investments –

Hedge and Absolute

Return Funds

   Invests in a diversified portfolio of alternative investment styles and strategies.    Generate long-term capital appreciation while maintaining a low correlation with the traditional global financial markets.

 

39


Categories of Plan Assets

Asset categories based on the nature and risks of the U.S. Pension Benefit Plan’s assets as of December 31, 2013 are summarized below.

 

      Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
    

Significant Other
Observable Inputs

(Level 2)

    

Significant
Unobservable
Inputs

(Level 3)

     Total  

Equity Securities:

           

U.S.

           

Capital goods

   $ 1,751       $ 0       $ 0       $ 1,751   

Chemicals

     2,203         0         0         2,203   

Commercial property

     1,747         0         0         1,747   

Commercial services

     1,052         0         0         1,052   

Common collective trust funds

     0         37,495         0         37,495   

Electronics

     1,371         0         0         1,371   

Engineering & construction

     1,096         0         0         1,096   

Food processing

     3,339         0         0         3,339   

Health care

     1,216         0         0         1,216   

Limited partnerships – public equity

     9,125         0         0         9,125   

Manufacturing

     2,653         0         0         2,653   

Oil & gas

     2,342         0         0         2,342   

Retail

     1,006         0         0         1,006   

Technology

     1,855         0         0         1,855   

Other (represents 10 business sectors)

     6,300         0         0         6,300   

International

           

Bank & financial services

     1,808         0         0         1,808   

Common collective trust funds

     0         7,024         0         7,024   

Engineering & construction

     1,187         0         0         1,187   

Oil & gas

     1,969         0         0         1,969   

Real estate

     1,440         0         0         1,440   

Technology

     1,366         0         0         1,366   

Other (represents 9 business sectors)

     3,756         0         0         3,756   

Total Equity Securities

     48,582         44,519         0         93,101   

Fixed-Income Securities:

           

Commingled funds

     0         17,159         0         17,159   

Preferred (represents 4 business sectors)

     5,851         0         0         5,851   

Other (represents 7 business sectors)

     0         3,849         0         3,849   

Total Fixed-Income Securities

     5,851         21,008         0         26,859   

Alternative Investments:

           

Managed funds (a)

     0         0         32,433         32,433   

Hedge and absolute return funds

     0         0         8,389         8,389   

Total Alternative Investments

     0         0         40,822         40,822   

Other (primarily cash and cash equivalents):

           

Mutual funds

     64         0         0         64   

Commingled funds

     0         1,065         0         1,065   

Other (b)

     2,174         0         0         2,174   

Total Other

     2,238         1,065         0         3,303   
     $ 56,671       $ 66,592       $ 40,822       $     164,085   

 

  (a) Includes approximately 43% in equity and equity-like asset securities, 50% in alternative investments (real assets, commodities and resources, absolute return funds) and 7% in fixed income securities and cash and cash equivalents.
  (b) Includes accrued receivables and pending broker settlements.

 

40


Asset categories based on the nature and risks of the U.S. Pension Benefit Plan’s assets as of December 31, 2012 are summarized below.

 

      Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
    

Significant Other
Observable Inputs

(Level 2)

    

Significant
Unobservable
Inputs

(Level 3)

     Total  

Equity Securities:

           

U.S.

           

Capital goods

   $ 1,269       $ 0       $ 0       $ 1,269   

Chemicals

     1,864         0         0         1,864   

Commercial property

     1,919         0         0         1,919   

Commercial services

     1,192         0         0         1,192   

Common collective trust funds

     0         30,451         0         30,451   

Electronics

     1,208         0         0         1,208   

Engineering & construction

     794         0         0         794   

Food processing

     3,549         0         0         3,549   

Health care

     830         0         0         830   

Limited partnerships – public equity

     7,251         0         0         7,251   

Manufacturing

     1,868         0         0         1,868   

Oil & gas

     3,322         0         0         3,322   

Retail

     870         0         0         870   

Technology

     879         0         0         879   

Other (represents 11 business sectors)

     5,196         0         0         5,196   

International

           

Bank & financial services

     1,255         0         0         1,255   

Common collective trust funds

     0         5,916         0         5,916   

Energy

     763         0         0         763   

Real estate

     1,929         0         0         1,929   

Technology

     1,004         0         0         1,004   

Other (represents 10 business sectors)

     3,751         0         0         3,751   

Total Equity Securities

     40,713         36,367         0         77,080   

Fixed-Income Securities:

           

Commingled funds

     0         14,482         0         14,482   

Preferred (represents 3 business sectors)

     5,755         0         0         5,755   

Other (represents 1 business sector)

     684         0         0         684   

Total Fixed-Income Securities

     6,439         14,482         0         20,921   

Alternative Investments:

           

Managed funds (a)

     0         0         30,064         30,064   

Hedge and absolute return funds

     0         0         6,490         6,490   

Total Alternative Investments

     0         0         36,554         36,554   

Other (primarily cash and cash equivalents):

           

Mutual funds

     2,944         0         0         2,944   

Commingled funds

     0         696         0         696   

Other (b)

     2,023         0         0         2,023   

Total Other

     4,967         696         0         5,663   
     $ 52,119       $ 51,545       $ 36,554       $     140,218   

 

  (a) Includes approximately 57% in equity and equity-like asset securities, 32% in alternative investments (real assets, commodities and resources, absolute return funds), 10% in fixed income securities and 1% in cash and cash equivalents.
  (b) Includes accrued receivables and pending broker settlements.

 

41


Asset categories based on the nature and risks of the Foreign Pension Benefit Plan’s assets as of December 31, 2013 are summarized below.

 

      Quoted Prices in 
Active Markets for
Identical Inputs
(Level 1)
    

Significant Other
Observable
Inputs

(Level 2)

    

Significant
Unobservable
Inputs

(Level 3)

     Total  

Equity Securities:

           

Commingled Funds (U.K.)

   $ 4,043       $ 0       $ 0       $ 4,043   

Commingled Funds (International)

     18,086         0         0         18,086   

Total Equity Securities

     22,129         0         0         22,129   

Fixed-Income Securities:

           

Commingled Funds (U.K.)

     15,211         0         0         15,211   

Alternative Investments:

                                   

Hedge and Absolute Return Funds

     0         0         11,041         11,041   

Cash and cash equivalents

     155         0         0         155   
     $ 37,495       $ 0       $ 11,041       $ 48,536   

Asset categories based on the nature and risks of the Foreign Pension Benefit Plan’s assets as of December 31, 2012 are summarized below.

 

      Quoted Prices in 
Active Markets for
Identical Inputs
(Level 1)
    

Significant Other
Observable
Inputs

(Level 2)

    

Significant
Unobservable
Inputs

(Level 3)

     Total  

Equity Securities:

           

Commingled Funds (U.K.)

   $ 3,277       $ 0       $ 0       $ 3,277   

Commingled Funds (International)

     15,140         0         0         15,140   

Total Equity Securities

     18,417         0         0         18,417   

Fixed-Income Securities:

           

Commingled Funds (U.K.)

     14,341         0         0         14,341   

Alternative Investments:

                                   

Hedge and Absolute Return Funds

     0         0         9,031         9,031   

Cash and cash equivalents

     86         0         0         86   
     $ 32,844       $ 0       $ 9,031       $ 41,875   

The table below sets forth a summary of changes in the fair value of the Level 3 plan assets for U.S. and foreign pension plans for the year ended December 31, 2013.

 

      Alternative Investments  
      U.S. Pension Benefits      Foreign Pension Benefits  

Fair value as of January 1, 2013

   $    6,490     $     30,064       $     9,031   

Acquisitions

       2,225                 0         1,100   

Withdrawals

   (1,320)      (2,070)         0   

Realized gain

          563           451         0   

Change in net unrealized gain

          431         3,988         644   

Other, primarily impact from changes in foreign currency exchange rates

               0                   0         266   

Fair value as of December 31, 2013

   $    8,389     $     32,433       $     11,041   

The table below sets forth a summary of changes in the fair value of the Level 3 plan assets for U.S. and foreign pension plans for the year ended December 31, 2012.

 

      Alternative Investments  
      U.S. Pension Benefits      Foreign Pension Benefits  

Fair value as of January 1, 2012

   $     5,940       $     29,280       $ 3,324   

Acquisitions

                 0                     0         5,191   

Withdrawals

             0         (1,919)         (87

Change in net unrealized gain

           550             2,703         333   

Other, primarily impact from changes in foreign currency exchange rates

                 0                     0         270   

Fair value as of December 31, 2012

   $     6,490       $     30,064       $     9,031   

 

 

42


Net Periodic Pension and Other Postretirement Benefit Costs

The actual return on the fair value of plan assets is included in determining the funded status of the plans. In determining net periodic pension costs, the expected long-term rate of return on the market-related value of plan assets is used. Differences between the actual return on plan assets and the expected long-term rate of return on plan assets are classified as part of unrecognized actuarial gains or losses and are recorded as a component of accumulated other comprehensive income (loss) on the consolidated balance sheet. When these gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are amortized to net periodic pension and other postretirement costs over the average remaining service period of employees expected to receive benefits under the plans. When the gains or losses are less than 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are included in net periodic pension and other postretirement costs indirectly as a result of lower/higher interest costs arising from a decrease/increase in the projected benefit obligation.

Net periodic pension and other postretirement benefit costs include the following components for the year ended December 31:

 

     U.S. Pension
Benefits
    Foreign Pension
Benefits
    Other Postretirement Benefits  
      2013     2012     2011     2013     2012     2011     2013      2012      2011  

Service cost

   $     4,424      $     3,943      $     3,115      $ 0      $ 0      $ 0      $ 943       $ 804       $ 643   

Interest cost

     8,070        8,514        8,867            2,551            2,506            2,589        926         919         1,020   

Expected return on plan assets

     (9,368     (9,556     (9,658     (2,485     (2,101     (2,311     0         0         0   

Amortization of prior service cost

     640        668        656        0        0        0        85         85         86   

Amortization of actuarial loss

     7,146        6,087        4,236        687        598        496        241         71         256   

Net cost

   $ 10,912      $ 9,656      $ 7,216      $ 753      $ 1,003      $ 774      $     2,195       $     1,879       $     2,005   

Assumptions

Assumptions are reviewed on an annual basis. The expected long-term rate of return on plan assets is an estimate of average rates of earnings expected to be earned on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. Since these benefits will be paid over many years, the expected long-term rate of return is reflective of current investment returns and investment returns over a longer period. Consideration is also given to target and actual asset allocations, inflation and real risk-free return. The discount rates used in determining future pension obligations and other postretirement benefits for each of the plans are based on rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension and other postretirement benefits. High-quality fixed-income investments are defined as those investments which have received one of the two highest ratings given by a recognized rating agency with maturities of 10+ years.

The following assumptions were used to determine the benefit obligations as of December 31:

 

     U.S. Pension
Benefits
   Foreign Pension
Benefits
         Other Postretirement
Benefits
 
      2013     2012           2013     2012           2013     2012  

Discount rate

     5.00     4.25        4.50     4.50        5.00     4.25

Weighted-average rate of increases in compensation

     4.00     4.00          n/a        n/a             n/a        n/a   

 

 

43


In addition, the assumed health care cost trend rate at December 31, 2013 for other postretirement benefits is 6.50% for 2014 gradually decreasing to 4.75% in 2018. In selecting rates for current and long-term health care assumptions, the Corporation considers known health care cost increases, the design of the benefit programs, the demographics of its active and retiree populations and expectations of inflation rates in the future. A one percentage point increase or decrease in the assumed health care cost trend rate would change the postretirement benefit obligation at December 31, 2013 and the annual benefit expense for 2013 by approximately $2,800 and $350, respectively.

The following assumptions were used to determine net periodic pension and other postretirement benefit costs for the year ended December 31:

     U.S. Pension
Benefits
  Foreign Pension
Benefits
    Other Postretirement
Benefits
 
      2013     2012     2011   2013     2012     2011     2013     2012     2011  

Discount rate

     4.25     5.00   5.75%     4.50     4.90     5.40     4.25     5.00     5.75

Expected long-term rate of return on plan assets

     8.00     8.00   8.00%     6.09     5.61     6.39     n/a        n/a        n/a   

Weighted-average rate of increases in compensation

     4.00     4.00   4.00%     n/a        n/a        n/a        n/a        n/a        n/a   

NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES:

Outstanding standby and commercial letters of credit as of December 31, 2013 approximated $17,906, the majority of which serves as collateral for the IRBs.

In 2010, UES-UK was awarded a government grant of up to $1,325 (£850) toward the purchase and installation of certain machinery and equipment. Approximately $1,083 (£680) has been received to date; the final portion is expected to be received in 2014. Under the agreement, the grant is repayable if certain conditions are not met including achieving and maintaining a targeted level of employment through 2017. UES-UK’s level of employment currently exceeds and is expected to continue to exceed the targeted level of employment; accordingly, no liability has been recorded.

Approximately 55% of the Corporation’s employees are covered by collective bargaining agreements. Of the six bargaining agreements, one of the agreements, representing approximately 20% of the covered employees, expired in 2012; however, employees continue to work under the expired agreement while negotiations proceed. The remaining agreements have expiration dates ranging from May 2014 to October 2017. Collective bargaining agreements expiring in 2014 (representing approximately 62% of covered employees) will be negotiated with the intent to secure mutually beneficial, long-term arrangements.

See Note 17 regarding litigation and Note 18 for environmental matters.

NOTE 9 – STOCK-BASED COMPENSATION:

In May 2011, the shareholders of the Corporation approved the adoption of the 2011 Omnibus Incentive Plan (“Incentive Plan”) which authorizes the issuance of up to 1,000,000 shares of the Corporation’s common stock for grants of equity-based compensation. Awards under the Incentive Plan may include incentive non-qualified stock options, stock appreciation rights, restricted shares and restricted stock units, performance awards, other stock-based awards or short-term cash incentive awards. Unexercised portions of terminated or forfeited awards are available for new awards. The Incentive Plan is administered by the Compensation Committee of the Board of Directors who has the authority to determine, within the limits of the express provisions of the Incentive Plan, the individuals to whom the awards will be granted; the nature, amount and terms of such awards; and the objectives and conditions for earning such awards.

The Compensation Committee granted non-qualified stock options in each of the years as outlined below. Options granted under the Incentive Plan have a ten-year life and vest over a three-year period. Options previously granted under earlier incentive plans have a ten-year life with one-third vesting at the date of grant, one-third vesting on the first anniversary date of the date of grant and one-third vesting on the second anniversary date of the date of grant. The exercise prices are equal to the closing prices of the Corporation’s common stock on the New York Stock Exchange on the dates of grant.

The Incentive Plan also provides for annual grants of shares of the Corporation’s common stock to non-employee directors following the Corporation’s annual shareholder meeting. Each annual director award will be for a number of shares having a fair market value equal to $25 and will fully vest as of the grant date. The number of shares of common stock issued to non-employee directors was 11,656 shares in 2013, 11,320 shares in 2012 and 7,944 shares in 2011.

 

44


The fair value of the options as of the dates of grant was calculated using the Black-Scholes option-pricing model based on the assumptions outlined below.

 

      Grant Date  
     2013      2012      2011  

Options granted

         173,750             164,500             176,250   

Exercise price

   $ 17.16       $ 17.67       $ 25.18   

Assumptions:

        

Expected life in years

     6         6         6   

Risk-free interest rate

     1.26%         0.76%         2.30%   

Expected annual dividend yield

     4.20%         3.01%         2.96%   

Expected forfeiture rate

     5.00%         0%         0%   

Expected volatility

     52.68%         53.46%         56.25%   

Grant date fair value

   $ 5.82       $ 6.68       $ 10.53   

Resulting stock-based compensation expense

   $ 961       $ 1,099       $ 1,857   

Stock-based compensation expense, including expense for shares to be issued to non-employee directors, approximated $1,196, $1,258 and $1,954 for 2013, 2012 and 2011, respectively. The related income tax benefit recognized in the consolidated statements of operations was $419, $440 and $684 for the respective years. Unrecognized stock-based compensation expense equaled $1,348 at December 31, 2013 and is expected to be recognized over a weighted-average period of approximately 2 years.

A summary of stock options outstanding and exercisable and activity for the year ended December 31, 2013 is as follows:

 

     

Shares

Under

Options

          Weighted
Average
Exercise
Price
     Remaining
Contractual
Life In
Years
    

Intrinsic

Value

 

Outstanding at January 1, 2013

     1,166,421             $ 26.00         7.1           $ 1,178   

Granted

     173,750           17.16         

Exercised

     (15,334        13.93         

Forfeited

     (123,084          26.25                     

Outstanding at December 31, 2013

     1,201,753               $ 24.85         6.5           $ 982   

Exercisable at December 31, 2013

     869,586               $ 27.18         5.7           $ 982   

Vested or expected to vest at December 31, 2013

     1,174,266               $     24.95         6.5           $     982   

NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE LOSS:

Net change and ending balances for the various components of other comprehensive income (loss) and for accumulated other comprehensive loss as of and for the year ended December 31, 2011, 2012 and 2013 are summarized below.

 

     

Foreign

Currency

Translation

Adjustments

   

Unrecognized

Components

of Employee

Benefit Plans

   

Unrealized
Holding Gains

(Losses) on

Securities

    Derivatives     Accumulated
Other
Comprehensive
Loss
 

Balance at January 1, 2011

       $ (5,389       $ (55,861       $ 577          $ 1,199          $ (59,474

Net Change

     653        (19,364     (15     (1,090     (19,816

Balance at December 31, 2011

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

Net Change

     3,193        (6,558     71        209        (3,085

Balance at December 31, 2012

     (1,543     (81,783     633        318        (82,375

Net Change

     1,820        34,321        374        (5     36,510   

Balance at December 31, 2013

       $ 277          $ (47,462       $ 1,007          $ 313          $ (45,865

 

45


The following summarizes the line items affected on the consolidated statements of operations for components reclassified from accumulated other comprehensive loss for each of the years ended December 31. Amounts in parentheses represent credits to net income.

 

      2013     2012     2011  

Amortization of unrecognized employee benefit costs:

      

Costs of products sold (excluding depreciation)

   $     5,691      $     4,807      $     3,764   

Selling and administrative

     2,241        1,939        1,371   

Other income (expense)

     867        763        595   

Total before income tax

     8,799        7,509        5,730   

Income tax provision

     (3,156     (3,547     (2,066

Net of income tax

   $ 5,643      $ 3,962      $ 3,664   

Realized gains/losses on sale of marketable securities:

      

Selling and administrative

   $ (87   $ (120   $ 20   

Income tax provision

     30        42        (7

Net of income tax

   $ (57   $ (78   $ 13   

Realized gains/losses from settlement of cash flow hedges:

      

Net sales (foreign currency sales contracts)

   $ 0      $ (197   $ (228

Depreciation (foreign currency purchase contracts)

     (27     (27     (32

Costs of products sold (excluding depreciation) (futures contracts – copper and aluminum)

     419        398        (353

Total before income tax

     392        174        (613

Income tax provision

     (146     (67     230   

Net of income tax

   $ 246      $ 107      $ (383
The income tax expense (benefit) associated with the various components of other comprehensive income (loss) for each of the years ended December 31 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.     
      2013     2012     2011  

Income tax expense (benefit) associated with changes in:

      

Unrecognized employee benefit costs

   $ (15,890   $ 5,256      $ 12,958   

Unrealized holding gains/losses on marketable securities

     (232     (80     15   

Fair value of cash flow hedges

     149        (61     427   

Income tax expense (benefit) associated with reclassification adjustments:

      

Amortization of unrecognized employee benefit costs

     (3,156     (3,547     (2,066

Realized gains/losses from sale of marketable securities

     30        42        (7

Realized gains/losses from settlement of cash flow hedges

     (146     (67     230   

NOTE 11 – DERIVATIVE INSTRUMENTS:

Certain of the Corporation’s operations are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, foreign currency sales contracts are entered into which are designated as cash flow or fair value hedges. As of December, 2013, approximately $21,714 of anticipated foreign-denominated sales has been hedged which are covered by fair value contracts settling at various dates through January 2015. The fair value of assets held as collateral for the fair value contracts as of December 31, 2013 approximated $828. As of December 31, 2013, there are no cash flow contracts outstanding for future sales.

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. The change in fair value of the derivative is deferred in accumulated other comprehensive income (loss). Any portion considered to be ineffective, including that arising from the unlikelihood of an anticipated transaction to occur, is reported as a component of earnings (other income/expense) immediately. Upon occurrence of the anticipated transaction, the futures contract is settled and the change in fair value previously deferred in accumulated other comprehensive income (loss) is reclassified to earnings (costs of products sold, excluding depreciation) when the projected sales occur. At December 31, 2013, approximately 57% or $2,970 of anticipated copper purchases over the next nine months and 38% or $463 of anticipated aluminum purchases over the next six months are hedged. The fair value of assets held as collateral as of December 31, 2013 equaled $400.

 

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The Corporation previously entered into foreign currency purchase contracts to manage the volatility associated with euro-denominated progress payments to be made for certain machinery and equipment. As of December 31, 2010, all contracts had been settled and the underlying fixed assets were placed in service. The change in the fair value is included in accumulated other comprehensive income (loss) and is being amortized to pre-tax earnings (as an offset to depreciation expense) over the life of the underlying assets.

No portion of the existing cash flow or fair value hedges is considered to be ineffective, including any ineffectiveness arising from the unlikelihood of an anticipated transaction to occur. Additionally, no amounts have been excluded from assessing the effectiveness of the hedge.

At December 31, 2013, the Corporation has purchase commitments covering 53% or $4,329 of anticipated natural gas usage over the next two years at one of its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the consolidated balance sheet.

The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.

The following summarizes location and fair value of the foreign currency sales contracts recorded on the consolidated balance sheets as of December 31:

 

      Location    2013     2012  

Cash flow hedge contracts

   Other current assets    $ 0      $           46   

Fair value hedge contracts

   Other current assets              426        218   
   Other noncurrent assets      17        0   

Fair value hedged item

   Accounts receivable      (36     (94
   Other current liability      488        233   
     Other noncurrent liability      40        0   

The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive income (loss). Amounts recognized as and reclassified from accumulated other comprehensive income (loss) are recorded as a component of other comprehensive income (loss) and are summarized below. All amounts are after-tax.

 

For the Year Ended December 31, 2013   

Comprehensive

Income (Loss)

Beginning of
the Year

   

Recognized as

Comprehensive
Income (Loss)

   

Gain (Loss)

Reclassified from

Accumulated Other

Comprehensive

Income (Loss)

   

Comprehensive

Income (Loss)

End of
the Year

 

Foreign currency sales contracts—cash flow hedges

       $ 0          $ 0          $ 0          $ 0   

Foreign currency purchase contracts

     292        <