FORM 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-898.
AMPCO-PITTSBURGH CORPORATION
Incorporated in Pennsylvania.
I.R.S. Employer Identification No. 25-1117717.
600 Grant Street, Pittsburgh, Pennsylvania 15219
Telephone Number 412/456-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
On November 8, 2005, 9,767,497 common shares were outstanding.
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AMPCO-PITTSBURGH CORPORATION
INDEX
Page No.
Part I - Financial Information:
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations -
Nine and Three Months Ended September 30, 2005
and 2004 (restated) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2005
and 2004 (restated) 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17
Item 3 - Quantitative and Qualitative
Disclosures about Market Risk 20
Item 4 - Controls and Procedures 20
Part II - Other Information:
Item 1 - Legal Proceedings 21
Item 6 - Exhibits 21
Signatures 22
Exhibit Index 23
Exhibits
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
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PART I - FINANCIAL INFORMATION
AMPCO-PITTSBURGH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2005 2004
Assets
Current assets:
Cash and cash equivalents $ 3,455,974 $ 11,339,514
Short-term marketable securities 29,650,000 25,455,000
Receivables, less allowance for
doubtful accounts of $701,370 in
2005 and $955,677 in 2004 40,544,254 37,495,920
Inventories 52,510,763 54,318,553
Other 6,204,674 8,032,423
Total current assets 132,365,665 136,641,410
Property, plant and equipment, net 66,765,244 69,432,041
Prepaid pensions 26,099,073 25,139,810
Goodwill 2,694,240 2,694,240
Other noncurrent assets 4,133,459 4,036,142
$232,057,681 $237,943,643
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 11,113,340 $ 15,446,125
Accrued payrolls and employee benefits 8,484,643 8,512,807
Industrial Revenue Bond debt 13,311,000 13,311,000
Other 15,150,593 17,226,676
Total current liabilities 48,059,576 54,496,608
Employee benefit obligations 26,813,984 28,448,316
Deferred income taxes 19,514,229 18,843,171
Other noncurrent liabilities 3,156,192 7,638,139
Total liabilities 97,543,981 109,426,234
Commitments and contingent liabilities
(Note 6)
Shareholders' equity:
Preference stock - no par value;
authorized 3,000,000 shares; none
issued - -
Common stock - par value $1; authorized
20,000,000 shares; issued and
outstanding 9,762,497 shares in 2005
and 9,747,497 shares in 2004 9,762,497 9,747,497
Additional paid-in capital 104,367,589 104,204,311
Retained earnings 37,992,783 34,162,688
Accumulated other comprehensive loss (17,609,169) (19,597,087)
Total shareholders' equity 134,513,700 128,517,409
$232,057,681 $237,943,643
See Notes to Condensed Consolidated Financial Statements.
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AMPCO-PITTSBURGH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
2005 2004 * 2005 2004 *
Net sales $177,872,725 $151,354,311 $ 56,631,688 $ 50,922,137
Operating costs and expenses:
Costs of products sold
(excluding depreciation) 141,460,631 124,299,303 44,614,970 44,130,224
Selling and administrative 22,109,756 21,051,749 7,465,317 7,195,319
Depreciation 5,038,070 4,791,466 1,640,952 1,581,508
(Gain) loss on disposition
of assets (35,891) 23,961 (34,548) 20,228
Total operating
expenses 168,572,566 150,166,479 53,686,691 52,927,279
Income (loss) from operations 9,300,159 1,187,832 2,944,997 (2,005,142)
Other (expense) income:
Interest expense (389,586) (207,687) (142,601) (80,029)
Other - net 275,271 451,736 283,061 55,855
(114,315) 244,049 140,460 (24,174)
Income (loss) before
income taxes 9,185,844 1,431,881 3,085,457 (2,029,316)
Income tax provision
(benefit) 2,427,000 964,409 976,000 (249,591)
Net income (loss) $ 6,758,844 $ 467,472 $ 2,109,457 $(1,779,725)
Basic and diluted earnings
per common share:
Net income (loss) per
common share - Basic $ 0.69 $ 0.05 $ 0.22 $ (0.18)
Net income (loss) per
common share - Diluted $ 0.69 $ 0.05 $ 0.21 $ (0.18)
Cash dividends declared
per share $ 0.30 $ 0.30 $ 0.10 $ 0.10
Weighted average number of
common shares outstanding:
Basic shares 9,757,978 9,699,654 9,760,120 9,708,964
Diluted shares 9,812,291 9,758,783 9,820,832 9,708,964
* Restated - Note 13.
See Notes to Condensed Consolidated Financial Statements.
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AMPCO-PITTSBURGH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Sept. 30,
2005 2004 *
Net cash flows provided by operating
activities $ 2,003,802 $ 7,877,047
Cash flows from investing activities:
Purchases of property, plant
and equipment (3,205,748) (5,250,618)
Purchases of short-term marketable
securities (29,200,000) (42,135,000)
Proceeds from the sale of short-term
marketable securities 25,005,000 35,955,000
Proceeds from sale of business - 500,000
Proceeds from U.K. governmental grants - 922,500
Proceeds from sale of assets 59,196 38,757
Net cash flows used in investing
activities (7,341,552) (9,969,361)
Cash flows from financing activities:
Proceeds from the issuance of common
stock 178,278 721,500
Dividends paid (2,927,249) (2,907,249)
Net cash flows used in financing
activities (2,748,971) (2,185,749)
Effect of exchange rate changes on cash
and cash equivalents 203,181 (212,271)
Net decrease in cash and cash
equivalents (7,883,540) (4,490,334)
Cash and cash equivalents at
beginning of period 11,339,514 15,488,789
Cash and cash equivalents at
end of period $ 3,455,974 $ 10,998,455
Supplemental information:
Income tax payments $ 1,459,837 $ 570,419
Interest payments $ 378,452 $ 204,171
* Restated - Note 13.
See Notes to Condensed Consolidated Financial Statements.
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AMPCO-PITTSBURGH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Unaudited Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of September 30, 2005, the
condensed consolidated statements of operations for the nine and three
months ended September 30, 2005 and 2004 and the condensed
consolidated statements of cash flows for the nine months ended
September 30, 2005 and 2004 have been prepared by Ampco-Pittsburgh
Corporation (the Corporation) without audit. In the opinion of
management, all adjustments, consisting of only normal and recurring
adjustments necessary to present fairly the financial position,
results of operations and cash flows for the periods presented have
been made. The results of operations for the nine and three months
ended September 30, 2005 are not necessarily indicative of the
operating results expected for the full year.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted.
2.Inventories
At September 30, 2005 and December 31, 2004, approximately 66% and
64%, respectively, of the inventories were valued on the LIFO method,
with the remaining inventories being valued on the FIFO method.
Inventories were comprised of the following:
(in thousands)
September 30, December 31,
2005 2004
Raw materials $13,083 $13,984
Work-in-process 22,743 25,717
Finished goods 10,724 8,320
Supplies 5,961 6,298
$52,511 $54,319
3. Property, Plant and Equipment
Property, plant and equipment were comprised of the following:
(in thousands)
September 30, December 31,
2005 2004
Land and land improvements $ 4,300 $ 4,292
Buildings 25,140 25,170
Machinery and equipment 136,310 135,058
165,750 164,520
Accumulated depreciation (98,985) (95,088)
$ 66,765 $ 69,432
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4.Other Current Liabilities
Other current liabilities were comprised of the following:
(in thousands)
September 30, December 31,
2005 2004
Customer-related liabilities $ 4,652 $ 5,991
Other 10,499 11,236
$15,151 $17,227
Included in customer-related liabilities are costs expected to be
incurred with respect to product warranties. Changes in the liability
for product warranty claims for the nine and three months ended
September 30, 2005 and 2004 consisted of:
(in thousands)
Nine Months Three Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
Balance at the beginning of
the period $ 4,150 $ 3,435 $ 3,459 $ 3,153
Satisfaction of warranty
claims (2,397) (1,557) (731) (305)
Provision for warranty claims 1,798 1,814 665 881
Other, primarily impact from
changes in foreign currency
exchange rates (198) 12 (40) (25)
Balance at end of the period $ 3,353 $ 3,704 $ 3,353 $ 3,704
5.Pension and Other Postretirement Benefits
Contributions for the nine months ended September 30, 2005 and 2004
were as follows:
(in thousands)
2005 2004
U.S. pension benefits plans $ - $ -
Foreign pension benefits plan $ 415 $ 414
Other postretirement benefits
(e.g. net payments) $ 824 $ 669
U.K. defined contribution plan $ 253 $ 13
Net periodic pension and other postretirement costs include the
following components for the nine and three months ended September 30,
2005 and 2004:
(in thousands)
U.S. Pension Benefits:
Nine Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
Service cost $ 1,532 $ 1,530 $ 399 $ 493
Interest cost 5,123 4,996 1,755 1,681
Expected return on plan
assets (7,958) (7,648) (2,644) (2,543)
Amortization of prior
service cost 444 443 148 147
Actuarial gain (84) (100) (16) (38)
Net benefit income $ (943) $ (779) $ (358) $ (260)
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(in thousands)
Foreign Pension Benefits:
Nine Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
Service cost $ - $ 826 $ - $ 275
Interest cost 1,630 1,381 526 460
Expected return on plan
assets (1,430) (1,303) (461) (434)
Actuarial loss 276 578 89 192
Net benefit cost $ 476 $ 1,482 $ 154 $ 493
(in thousands)
Other Postretirement Benefits:
Nine Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
Service cost $ 227 $ 208 $ 76 $ 89
Interest cost 578 579 193 188
Amortization of prior
service benefit (411) (411) (137) (137)
Actuarial loss 125 111 41 32
Net benefit cost $ 519 $ 487 $ 173 $ 172
6. Commitments and Contingent Liabilities
Outstanding standby and commercial letters of credit as of September
30, 2005 approximated $18,824,000, a major portion of which serves as
collateral for the Industrial Revenue Bond debt.
In connection with the sale of certain subsidiaries in 2003, the
Corporation provided typical warranties to the buyer (such as those
relating to income taxes, intellectual property, legal proceedings,
product liabilities and title to property, plant and equipment) which
primarily expire with the statutes of limitations. Losses suffered by
the buyer as a result of the Corporation's breach of warranties are
reimbursable by the Corporation up to approximately $2,000,000. No
amount has been paid to date and based on experience while owning the
subsidiaries, the Corporation expects that no amounts will become due.
During 2004, the Davy Roll operations received $1,498,000 (800,000
GBP) of U.K. governmental grants toward the purchase and installation
of certain machinery and equipment. Under the agreement, the grants
are repayable if certain conditions are not met including achieving
and maintaining a targeted level of employment through March 2009.
7.Stock Option Plan
On July 26, 2005, the Stock Option Committee of the Board of Directors
agreed to issue to selected employees the remaining 45,000 stock
options available under the 1997 Stock Option Plan, as amended. The
exercise price of $13.67 was equivalent to the market price on the
date of grant; accordingly, no stock-based compensation expense was
recognized. The weighted-average fair value of the options, as of the
date of grant using the Black-Scholes option-pricing model, was $3.08
based on the following
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assumptions: dividend yield of 2.9%, expected volatility of 26.3%,
risk-free interest rate of 3.9% and expected option life of 5.7 years.
The following table illustrates the effect on net income (loss) and
earnings per common share if the Corporation had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
There were no options granted in 2004 and previously granted options
are fully vested; accordingly there would be no effect on net income
(loss) or earnings per common share in 2004.
(in thousands, except
shares and per share amounts)
Nine months ended Three months ended
September 30, 2005 September 30, 2005
Net income, as reported $ 6,759 $ 2,109
Add stock-based employee
compensation expense included
in net income, as reported - -
Less stock-based employee
compensation expense
determined under fair value
based method, net of tax (92) (92)
Net income, pro forma $ 6,667 $ 2,017
Basic Diluted Basic Diluted
Earnings per common share,
as reported $ 0.69 $ 0.69 $ 0.22 $ 0.21
Add stock-based employee
compensation expense included
in net income, as reported - - - -
Less stock-based employee
compensation expense
determined under fair value
based method, net of tax (0.01) (0.01) (0.01) -
Earnings per common share,
pro forma $ 0.68 $ 0.68 $ 0.21 $ 0.21
Stock option activity during 2004-2005 was as follows:
Shares Under Exercise Weighted Average
Options Price Exercise Price
Balance at January 1, 2004 484,000 $10.44
Granted during 2004 -
Exercised during 2004 (94,000) $10.30
Balance at December 31, 2004 390,000 $10.47
Granted during 2005 45,000 $13.67
Exercised through
September 30, 2005 (15,000) $10.27
Balance at December 31, 2005 420,000 $10.82
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Stock options outstanding and exercisable as of September 30, 2005
were as follows:
Shares Weighted Average Weighted Average
Under Exercise Price Remaining Contractual
Options Per Share Life in Years
157,500 10.0000 3.25
212,500 10.8125 4.55
5,000 11.1250 5.25
45,000 13.6700 10.00
420,000 4.63
8.Comprehensive Income (Loss)
The Corporation's comprehensive income (loss) for the nine and three
months
ended September 30, 2005 and 2004 consisted of:
(in thousands)
Nine Months Three Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
Net income (loss) $ 6,759 $ 467 $ 2,109 $(1,780)
Foreign currency translation
adjustments (2,639) 140 (472) (313)
Adjustment to minimum
pension liability 1,862 (138) 342 120
Unrealized holding (losses)
gains on marketable
securities (96) 38 57 (23)
Change in fair value
of derivatives 2,861 519 451 (217)
Comprehensive income (loss) $ 8,747 $ 1,026 $ 2,487 $(2,213)
9.Foreign Exchange and Futures Contracts
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, forward foreign exchange contracts
are purchased which are designated as fair value or cash flow hedges.
As of September 30, 2005, approximately $62,027,000 of anticipated
foreign denominated sales has been hedged with the underlying
contracts settling at various dates through March 2010. As of
September 30, 2005, the fair value of contracts expected to settle
within the next 12 months, which is recorded in other current
liabilities, approximated $630,000 and the fair value of the remaining
contracts, which is recorded in other noncurrent liabilities,
approximated $1,114,000. The change in the fair value of the
contracts designated as cash flow hedges is recorded as a component of
accumulated other comprehensive income (loss) and approximated
$(970,000), net of income taxes, as of September 30, 2005. The change
in fair value will be reclassified into earnings when the projected
sales occur with approximately $(560,000) expected to be released to
pre-tax earnings within the next 12 months. During the nine months
ended September 30, 2005 and 2004, approximately $(692,000) and
$(1,197,000), respectively, were released to
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pre-tax earnings, and during the three months ended September 30, 2005
and 2004, approximately $(135,000) and $(314,000), respectively, were
released to pre-tax earnings.
(Losses) gains on foreign exchange transactions approximated $(89,000)
and $297,000 for the nine months ended September 30, 2005 and 2004,
respectively, and $127,000 and $10,000 for the three months ended
September 30, 2005 and 2004, respectively.
In addition, one of the Corporation's subsidiaries is subject to risk
from increases in the price of a commodity (copper) used in the
production of inventory. To minimize this risk, futures contracts are
entered into which are designated as cash flow hedges. At September
30, 2005, approximately 98% or $2,690,000 of anticipated commodity
purchases over the next 12 months are hedged. The fair value of the
contracts expected to be settled within the next 12 months
approximated $690,000 and the fair value of the remaining contracts
approximated $17,000 as of September 30, 2005. The change in the fair
value of the contracts designated as cash flow hedges is recorded as a
component of accumulated other comprehensive income (loss) and
approximated $446,000, net of income taxes, as of September 30, 2005.
The change in the fair value will be reclassified into earnings when the
projected sales occur with approximately $690,000, expected to be
released to pre-tax earnings within the next 12 months. During the
nine months ended September 30, 2005 and 2004, approximately $485,000
and $664,000, respectively, were released to pre-tax earnings and
during the three months ended September 30, 2005 and 2004,
approximately $131,000 and $240,000, respectively, were released to
pre-tax earnings.
10.Business Segments
Presented below are the net sales and income (loss) before income
taxes for the Corporation's two business segments.
(in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
2005 2004 2005 2004
Net sales:
Forged and Cast Rolls $121,435 $ 95,049 $ 38,152 $ 31,764
Air and Liquid Processing 56,438 56,305 18,480 19,158
Total Reportable Segments $177,873 $151,354 $ 56,632 $ 50,922
Income (loss) before
income taxes:
Forged and Cast Rolls $ 10,654 $ 1,571 $ 3,711 $ (1,651)
Air and Liquid Processing 2,617 3,819 728 1,382
Total Reportable Segments 13,271 5,390 4,439 (269)
Other expense, including
corporate costs - net (4,085) (3,958) (1,354) (1,760)
Total $ 9,186 $ 1,432 $ 3,085 $ (2,029)
Income (loss) before income taxes for the Forged and Cast Rolls
segment for the nine months ended September 30, 2005 includes
$2,320,000 of proceeds from the settlement of its business
interruption insurance claim (see Note 12).
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Income (loss) before income taxes for the Air and Liquid Processing
segment for the nine and three months ended September 30, 2005 and
2004 includes the majority of the legal and case management costs
associated with personal injury claims and insurance recovery
litigation related to asbestos-containing product and indemnity
payments not expected to be recovered from insurance carriers (see
Note 11).
11. Litigation and Environmental Matters
The Corporation and its 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 of certain of
the Corporation's subsidiaries. Those subsidiaries, and in some
cases, the Corporation, are defendants (among a number of defendants,
typically over 50 and often over 100) in cases filed in various state
and federal courts. The following table reflects information about
these cases for the nine months ended September 30, 2005:
Approximate open claims at end of period: 17,000
Approximate gross settlement and defense costs: $7,559,000
Approximate claims settled or dismissed during the period: 10,000
Substantially all settlement and defense costs in the above table were
paid by insurers.
The asbestos-related claims, along with certain asbestos-related
claims against another corporation insured under policies covering the
Corporation and its subsidiaries, have given rise to insurance-
coverage litigation in New York state court and in Pennsylvania
federal court. As described below, the insurance coverage disputes at
issue in those litigations have been resolved with respect to nearly
all parties by a comprehensive coverage arrangement. The only party
as to which a coverage arrangement has not yet been entered is one
insurer that issued two known policies to one of the Corporation's
subsidiaries.
On February 7, 2003, Utica Mutual Insurance Company ("Utica") filed a
lawsuit in the Supreme Court of the State of New York, County of
Oneida ("Oneida County Litigation") against the Corporation and
certain of the subsidiaries named in the underlying asbestos actions
(the "Policyholder Defendants") and three other insurance carriers
that provided primary coverage to the Corporation (the "Insurer
Defendants"). In the lawsuit, Utica disputed certain coverage
obligations to the Policyholder Defendants and asserted that the
Insurer Defendants also had defense and indemnity obligations to the
Policyholder Defendants.
As of November 24, 2003, the Policyholder Defendants and Utica had
reached an agreement that settled the Oneida County Litigation as
among themselves(the "Utica Settlement"), although the Oneida County
Litigation remained pending because settlement had not been reached
with all of the Insurer Defendants. Pursuant to the Utica Settlement,
Utica accepted financial responsibility, subject to the limits of its
policies and based on fixed defense percentages and specified
indemnity allocation formulas, for a substantial majority of the
asbestos personal injury claims arising out of
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exposure to alleged asbestos-containing components in products
distributed by the Policyholder Defendants that are subsidiaries of
the Corporation. Utica's agreed share of such defense and
indemnification costs varies depending upon the alleged asbestos-
containing product at issue, whether Utica's primary or umbrella
policies are responsible for the claims and, for indemnification costs
only, the years of the claimant's exposure to asbestos. The
Policyholder Defendants subsequently reached similar arrangements with
four other of their historical insurers.
On January 23, 2004, Utica sought the court's approval to file an
amended complaint seeking additional relief against the Policyholder
Defendants that is substantially identical to the relief Utica seeks
against those defendants in a separate lawsuit filed by Howden
Buffalo, Inc. ("Howden") in the United States District Court for the
Western District of Pennsylvania (the "Pennsylvania Litigation") that
is described below. Utica also sought to add Howden as a defendant in
the Oneida County Litigation.
On November 25, 2003, Howden filed the Pennsylvania Litigation against
the Corporation, Utica and two of the Insurer Defendants, and Howden
subsequently amended its complaint to include three other insurers,
two of which had issued policies to the Company (collectively, the
"Howden Insurer Defendants"). Howden alleged that (1) Buffalo Forge
Company, a former subsidiary of the Corporation, or its predecessors
(collectively or individually, "Buffalo Forge") had rights in certain
policies issued by the Howden Insurer Defendants to the Corporation or
its subsidiaries; (2) those rights were transferred in the 1993
transaction whereby the Corporation sold all of the capital stock of
Buffalo Forge to Howden Group America, Inc. and Howden Group Canada,
Ltd.; and (3) those rights reside in Howden, as successor to Buffalo
Forge. In the lawsuit, Howden sought a judicial determination of the
rights and duties of the Corporation and the Howden Insurer Defendants
with respect to asbestos-related personal injury claims asserted
against Howden arising from the historical operations of Buffalo
Forge, as well as monetary damages from Utica as a result of its
denial of Howden's rights under policies it issued that allegedly
covered Buffalo Forge.
As one of the Howden Insurer Defendants, Utica filed a cross-claim
against the Corporation, and a third-party complaint against two of
its subsidiaries, seeking a declaratory judgment that, to the extent
Utica has defense or indemnity obligations to Howden: (1) Utica is
entitled to contribution, subrogation and reimbursement from the
Corporation or its subsidiaries with respect to defense and indemnity
payments paid on behalf of the Corporation or its subsidiaries; and
(2)the Corporation and its subsidiaries have no rights under the
insurance contracts issued by Utica to Buffalo Forge.
In September 2005, the Corporation and its subsidiaries, Howden, and
all insurer parties to the Oneida County Litigation and Pennsylvania
Litigation (except for one insurer that issued only two policies to
one of the Corporation's subsidiaries) entered into a comprehensive
coverage-in-place arrangement ("Coverage Arrangement")resolving as
among themselves the disputed asbestos insurance coverage issues
arising out of the historical products manufactured or distributed by
Buffalo Forge Company and its former subsidiaries (the "Products").
The Coverage Arrangement reaffirmed the Utica Settlement and coverage
arrangements previously made by the
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Corporation and its subsidiaries with four other insurers. The
Coverage Arrangement also includes an agreement pursuant to which all
parties acknowledge that both the Corporation and its subsidiaries and
Howden are entitled to coverage under policies covering the Products.
The non-settling insurer and the Corporation and its subsidiaries did
not assert claims against each other in either litigation, and are
currently in negotiations.
Based on the Corporation's claims experience to date with the
underlying asbestos claims, the available insurance coverage and the
identity of the subsidiaries that are named in the cases, the
Corporation believes that the pending legal proceedings will not have
a material adverse effect on its consolidated financial condition or
liquidity. The outcome of particular lawsuits, however, could be
material to the consolidated results of operations of the period in
which the costs, if any, are recognized.
There can be no assurance that the Corporation or certain of its
subsidiaries will not be subjected to significant additional claims in
the future or that the Corporation's or its subsidiaries' ultimate
liability with respect to these claims will not present significantly
greater and longer lasting financial exposure than presently
contemplated. The Corporation has made an accrual in its financial
statements to reflect its estimated share of costs for pending
asbestos claims, based on deductible and similar features of its
relevant insurance policies. In addition, the Corporation incurred
uninsured legal costs in connection with advice on certain matters
pertaining to these asbestos cases including insurance litigation,
case management and other issues. Those costs amounted to
approximately $762,000 and $332,000 for the nine and three months
ended September 30, 2005, respectively, in comparison to $807,000 and
$79,000 for the same periods of the prior year.
With respect to environmental matters, the Corporation is currently
performing certain remedial actions in connection with the sale of
real estate previously owned and has been named a Potentially
Responsible Party at four third-party landfill sites. In addition, as
a result of the sale of certain subsidiaries, the Corporation retained
the liability to remediate certain environmental contamination at two
of the sold locations and has agreed to indemnify the buyer against
third-party claims arising from the discharge of certain contamination
from one of these locations, the cost for which was accrued at the
time of sale. Environmental exposures are difficult to assess and
estimate for numerous reasons including lack of reliable data, the
multiplicity of possible solutions, the years of remedial and
monitoring activity required, and identification of new sites.
However, in the opinion of management, the potential liability for all
environmental proceedings of approximately $2,200,000 accrued at
September 30, 2005 is considered adequate based on information known
to date.
12. Flood Damage
In September 2004, the Carnegie, Pennsylvania plant of the
Corporation's Union Electric Steel subsidiary was damaged by flooding
as a result of the remnants of Hurricane Ivan. The Corporation
received $5,740,000 toward its claim of which $3,000,000 was received
in 2004. Of the $2,740,000 received in 2005, $2,320,000 represents
settlement of its business interruption insurance claim which was
recorded as a reduction of costs of products sold (excluding
depreciation) in the accompanying condensed consolidated
- 14 -
statements of operations. The remaining $3,420,000 represents
reimbursement of clean-up costs, repairs to machinery and recovery of
certain fixed expenses.
13. Restatement
Subsequent to the issuance of the Corporation's condensed consolidated
financial statements for the nine and three months ended September 30,
2004, the Corporation determined that deferred tax liabilities were
not required to be provided for interest receivable from its U.K.
subsidiary on intercompany debt owed to the Corporation.
Additionally, subsequent to the issuance of the Corporation's
consolidated financial statements for the year ended December 31,
2004, the Corporation concluded, based on supplemental guidance
issued, that auction-rate securities did not meet the definition of
cash equivalents and should therefore be classified as short-term
marketable securities. Accordingly, the accompanying condensed
consolidated financial statements for the nine and three months ended
September 30, 2004 have been restated from the amounts previously
reported.
The effect of reversing the deferred tax liabilities on the condensed
consolidated statements of operations for the nine and three months
ended September 30, 2004 were as follows:
(in thousands, except per share amounts)
Nine Months Ended Three Months Ended
Previously As Previously As
Reported Restated Reported Restated
Income tax provision
(benefit) $ 1,261 $ 964 $ (152) $ (250)
Net income (loss) 170 467 (1,878) (1,780)
Net income (loss)
per common share:
Basic 0.02 0.05 (0.19) (0.18)
Diluted 0.02 0.05 (0.19) (0.18)
The effect of correcting the classification of its investments in
auction-rate securities from cash and cash equivalents to short-term
marketable securities on the accompanying condensed consolidated
statement of cash flows for the nine months ended September 30, 2004
was as follows:
(in thousands)
Previously As
Reported Restated
Purchases of short-term marketable securities $ - $(42,135)
Proceeds from the sale of short-term marketable
securities - 35,955
Net cash flows used in investing activities (3,789) (9,969)
Net increase (decrease) in cash and
cash equivalents 1,690 (4,490)
Cash and cash equivalents at beginning
of period 35,739 15,489
Cash and cash equivalents at end of period 37,428 10,998
The difference in cash and cash equivalents at the end of period of
$26,430,000 represents the Corporation's investment in short-term
marketable securities at September 30, 2004.
- 15 -
14. Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 151, "Inventory Costs" which confirms that accounting
for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) be recognized as current period
charges and that allocation of fixed production overheads to
inventories be based on normal capacity of the production facilities.
The provisions of SFAS No. 151 will become effective for the
Corporation on January 1, 2006 and are not expected to have a
significant effect on its financial condition or results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets" which amends previously issued guidance by
eliminating the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an
exception for exchanges which do not have commercial substance. The
provisions of SFAS No. 153 became effective for the Corporation on
July 1, 2005. Until the Corporation enters into such transactions, the
standard will not impact the Corporation's financial condition or
results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Shared-Based
Payment" which requires companies to recognize compensation cost for
stock options and other stock-based awards based on their fair value.
Companies will no longer be permitted to follow the intrinsic value
accounting method. The provisions of SFAS No. 123(R) become effective
for the Corporation on January 1, 2006. The Corporation does not have
any remaining options available for grant and granted options are
fully vested; accordingly, the standard will not impact the
Corporation's financial condition or results of operations unless the
Corporation issues share-based payments in future years.
In March 2005, the FASB issued an interpretation of SFAS No. 143,
"Accounting for Conditional Asset Retirement Obligations" which
clarifies the term conditional asset retirement obligation. The
interpretation did not impact the Corporation's financial condition or
results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB
Statement No. 3" which provides guidance for the accounting and
reporting of a change in accounting principle. It also applies to
changes required by a newly-issued accounting pronouncement if that
pronouncement does not provide such guidance. Previously, most changes
in accounting principles were recognized by including the cumulative
effect of changing to the new accounting principle in net income of
the period of the change. SFAS No. 154 requires retrospective
application to prior periods and becomes effective for the Corporation
on January 1, 2006. Until the Corporation makes any such changes, the
standard will not impact the Corporation's financial condition or
results of operations.
- 16 -
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
The Corporation currently operates in two business segments - the Forged
and Cast Rolls segment and the Air and Liquid Processing segment. After
several years of weak sales and earnings, the Forged and Cast Rolls
segment is benefiting from a strong global steel industry and the weaker
dollar which is improving export business, particularly to the Asian and
Indian markets. Despite the continuing high level of raw material and
unprecedented energy costs, the Forged and Cast Rolls segment continues
to improve its income from operations. Backlog of orders is at an all-
time high and is reflective of the demand for rolling mill rolls from
steel producers throughout the world. Additional machinery brought on-
line late in 2004 at Davy Roll is contributing to operational
improvements and has added needed capacity.
The Air and Liquid Processing segment continues to experience weak sales
and earnings resulting from a decline in the level of capital spending by
the industrial sector and a slow down in construction spending. In
particular, demand for lube oil pumps while expected to remain steady is
significantly below peak levels of several years ago due to reduced
demand for gas turbines. The segment is also being impacted by higher
material costs, the slow down in the construction industry particularly
related to air handling systems for the pharmaceutical, institutional and
health care markets, and the resulting decline in margins following
aggressive pricing by competitors as a reduced level of potential
business is pursued. Product offerings have been expanded but no
significant improvement in demand for air handling equipment is expected
until capital spending for new construction improves.
The following MD&A gives effect to the restatement discussed in Note 13
to the condensed consolidated financial statements for the nine and three
months ended September 30, 2004.
Operations for the Nine and Three Months Ended September 30, 2005 and 2004
Net Sales. Net sales for the nine and three months ended September 30,
2005 were $177,873,000 and $56,632,000, respectively, compared to
$151,354,000 and $50,922,000,for the same periods of 2004. A discussion
of sales for the Corporation's two segments is included below. Order
backlogs approximated $289,246,000 at September 30, 2005 against
$164,981,000 at December 31, 2004. Although the backlog has improved for
both of the segments, the increase is principally attributable to the
Forged and Cast Rolls segment. Approximately $222,232,000 of the
September 30, 2005 backlog is scheduled for shipment after December 31,
2005.
Costs of Products Sold. Costs of products sold, excluding depreciation,
were 79.5% and 82.1% of net sales for the nine months ended September 30,
2005 and 2004, respectively, and 78.8% and 86.7% of net sales for the
three months ended September 30, 2005 and 2004, respectively. The
improvement is due primarily to receipt of $2,320,000 from the settlement
of the Corporation's business interruption insurance claim which is
recorded as a reduction of costs of products sold for the nine months
ended September 30, 2005, and raw material surcharges assessed in 2004
which are progressively flowing through to earnings in 2005.
- 17 -
Selling and Administrative. Selling and administrative expenses for the
nine and three months ended September 30, 2005 approximated 12.4% and
13.2% of net sales, respectively, and 13.9% and 14.1% of net sales for
the comparable prior year periods. The decrease is due to higher sales
which dilute the effect of certain selling and administrative costs which
are fixed in nature.
Income (Loss) from Operations. Income (loss) from operations for the
nine and three months ended September 30, 2005 approximated $9,300,000
and $2,945,000, respectively, against $1,188,000 and $(2,005,000) for the
comparable prior year periods. A discussion of year-to-date and third
quarter results for the Corporation's two segments is included below.
Forged and Cast Rolls. Sales and operating income for the nine and three
months ended September 30, 2005 improved over the flood-impaired periods
of the prior year as a result of greater demand from steel producers
throughout the world and better margins as surcharges and price increases
for raw material and energy began to flow through to earnings.
Additionally, during the second quarter, the segment finalized its 2004
flood-related business interruption insurance claim recording income of
$2,320,000. Backlog approximated $256,152,000 as of September 30, 2005
in comparison to $138,729,000 as of December 31, 2004. The increase is
reflective of global demand for products for both the U.S. and U.K.
operations. Approximately $209,960,000 of the September 30, 2005 backlog
is scheduled for shipment after 2005.
Air and Liquid Processing. Sales for the nine and three months ended
September 30, 2005 were comparable to the same periods of the prior year.
Operating income declined due principally to the weak performance of the
air handling business which has been impacted by a decline in
construction activity and depressed pricing on available projects.
However, activity for this operation has begun to show signs of
improvement although margins continue to be depressed. Results for the
pumps operation remain in line with the prior period. Earnings for the
heat exchange coil business have improved due to an increase in sales,
particularly to electric-utility customers. Backlog approximated
$33,094,000 as of September 30, 2005 in comparison to $26,252,000 as of
December 31, 2004; the increase is attributable to improvement in orders
for air handling units and receipt of long lead-time pump orders for U.S.
Navy ships. Approximately $12,272,000 of the September 30, 2005 backlog
is scheduled for shipment after 2005.
Other (Expense) Income. Other (expense) income for the nine months ended
September 30, 2005 and 2004 approximated $(114,000) and $244,000,
respectively. The change is due primarily to losses on foreign exchange
transactions in 2005 versus gains on foreign exchange transactions in
2004. Other (expense) income approximated $140,000 and $(24,000) for the
three months ended September 30, 2005 and 2004, respectively. The
improvement is attributable primarily to higher gains on foreign exchange
transactions in 2005.
Income Taxes. The effective tax rate approximated 26.4% and 67.4% for
the nine months ended September 30, 2005 and 2004, respectively, and
31.6% and (12.3%) for the three months ended September 30, 2005 and 2004,
respectively. The decrease is attributable principally to profitability
of the U.K. operations in 2005 for which no tax liability arises due to
utilization of net operating loss carryforwards and beneficial permanent
deductions in comparison to losses by the U.K. operations in the prior
year for which no tax benefit was recognized since it was more likely
than not the resulting asset would not be realized.
- 18 -
Net Income (Loss). As a result of the above, the Corporation's net
income (loss) for the nine months ended September 30, 2005 and 2004
equaled $6,759,000 and $467,000, respectively, and $2,109,000 and
$(1,780,000), respectively, for the three months ended September 30, 2005
and 2004.
Liquidity and Capital Resources
Net cash flows provided by operating activities approximated $2,004,000
and $7,877,000 for the nine months ended September 30, 2005 and 2004,
respectively. The decrease is attributable primarily to an increase in
accounts receivable arising from higher sales for the third quarter of
2005 versus third quarter of 2004 and a reduction in accounts payable due
primarily to timing of payments.
Net cash flows used in investing activities were $(7,342,000) and
$(9,969,000) for the nine months ended September 30, 2005 and 2004,
respectively. The change is attributable to a reduction in net purchases
of short-term marketable securities and lower capital expenditures.
Capital expenditures approximated $3,206,000 for the nine months ended
September 30, 2005 and $5,251,000 for the nine months ended September 30,
2004 of which approximately $923,000 of U.K. governmental grants were
received during the same period reducing the net cost of the
expenditures. Additionally, the remaining sales proceeds of $500,000
from the 2003 sale of the Plastic Processing Machinery segment were
received in 2004. As of September 30, 2005, future capital expenditures
totaling $3,696,000 have been approved. Funds on-hand and funds
generated by future operations are expected to be sufficient to finance
capital expenditure requirements.
Net cash flows used in financing activities were $(2,749,000) and
$(2,186,000) for the nine months ended September 30, 2005 and 2004,
respectively. Dividends were paid at a rate of $0.30 per share for each
of the nine month periods. Issuance of stock under the Corporation's
stock option plan provided cash of $178,000 and $722,000 for the
respective nine month periods.
The change in the value of local currencies against the dollar,
principally the British pound, impacted cash and cash equivalents by
$203,000 and $(212,000) for the nine months ended September 30, 2005 and
2004.
The Corporation maintains short-term lines of credit and an overdraft
facility in excess of the cash needs of its businesses. The total
available at September 30, 2005 was approximately $8,200,000 (including
2,100,000 GBP in the U.K. and 400,000 Euros in Belgium).
Litigation and Environmental Matters
See Note 11 to the condensed consolidated financial statements.
Critical Accounting Pronouncements
The Corporation's critical accounting policies, as summarized in its Form
10-K/A for the year ended December 31, 2004, remain unchanged.
Recently Issued Accounting Pronouncements
See Note 14 to the condensed consolidated financial statements.
- 19 -
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements made by or on behalf of the
Corporation. Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of the Form 10-Q contain
forward-looking statements that reflect the Corporation's current views
with respect to future events and financial performance. Forward-looking
statements are identified by the use of the words "believe," "expect,"
"anticipate," "estimate," "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. In addition, there may be events in the future that the
Corporation is not able to accurately predict or control which may cause
actual results to differ materially from expectations expressed or
implied by forward-looking statements. The Corporation undertakes no
obligation to update any forward-looking statement, whether as a result
of new information, events or otherwise. These forward-looking statements
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Form 10-Q into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 and shall
not otherwise be deemed filed under such Acts.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Corporation's exposure to market
risk from December 31, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. An evaluation of the
effectiveness of the Corporation's disclosure controls and procedures as
of the end of the period covered by this report was carried out under the
supervision, and with the participation, of the management, including the
principal executive officer and principal financial officer. Disclosure
controls and procedures are defined under Securities and Exchange
Commission ("SEC") rules as controls and other procedures that are
designed to ensure that information required to be disclosed by a company
in reports that it files under the Exchange Act are recorded, processed,
summarized and reported within the required time periods. Based on that
evaluation, the Corporation's management, including the principal
executive officer and principal financial officer, have concluded that
the Corporation's disclosure controls and procedures were effective as of
September 30, 2005.
(c) Changes in internal control over financial reporting. During the
quarter ended September 30, 2005, there have been no changes in our
internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
- 20 -
PART II - OTHER INFORMATION
AMPCO-PITTSBURGH CORPORATION
Item 1 Legal Proceedings
The information contained in Note 11 to the condensed
consolidated financial statements (Litigation and Environmental
Matters) is incorporated herein by reference.
Items 2-5 None
Item 6 Exhibits
(3) Articles of Incorporation and By-laws
(a) Articles of Incorporation
Incorporated by reference to the Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1983, March
31, 1984, March 31, 1985, March 31, 1987 and September
30, 1998.
(b) By-laws
Incorporated by reference to the Quarterly Reports on
Form 10-Q for the quarters ended September 30, 1994,
March 31, 1996, June 30, 2001 and June 30, 2004.
(4) Instruments defining the rights of securities holders
(a) Rights Agreement between Ampco-Pittsburgh Corporation and
Chase Mellon Shareholder Services dated as of
September 28, 1998.
Incorporated by reference to the Form 8-K Current Report
dated September 28, 1998.
(31.1) Certification of the principal executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
(31.2) Certification of the principal financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(32.2) Certification of principal financial officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- 21 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AMPCO-PITTSBURGH CORPORATION
DATE: November 8, 2005 BY: __________________________
Robert A. Paul
Chairman and
Chief Executive Officer
DATE: November 8, 2005 BY: ___________________________
Marliss D. Johnson
Vice President
Controller and Treasurer
- 22 -
AMPCO-PITTSBURGH CORPORATION
EXHIBIT INDEX
Exhibit (31.1) Certification of principal executive officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of principal financial officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32.1) Certification of principal executive officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2) Certification of principal financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- 23 -