NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except claim amounts)
1.
|
Unaudited Condensed Consolidated Financial Statements
|
The condensed consolidated balance sheet as of March 31, 2018, and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2018, and 2017, have been prepared by Ampco-Pittsburgh Corporation (the “Corporation”) without audit. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made.
The results of operations for the three months ended March 31, 2018, are not necessarily indicative of the operating results expected for the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.
Recently Implemented Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU 2017-09,
Scope of Modification Accounting
, which provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. The amendment will be applied prospectively to an award modified on or after January 1, 2018, of which there have been none. The amended guidance became effective for the Corporation on January 1, 2018, and did not affect its financial position, operating results or liquidity.
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires an employer who offers defined benefit and postretirement benefit plans to report the service cost component of net periodic benefit cost in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations. The amendment also allows only for the service cost component of net periodic benefit cost to be eligible for capitalization when applicable. The amended guidance does not change the amount of net periodic benefit cost to be recognized, only where it is to be recognized in the income statement. The amended guidance became effective for the Corporation on January 1, 2018, and was applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and other postretirement costs in the income statement. As permitted by the guidance, the Corporation used the amounts disclosed in its pension and other postretirement benefits footnote (Note 6) as the estimate to apply retrospec
tively. The impact of the retrospective guidance was an increase to loss from operations and a decrease to other – net within other income (expense) of $197 for the three months ended March 31, 2017. The guidance did not affect the Corporation’s financial position or liquidity.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance became effective for the Corporation on January 1, 2018, and did not have a significant impact on the presentation of its cash flow statement, and it did not affect the Corporation’s financial position, operating results or liquidity.
In May 2016, April 2016, March 2016 and May 2014, the FASB issued ASUs 2016-12, 2016-10, 2016-08 and 2014-09, respectively,
Revenue from Contracts with Customers (Topic 606)
, which outline a single comprehensive model for companies to use in accounting for revenue from contracts with customers and supersede most previous revenue recognition guidance. The guidance establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. The core principle of Topic 606 is for a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This core principle is supported by a five-step model. It also requires comprehensive disclosures regarding revenue recognition. The guidance became effective January 1, 2018, and could have been implemented on either a full or modified retrospective basis (cumulative-effect adjustment to January 1, 2018 retained earnings). The Corporation adopted the guidance using the modified retrospective approach and by applying it to those contracts that were not completed as of January 1, 2018. There was, however, no cumulative-effect adjustment to the Corporation’s January 1, 2018 retained earnings since the new guidance did not change the Corporation’s timing of revenue recognition, which continues to be at a point in time. See Note 14 for the additional disclosures. In connection with the adoption of ASC 606, the Corporation elected to use the following practical expedients:
|
•
|
to not adjust the promised amount of consideration for the effects of a significant financing component when the Corporation expects, at contract inception, that the period between the Corporation's transfer of a promised product to a customer and the customer’s payment for that good will be one year or less;
|
|
•
|
to exclude from the transaction price any amounts collected from customers for sales and similar taxes;
|
7
|
•
|
to treat incremental costs of obtaining a contract as expense, when incurred, if the amortization period would have been one year or less;
|
|
•
|
to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations;
|
|
•
|
to apply the new revenue standard to a portfolio of contracts (or performance obligations) with similar characteristics if the Corporation reasonably expects that the effects on the financial statements of applying the guidance to the portfolio would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio; and
|
|
•
|
to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
|
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Liabilities
, which simplifies the accounting and disclosures related to equity investments. ASU 2016-01 requires entities to carry certain investments in equity securities at fair value with changes in fair value recorded through net income (loss) versus other comprehensive income (loss). ASU 2016-01 does not apply to investments that qualify for the equity method of accounting or result in consolidation of the investee. The guidance became effective for the Corporation on January 1, 2018, and as required, was adopted by means of a cumulative-effect adjustment to retained earnings as of the beginning of 2018, as follows:
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
As of January 1, 2018, as originally presented
|
|
$
|
38,348
|
|
|
$
|
(44,760
|
)
|
Cumulative effect of ASU 2016-01
|
|
|
632
|
|
|
|
(632
|
)
|
As of January 1, 2018, as adjusted
|
|
$
|
38,980
|
|
|
$
|
(45,392
|
)
|
Recently Issued Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging
, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The amended guidance will be effective for interim and annual periods beginning after December 15, 2018; however, early adoption is permitted. The Corporation is currently evaluating the impact the guidance will have on its financial position and operating results. It will not, however, affect the Corporation’s liquidity.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing generally accepted accounting principles. The guidance becomes effective for the Corporation on January 1, 2019. The Corporation is currently evaluating the impact the guidance will have on its financial position, operating results and liquidity.
At March 31, 2018, and December 31, 2017, approximately 42% of the inventories were valued on the LIFO method with the remaining inventories valued on the FIFO method. Inventories were comprised of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
24,106
|
|
|
$
|
24,249
|
|
Work-in-process
|
|
|
46,987
|
|
|
|
42,840
|
|
Finished goods
|
|
|
28,542
|
|
|
|
24,083
|
|
Supplies
|
|
|
18,545
|
|
|
|
16,389
|
|
Inventories
|
|
$
|
118,180
|
|
|
$
|
107,561
|
|
8
3.
|
Property, Plant and Equipment
|
Property, plant and equipment were comprised of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Land and land improvements
|
|
$
|
12,140
|
|
|
$
|
12,172
|
|
Buildings
|
|
|
68,845
|
|
|
|
68,572
|
|
Machinery and equipment
|
|
|
343,236
|
|
|
|
340,396
|
|
Construction-in-process
|
|
|
5,908
|
|
|
|
5,019
|
|
Other
|
|
|
7,204
|
|
|
|
7,193
|
|
|
|
|
437,333
|
|
|
|
433,352
|
|
Accumulated depreciation and amortization
|
|
|
(224,374
|
)
|
|
|
(218,372
|
)
|
Property, plant and equipment, net
|
|
$
|
212,959
|
|
|
$
|
214,980
|
|
The majority of the assets of the Corporation, except real property including the land and building of Union Electric Steel UK Limited (“UES-UK”), is pledged as collateral for the Corporation’s Revolving Credit and Security Agreement (Note 7). Land and buildings of UES-UK, equal to approximately $2,939 (£2,098) at March 31, 2018, are held as collateral by the trustees of the UES-UK defined benefit pension plan (see Note 6). The gross value of assets under capital lease and the related accumulated amortization as of March 31, 2018, approximated $3,907 and $956, respectively, and at December 31, 2017, approximated $4,082 and $1,101, respectively.
Intangible assets were comprised of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Customer relationships
|
|
$
|
6,560
|
|
|
$
|
6,543
|
|
Developed technology
|
|
|
4,438
|
|
|
|
4,429
|
|
Trade name
|
|
|
2,705
|
|
|
|
2,696
|
|
|
|
|
13,703
|
|
|
|
13,668
|
|
Accumulated amortization
|
|
|
(2,961
|
)
|
|
|
(2,647
|
)
|
Intangible assets, net
|
|
$
|
10,742
|
|
|
$
|
11,021
|
|
Movement in foreign currency exchange rates used to translate intangible assets from local currency to the U.S. dollar changed the gross value of intangible assets between the periods. Amortization expense for the three months ended March 31, 2018, and 2017, was $314 and $298, respectively.
5.
|
Other Current Liabilities
|
Other current liabilities were comprised of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Customer-related liabilities
|
|
$
|
17,830
|
|
|
$
|
18,512
|
|
Accrued interest payable
|
|
|
2,863
|
|
|
|
2,697
|
|
Accrued sales commissions
|
|
|
2,348
|
|
|
|
2,301
|
|
Other
|
|
|
11,535
|
|
|
|
13,579
|
|
Other current liabilities
|
|
$
|
34,576
|
|
|
$
|
37,089
|
|
9
Included in customer-related liabilities are costs expected to be incurred with respect to product warranties and customer deposits. Changes in the liability for product warranty claims consisted of the following:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of the period
|
|
$
|
11,702
|
|
|
$
|
11,521
|
|
Satisfaction of warranty claims
|
|
|
(597
|
)
|
|
|
(870
|
)
|
Provision for warranty claims
|
|
|
1,013
|
|
|
|
1,019
|
|
Reversal of unneeded provision for warranty claims
|
|
|
(1,240
|
)
|
|
|
0
|
|
Other, primarily impact from changes in foreign currency
exchange rates
|
|
|
27
|
|
|
|
78
|
|
Balance at end of the period
|
|
$
|
10,905
|
|
|
$
|
11,748
|
|
The liability for customer deposits is reversed when the Corporation satisfies its performance obligations and control of the inventory transfers to the customer, typically when title transfers. Performance obligations related to customer deposits are expected to be satisfied in less than one year. Changes in customer deposits consisted of the following:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of the period
|
|
$
|
4,573
|
|
|
$
|
6,786
|
|
Satisfaction of performance obligations
|
|
|
(2,512
|
)
|
|
|
(2,088
|
)
|
Receipt of additional deposits
|
|
|
2,637
|
|
|
|
3,240
|
|
Other, primarily changes in foreign currency
exchange rates
|
|
|
4
|
|
|
|
4
|
|
Balance at end of the period
|
|
$
|
4,702
|
|
|
$
|
7,942
|
|
6.
|
Pension and Other Postretirement Benefits
|
On March 23, 2018, in connection with the ratification of the collective bargaining agreement for employees of the Union Electric Steel Harmon Creek Steelworkers Location, employee participation in the qualified domestic defined benefit pension plan will be frozen effective June 1, 2018. Benefit accruals will be replaced with employer non-elective contributions to a defined contribution plan equaling 3% of compensation. The plan freeze will result in remeasurement of the liability, using discount rates and other assumptions as of June 1, 2018; accordingly, the impact of the freeze on the pension liability is currently not known.
Contributions were as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Foreign defined benefit pension plans
|
|
$
|
540
|
|
|
$
|
424
|
|
Other postretirement benefits (e.g., net payments)
|
|
|
307
|
|
|
|
275
|
|
U.K. defined contribution pension plan
|
|
|
91
|
|
|
|
65
|
|
U.S. defined contribution plan
|
|
|
705
|
|
|
|
650
|
|
Net periodic pension and other postretirement costs include the following components:
|
|
Three Months Ended March 31,
|
|
U.S. Defined Benefit Pension Plans
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
335
|
|
|
$
|
411
|
|
Interest cost
|
|
|
2,040
|
|
|
|
2,098
|
|
Expected return on plan assets
|
|
|
(3,284
|
)
|
|
|
(3,127
|
)
|
Amortization of prior service cost
|
|
|
13
|
|
|
|
13
|
|
Amortization of actuarial loss
|
|
|
475
|
|
|
|
936
|
|
Net benefit (income) cost
|
|
$
|
(421
|
)
|
|
$
|
331
|
|
10
|
|
Three Months Ended March 31,
|
|
Foreign Defined Benefit Pension Plans
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
111
|
|
|
$
|
90
|
|
Interest cost
|
|
|
364
|
|
|
|
445
|
|
Expected return on plan assets
|
|
|
(672
|
)
|
|
|
(538
|
)
|
Amortization of prior service credit
|
|
|
(88
|
)
|
|
|
0
|
|
Amortization of actuarial loss
|
|
|
194
|
|
|
|
181
|
|
Net benefit (income) cost
|
|
$
|
(91
|
)
|
|
$
|
178
|
|
|
|
Three Months Ended March 31,
|
|
Other Postretirement Benefit Plans
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
102
|
|
|
$
|
172
|
|
Interest cost
|
|
|
125
|
|
|
|
172
|
|
Amortization of prior service credit
|
|
|
(402
|
)
|
|
|
(405
|
)
|
Amortization of actuarial (gain) loss
|
|
|
(62
|
)
|
|
|
8
|
|
Net benefit income
|
|
$
|
(237
|
)
|
|
$
|
(53
|
)
|
7.
|
Borrowing Arrangements
|
The Corporation has a five-year Revolving Credit and Security Agreement (the “Credit Agreement”) with a syndicate of banks that expires in May 2021. The Credit Agreement provides for initial borrowings not to exceed $100,000 with an option to increase the credit facility by an additional $50,000 at the request of the Corporation and with the approval of the banks. The Credit Agreement includes sublimits for letters of credit not to exceed $40,000, European borrowings not to exceed $15,000, and Canadian borrowings not to exceed $15,000.
Availability under the Credit Agreement is based on eligible accounts receivable, inventory and fixed assets. Amounts outstanding under the credit facility bear interest at the Corporation’s option at either (i) LIBOR plus an applicable margin ranging between 1.25% to 1.75% based on the quarterly average excess availability or (ii) the base rate plus an applicable margin ranging between 0.25% to 0.75% based on the quarterly average excess availability. Additionally, the Corporation is required to pay a commitment fee ranging between 0.25% and 0.375% based on the daily unused portion of the credit facility. As of March 31, 2018, the Corporation had outstanding borrowings under the Credit Agreement of $36,401 (including £1,000 of European borrowings for its U.K. subsidiary). The average interest rate for the three months ended March 31, 2018, was approximately 2.62%. Additionally, the Corporation had utilized a portion of the credit facility for letters of credit (Note 8). As of March 31, 2018, remaining availability under the Credit Agreement approximated $40,000.
The debt outstanding under the Credit Agreement is collateralized by a first priority perfected security interest in substantially all of the assets of the Corporation and its subsidiaries (other than real property). Additionally, the Credit Agreement contains customary affirmative and negative covenants and limitations, including, but not limited to, investments in certain of its subsidiaries, payment of dividends, incurrence of additional indebtedness, upstream distributions from subsidiaries, and acquisitions and divestures. The Corporation must also maintain a certain level of excess availability. If excess availability falls below the established threshold, or in an event of default, the Corporation will be required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00. The Corporation was in compliance with the applicable bank covenants as of March 31, 2018.
Outstanding borrowings of the Corporation as of March 31, 2018, and December 31, 2017, consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Industrial Revenue Bonds ("IRB")
|
|
$
|
13,311
|
|
|
$
|
13,311
|
|
Promissory notes (and interest)
|
|
|
25,795
|
|
|
|
25,395
|
|
Revolving Credit and Security Agreement
|
|
|
36,401
|
|
|
|
20,349
|
|
Minority shareholder loan
|
|
|
5,517
|
|
|
|
5,325
|
|
Capital leases
|
|
|
1,648
|
|
|
|
1,773
|
|
Outstanding borrowings
|
|
|
82,672
|
|
|
|
66,153
|
|
Debt - current portion
|
|
|
(45,225
|
)
|
|
|
(19,335
|
)
|
Long-term debt
|
|
$
|
37,447
|
|
|
$
|
46,818
|
|
11
8
.
|
Commitments and Contingent Liabilities
|
Outstanding standby and commercial letters of credit as of March 31, 2018, approximated $22,636, the majority of which serves as collateral for the IRB debt. In addition, the Corporation issued two surety bonds approximating $4,000 (SEK 33,900) to guarantee certain obligations under a credit insurance arrangement for certain of its foreign pension commitments.
See Note 9 for derivative instruments, Note 15 for litigation and Note 16 for environmental matters.
9.
|
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 March 31, 2018, approximately $22,782 of anticipated foreign-denominated sales has been hedged which are covered by fair value contracts settling at various dates through April 2019.
Additionally, certain of the divisions of the Air and Liquid Processing segment are subject to risk from increases in the price of commodities (copper and aluminum) used in the production of inventory. To minimize this risk, futures contracts are entered into which are designated as cash flow hedges. At March 31, 2018, approximately 46% or $2,464 of anticipated copper purchases over the next 11 months and 56% or $535 of anticipated aluminum purchases over the next six months are hedged.
The Corporation previously entered into foreign currency purchase contracts to manage the volatility associated with Euro-denominated progress payments to be made for certain machinery and equipment. As of December 31, 2010, all contracts had been settled and the underlying fixed assets were placed in service.
No portion of the existing cash flow or fair value hedges is considered to be ineffective, including any ineffectiveness arising from the unlikelihood of an anticipated transaction to occur. Additionally, no amounts have been excluded from assessing the effectiveness of a hedge.
As of March 31, 2018, the Corporation has purchase commitments covering 58% or $864 of anticipated natural gas usage for 2018 for one of its subsidiaries. The commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheet. Purchases of natural gas under previously existing commitments approximated $422 for the three months ended March 31, 2018. There were no purchases of natural gas under previously existing commitments for the three months ended March 31, 2017.
The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
Losses on foreign exchange transactions included in other income (expense) approximated $821 and $1,064 for the three months ended March 31, 2018, and 2017, respectively.
The location and fair value of the foreign currency sales contracts recorded on the condensed consolidated balance sheets were as follows:
|
|
Location
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
$
|
1,412
|
|
|
$
|
961
|
|
|
|
Other noncurrent assets
|
|
|
22
|
|
|
|
0
|
|
|
|
Other current liabilities
|
|
|
59
|
|
|
|
89
|
|
|
|
Other noncurrent liabilities
|
|
|
1
|
|
|
|
1
|
|
Fair value hedged items
|
|
Receivables
|
|
|
(470
|
)
|
|
|
(269
|
)
|
|
|
Other current assets
|
|
|
135
|
|
|
|
169
|
|
|
|
Other noncurrent assets
|
|
|
7
|
|
|
|
16
|
|
|
|
Other current liabilities
|
|
|
1,152
|
|
|
|
907
|
|
|
|
Other noncurrent liabilities
|
|
|
14
|
|
|
|
0
|
|
12
The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive loss. The balances as of March 31, 2018, and 2017, and the amount recognized as and reclassified from accumulated other comprehensive loss
for each of the periods is summarized below. Amounts recognized as comprehensive income (loss) and reclassified from accumulated other comprehensive loss have no tax effect due to the Corporation recording a valuation allowance against its deferred income
tax assets in the related jurisdictions.
Three Months Ended March 31, 2018
|
|
Accumulated
Other
Comprehensive
Income (Loss)
Beginning of
the Year
|
|
|
Plus
Recognized as
Comprehensive
Income (Loss)
|
|
|
Less
Gain
Reclassified
from
Accumulated
Other
Comprehensive
Loss
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
End of
the Period
|
|
Foreign currency purchase contracts
|
|
$
|
239
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
232
|
|
Futures contracts – copper and aluminum
|
|
|
500
|
|
|
|
(315
|
)
|
|
|
202
|
|
|
|
(17
|
)
|
|
|
$
|
739
|
|
|
$
|
(315
|
)
|
|
$
|
209
|
|
|
$
|
215
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
$
|
216
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
209
|
|
Futures contracts – copper and aluminum
|
|
|
335
|
|
|
|
224
|
|
|
|
148
|
|
|
|
411
|
|
|
|
$
|
551
|
|
|
$
|
224
|
|
|
$
|
155
|
|
|
$
|
620
|
|
The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive loss to earnings is summarized below. All amounts are pre-tax.
|
|
Location of
Gain (Loss)
in Statements
|
|
Estimated to
be Reclassified
in the Next
|
|
|
Three Months Ended March 31,
|
|
|
|
of Operations
|
|
12 Months
|
|
|
2018
|
|
|
2017
|
|
Foreign currency purchase contracts
|
|
Depreciation and
amortization
|
|
$
|
27
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Futures contracts – copper and aluminum
|
|
Costs of products
sold (excluding
depreciation and
amortization)
|
|
|
(17
|
)
|
|
|
202
|
|
|
|
148
|
|
10.
|
Accumulated Other Comprehensive Loss
|
Net change and ending balances for the various components of accumulated other comprehensive loss as of and for the three months ended March 31, 2018, and 2017, are summarized below. All amounts are net of tax, where applicable.
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
Employee
Benefit Costs
|
|
|
Unrealized
Holding
Gains
on Marketable
Securities
|
|
|
Cash Flow
Hedges
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance at January 1, 2018, as originally presented
|
|
$
|
(11,932
|
)
|
|
$
|
(34,196
|
)
|
|
$
|
632
|
|
|
$
|
739
|
|
|
$
|
(44,757
|
)
|
Cumulative effect of ASU 2016-01
|
|
|
0
|
|
|
|
0
|
|
|
|
(632
|
)
|
|
|
0
|
|
|
|
(632
|
)
|
Balance at January 1, 2018, adjusted
|
|
|
(11,932
|
)
|
|
|
(34,196
|
)
|
|
|
0
|
|
|
|
739
|
|
|
|
(45,389
|
)
|
Net Change
|
|
|
2,498
|
|
|
|
(283
|
)
|
|
|
0
|
|
|
|
(524
|
)
|
|
|
1,691
|
|
Balance at March 31, 2018
|
|
$
|
(9,434
|
)
|
|
$
|
(34,479
|
)
|
|
$
|
0
|
|
|
$
|
215
|
|
|
$
|
(43,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
(22,973
|
)
|
|
$
|
(38,636
|
)
|
|
$
|
59
|
|
|
$
|
551
|
|
|
$
|
(60,999
|
)
|
Net Change
|
|
|
2,252
|
|
|
|
478
|
|
|
|
179
|
|
|
|
69
|
|
|
|
2,978
|
|
Balance at March 31, 2017
|
|
$
|
(20,721
|
)
|
|
$
|
(38,158
|
)
|
|
$
|
238
|
|
|
$
|
620
|
|
|
$
|
(58,021
|
)
|
13
The following summarizes the line items affected on the condensed consolidated statements of
operations for components reclassified from accumulated other comprehensive loss. Amounts in parentheses represent credits to net income (loss). There was no income tax benefit or expense associated with the various components of other comprehensive income
for either of the periods, due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the jurisdiction where the expense is recognized. Foreign currency translation adjustments exclude the effect of income taxe
s since earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time. On January 1, 2018, ASU 2016-01 became effective, which requires entities to record changes in fair value for certain investments in equity securities t
hrough net income (loss) versus other comprehensive income (loss). Accordingly, no amounts for changes in the fair value of the Corporation’s marketable securities were reclassified from accumulated other comprehensive loss to net income for the three mont
hs ended March 31, 2018. For the three months ended March 31, 2017, the Corporation reclassified an insignificant amount of realized gains from the sale of marketable securities to the condensed consolidated statement of operations.
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Amortization of unrecognized employee benefit costs:
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
$
|
130
|
|
|
$
|
733
|
|
Income tax provision
|
|
|
0
|
|
|
|
0
|
|
Net of tax
|
|
$
|
130
|
|
|
$
|
733
|
|
Realized gains from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
Depreciation and amortization (foreign currency
purchase contracts)
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
Costs of products sold (excluding depreciation and
amortization) (futures contracts – copper and
aluminum)
|
|
|
(202
|
)
|
|
|
(148
|
)
|
Total before income tax
|
|
|
(209
|
)
|
|
|
(155
|
)
|
Income tax provision
|
|
|
0
|
|
|
|
0
|
|
Net of tax
|
|
$
|
(209
|
)
|
|
$
|
(155
|
)
|
11.
|
Stock-Based Compensation
|
The Ampco-Pittsburgh Corporation 2016 Omnibus Incentive Plan (the “Incentive Plan”) authorizes the issuance of up to 1,100,000 shares of the Corporation’s common stock for awards under the Incentive Plan. Awards under the Incentive Plan may include incentive non-qualified stock options, stock appreciation rights, restricted shares and restricted stock units, performance awards, other stock-based awards or short-term cash incentive awards. If any award is canceled, terminates, expires or lapses for any reason prior to the issuance of shares, or if shares are issued under the Incentive Plan and thereafter are forfeited to the Corporation, the shares subject to such awards and the forfeited shares will not count against the aggregate number of shares available under the Incentive Plan. Shares tendered or withheld to pay the option exercise price or tax withholding will continue to count against the aggregate number of shares of common stock available for grant under the Incentive Plan. Any shares repurchased by the Corporation with cash proceeds from the exercise of options will not be added back to the pool of shares available for grant under the Incentive Plan.
The Incentive Plan may be administered by the Board of Directors or the Compensation Committee of the Board of Directors. The Compensation Committee has the authority to determine, within the limits of the express provisions of the Incentive Plan, the individuals to whom the awards will be granted and the nature, amount and terms of such awards.
The Incentive Plan also provides for equity-based awards during any one year to non-employee members of the Board of Directors, based on the grant date fair value, not to exceed $200. The limit does not apply to shares received by a non-employee director at his or her election in lieu of all or a portion of the director’s retainer for board service.
Stock-based compensation expense for the three months ended March 31, 2018, and 2017, equaled $666 and $664, respectively. There was no income tax benefit for either of the periods, due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the jurisdiction where the expense is recognized.
14
The Corporation’s financial assets and liabilities that are reported at fair value in the condensed consolidated balance sheets as of March 31, 2018, and December 31, 2017, were as follows:
|
|
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
As of March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
4,174
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,174
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
1,547
|
|
|
|
0
|
|
|
|
1,547
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
29
|
|
|
|
0
|
|
|
|
29
|
|
Other current liabilities
|
|
|
0
|
|
|
|
1,211
|
|
|
|
0
|
|
|
|
1,211
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
15
|
|
|
|
0
|
|
|
|
15
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
4,204
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,204
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
1,130
|
|
|
|
0
|
|
|
|
1,130
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
|
|
16
|
|
Other current liabilities
|
|
|
0
|
|
|
|
996
|
|
|
|
0
|
|
|
|
996
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
The investments held as other noncurrent assets represent assets held in a “Rabbi” trust for the purpose of providing benefits under a non-qualified defined benefit pension plan. The fair value of the investments is based on quoted prices of the investments in active markets. The fair value of foreign currency exchange contracts is determined based on the fair value of similar contracts with similar terms and remaining maturities. The fair value of futures contracts is based on market quotations. The fair value of the variable-rate IRB debt approximates its carrying value. Additionally, the fair value of trade receivables and trade payables approximates their carrying value.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “Tax Reform”), which became effective as of January 1, 2018. The Tax Reform lowered the U.S. corporate statutory income tax rate from 35% to 21%, implemented a modified territorial tax system and imposed a one-time tax on deemed repatriated earnings of foreign subsidiaries, which the Corporation recorded in the fourth quarter of 2017. Initially, no cash outlay due to the Tax Reform was expected; however, the Internal Revenue Service issued additional guidance regarding the one-time tax on deemed repatriated earnings of foreign subsidiaries. The additional guidance allows the taxpayer to elect to exclude the deemed repatriated earnings from the computation of net operating losses generated in tax year 2017. The Corporation will prevail itself of the election and, as a result, the Corporation will be able to utilize a larger net operating loss carryback, increasing the amount of income tax refund available to it. While the deemed repatriated earnings will not be included in the computation of net operating losses generated in 2017, the Corporation will nonetheless remain liable for a one-time tax on the Corporation’s deemed repatriated earnings. The Corporation plans to make an election to pay this tax over a period of eight years as prescribed in the statute.
In response to the Tax Reform, Staff Accounting Bulletin No. 118 (SAB 118) was issued in 2018 to address the application of U.S. Generally Accepted Accounting Principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform. As of December 31, 2017, in accordance with SAB 118, the Corporation had made a reasonable estimate of the: (i) one-time repatriation transition tax; (ii) increased bonus depreciation for assets placed in service on or after September 27, 2017; and (iii) effects on the Corporation’s existing deferred tax balances, but had not completed its full accounting for the tax effects of the Tax Reform. The Corporation anticipates U.S. regulatory agencies may issue further regulations during 2018, which may alter this estimate. Accordingly, the Corporation will continue to analyze the Tax Reform and refine its provisional amounts, which could potentially impact the measurement of its tax balances. Additionally, the Corporation is continuing to analyze its earnings and profits in foreign jurisdictions and its deferred tax balances.
15
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Reform. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangib
le assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treating any taxes on GILTI inclusions as period cost are both acceptable methods, subject to an accounting policy electio
n. The Corporation is still evaluating the GILTI provisions and has not yet elected an accounting policy for GILTI. The final determination of the tax effects of enactment of the Tax Reform will be completed within the measurement period of up to one year
from the enactment date as permitted by SAB 118, and any adjustments to provisional amounts that are identified during the measurement period will be recorded in the reporting period in which the adjustment is determined.
Presented below are the net sales and income (loss) before income taxes for the Corporation’s two business segments. Other expense, including corporate costs
,
for the three months ended March 31
,
2018, includes the impact of a favorable contractual settlement with a third party of approximately $2,425 and higher pension and other postretirement benefit income of approximately $1,100. For the three months ended March 31, 2017, other expense, including corporate costs, includes $367 of interest, fees and early termination costs associated with extinguishing the outstanding credit facility and term loan of an acquired entity.
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
93,908
|
|
|
$
|
81,702
|
|
Air and Liquid Processing
|
|
|
21,169
|
|
|
|
21,814
|
|
Total Reportable Segments
|
|
$
|
115,077
|
|
|
$
|
103,516
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
Forged and Cast Engineered Products
|
|
$
|
876
|
|
|
$
|
(723
|
)
|
Air and Liquid Processing
|
|
|
2,259
|
|
|
|
2,681
|
|
Total Reportable Segments
|
|
|
3,135
|
|
|
|
1,958
|
|
Other expense, including corporate costs
|
|
|
(2,187
|
)
|
|
|
(6,535
|
)
|
Total
|
|
$
|
948
|
|
|
$
|
(4,577
|
)
|
The Forged and Cast Engineered Products segment produces forged hardened steel rolls – forged mill rolls or cast mill rolls – and ingot and open-die forged products (“forged engineered products”). The Air and Liquid Processing segment produces custom-engineered finned tube heat exchange coils and related heat transfer products, large custom-designed air handling systems and centrifugal pumps. The Corporation’s contracts with customers can be a purchase order from the customer, an order acknowledgment from the Corporation, a longer-term supply agreement between the buyer and 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). Sales agreements typically include a single performance obligation for the manufacturer of product which is satisfied upon transfer of control of the product to the customer.
Transfer of control is assessed based on alternative use of the product manufactured and, under the terms of the sales agreement, enforceable right to payment for performance to date. Transfer of control, and therefore revenue recognition, occurs when title, ownership and risk of loss pass to the customer. 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. Shipping terms vary across the businesses and typically depend on the product, country of origin and type of transportation (truck or vessel).
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 is known at the time of shipment and increases or decreases, as applicable, the selling price of a 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. The Corporation provides a limited warranty on its products and may issue credit notes or replace products free of charge for valid claims. Historically, warranty claims have been insignificant. The Corporation records a provision for product warranties at the time the underlying sale is recorded. The provision is based on historical experience as a percent of sales adjusted for potential claims when a liability is probable and for known claims. Payment terms are standard to the industry and generally require payment 30 days after title transfers.
16
Net sales and income (loss) before income taxes and equity income in joint ve
nture by geographic area for the three months ended March 31, 2018, and 2017, were as follows:
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
58,551
|
|
|
$
|
55,502
|
|
|
$
|
(2,175
|
)
|
|
$
|
(4,886
|
)
|
Foreign
|
|
|
56,526
|
|
|
|
48,014
|
|
|
|
3,123
|
|
|
|
309
|
|
|
|
$
|
115,077
|
|
|
$
|
103,516
|
|
|
$
|
948
|
|
|
$
|
(4,577
|
)
|
Net sales by product line for the three months ended March 31, 2018, and 2017, were as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Forged and cast mill rolls
|
|
$
|
67,488
|
|
|
$
|
64,252
|
|
Forged engineered products
|
|
|
26,420
|
|
|
|
17,451
|
|
Heat exchange coils
|
|
|
6,401
|
|
|
|
6,921
|
|
Centrifugal pumps
|
|
|
8,375
|
|
|
|
10,184
|
|
Air handling systems
|
|
|
6,393
|
|
|
|
4,708
|
|
|
|
$
|
115,077
|
|
|
$
|
103,516
|
|
The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses and are also subject to asbestos litigation as described below. In February 2017, the Corporation, its indirect subsidiary Akers National Roll Company, as well as the Akers National Roll Company Health & Welfare Benefits Plan were named as defendants in a class action complaint filed in the United States District Court for the Western District of Pennsylvania, where the plaintiffs (currently retired former employees of Akers National Roll Company and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union, AFL-CIO) alleged that the defendants breached collective bargaining agreements and violated the benefit plan by modifying medical benefits of the plaintiffs and similarly situated retirees. The defendants moved to dismiss the case, and plaintiffs petitioned the court to compel arbitration. On June 13, 2017, the District Court compelled arbitration and denied the defendants’ motion to dismiss as moot. Defendants appealed this decision to the Third Circuit Court of Appeals on June 21, 2017. Defendants also filed a motion to stay arbitration pending the resolution of the appeal, and that motion was granted on September 5, 2017. The Third Circuit Court of Appeals will next consider whether the District Court erred in compelling arbitration. While no assurance can be given as to the ultimate outcome of this matter, the Corporation believes that the final resolution of this action will not have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Asbestos Litigation
Claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products manufactured by predecessors of Air & Liquid (“Asbestos Liability”). Air & Liquid, 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.
17
Asbestos Claims
The following table reflects approximate information about the claims for Asbestos Liability against the subsidiaries and the Corporation for the three months ended March 31, 2018, and 2017 (claims not in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total claims pending at the beginning of the period
|
|
|
6,907
|
|
|
|
6,618
|
|
New claims served
|
|
|
287
|
|
|
|
336
|
|
Claims dismissed
|
|
|
(112
|
)
|
|
|
(80
|
)
|
Claims settled
|
|
|
(78
|
)
|
|
|
(88
|
)
|
Total claims pending at the end of the period
(1)
|
|
|
7,004
|
|
|
|
6,786
|
|
Gross settlement and defense costs (in 000’s)
|
|
$
|
6,881
|
|
|
$
|
4,888
|
|
Avg. gross settlement and defense costs per claim
resolved (in 000’s)
|
|
$
|
36.22
|
|
|
$
|
29.10
|
|
|
(1)
|
Included as “open claims” are approximately 479 and 445 claims as of March 31, 2018, and 2017, 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 Air & Liquid are parties to a series of settlement agreements (“Settlement Agreements”) with insurers that have coverage obligations for Asbestos Liability (the “Settling Insurers”). Under the Settlement Agreements, the Settling Insurers accept financial responsibility, subject to the terms and conditions of the respective agreements, including overall coverage limits, for pending and future claims for Asbestos Liability. The Settlement Agreements encompass the substantial majority of insurance policies that provide coverage for claims for Asbestos Liability.
The Settlement Agreements include acknowledgements that Howden North America, Inc. (“Howden”) is entitled to coverage under policies covering Asbestos Liability for claims arising out of the historical products manufactured or distributed by Buffalo Forge, 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.
Asbestos Valuations
In 2006, the Corporation retained Hamilton, Rabinovitz & Associates, Inc. (“HR&A”), a nationally recognized expert in the valuation of asbestos liabilities, to assist the Corporation in estimating the potential liability for pending and unasserted future claims for Asbestos Liability. Based on this analysis, the Corporation recorded a reserve for Asbestos Liability claims pending or projected to be asserted through 2013 as of December 31, 2006. HR&A’s analysis has been periodically updated since that time. Most recently, the HR&A analysis was updated in 2016, and additional reserves were established by the Corporation as of December 31, 2016, for Asbestos Liability claims pending or projected to be asserted through 2026. The methodology used by HR&A in its projection in 2016 of the operating subsidiaries’ liability for pending and unasserted potential future claims for Asbestos Liability, which is substantially the same as the methodology employed by HR&A in prior estimates, relied upon and included the following factors:
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HR&A’s interpretation of a widely accepted forecast of the population likely to have been exposed to asbestos;
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epidemiological studies estimating the number of people likely to develop asbestos-related diseases;
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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, 2014, to September 9, 2016;
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an analysis of pending cases, by type of injury claimed and jurisdiction where the claim is filed;
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an analysis of claims resolution history from January 1, 2014, to September 9, 2016, to determine the average settlement value of claims, by type of injury claimed and jurisdiction of filing; and
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an adjustment for inflation in the future average settlement value of claims, at an annual inflation rate based on the Congressional Budget Office’s ten year forecast of inflation.
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Using this information, HR&A estimated in 2016 the number of future claims for Asbestos Liability that would be filed through the year 2026, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2026. This methodology has been accepted by numerous courts.
In conjunction with developing the aggregate liability estimate referenced above, the Corporation also developed an estimate of probable insurance recoveries for its Asbestos Liabilities. In developing the estimate, the Corporation considered HR&A’s projection for settlement or indemnity costs for Asbestos Liability and management’s projection of associated defense costs, 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 2026. Although the Corporation believes that the assumptions employed in the insurance valuation were reasonable and previously consulted with its outside legal counsel and insurance consultant regarding those assumptions, there are other assumptions that could have been employed that would have resulted in materially lower insurance recovery projections.
Based on the analyses described above, the Corporation’s reserve at December 31, 2016, for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2026, was $171,181 of which approximately 70% was attributable to settlement costs for unasserted claims projected to be filed through 2026 and future defense costs. The reserve at March 31, 2018, was $142,869. While it is reasonably possible that the Corporation will incur additional charges for Asbestos Liability and defense costs in excess of the amounts currently reserved, the Corporation believes that there is too much uncertainty to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them beyond 2026. Accordingly, no reserve has been recorded for any costs that may be incurred after 2026.
The Corporation’s receivable at December 31, 2016, 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, 2016, and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $115,945 ($95,388 at March 31, 2018).
The following table summarizes activity relating to insurance recoveries.
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Three Months Ended March 31,
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2018
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2017
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Insurance receivable – asbestos, beginning of the year
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$
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100,342
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$
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115,945
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Settlement and defense costs paid by insurance carriers
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(4,954
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)
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(3,626
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)
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Insurance receivable – asbestos, end of the period
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$
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95,388
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$
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112,319
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The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers and a substantial majority of the insurance recoveries deemed probable is from insurance companies rated A – (excellent) or better by A.M. Best Corporation. There can be no assurance, however, that there will not be further insolvencies among the relevant insurance carriers, or that the assumed percentage recoveries for certain carriers will prove correct. The difference between insurance recoveries and projected costs is not due to exhaustion of all insurance coverage for Asbestos Liability. The Corporation and the subsidiaries have substantial additional insurance coverage which the Corporation expects to be available for Asbestos Liability claims and defense costs that the subsidiaries and it may incur after 2026. However, this insurance coverage also can be expected to have gaps creating significant shortfalls of insurance recoveries against claims expense, which could be material in future years.
The amounts recorded by the Corporation for Asbestos Liabilities and insurance receivables rely on assumptions that are based on currently known facts and strategy. The 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
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results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, t
he 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 r
espect 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.
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Environmental Matters
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The Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned and periodically incurs costs to maintain compliance with environmental laws and regulations. Environmental exposures are difficult to assess and estimate for numerous reasons, including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. In the opinion of management, the potential liability for environmental compliance measures of approximately $439 at March 31, 2018, is considered adequate based on information known to date.
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