NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Description of Business
Ampco-Pittsburgh Corporation and its subsidiaries (the “Corporation”) manufacture and sell highly engineered, high-performance specialty metal products and customized equipment utilized by industry throughout the world. It operates in two business segments, the Forged and Cast Engineered Products segment and the Air and Liquid Processing segment.
The
Forged and Cast Engineered Products
segment produces forged hardened steel rolls, cast rolls, open-die forged products, and specialty steel ingot and cast billet products. Forged hardened steel rolls are used mainly in rolling mills by producers of steel, aluminum and other metals. Cast rolls, which are produced in a variety of iron and steel qualities, are used mainly in hot and cold strip mills, medium/heavy section mills and plate mills. Ingot and forged engineered products are used in the oil and gas industry and the aluminum and plastic extrusion industries. Specialty steel ingot and cast billet products are used primarily by the open-die industry and downstream rolled-steel producers. The segment has operations in the United States, England, Sweden, Slovenia, Canada and an equity interest in three joint venture companies in China. Collectively, the segment primarily competes with European, Asian and North and South American companies in both domestic and foreign markets and distributes a significant portion of its products through sales offices located throughout the world.
The
Air and Liquid Processing
segment includes Aerofin, Buffalo Air Handling and Buffalo Pumps, all divisions of Air & Liquid Systems Corporation (“Air & Liquid”), a wholly owned subsidiary of the Corporation. Aerofin produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including OEM/commercial, nuclear power generation and industrial process. Buffalo Air Handling produces large custom-designed air handling systems for institutional (e.g., hospital, university), pharmaceutical and general industrial building markets. Buffalo Pumps manufactures centrifugal pumps for the fossil-fueled power generation, marine defense and industrial refrigeration industries. The segment has operations in Virginia and New York with headquarters in Carnegie, Pennsylvania. The segment distributes a significant portion of its products through a common independent group of sales offices located throughout the United States and Canada.
Discontinued Operations
In October 2018, the Board of Directors of the Corporation approved the sale of ASW Steel Inc. (“ASW”). ASW is a specialty steel producer based in Canada and is part of the Forged and Cast Engineered Products segment. The sale of ASW represents a strategic shift that will have a major impact on the Corporation’s results of operations and has been accounted for as a discontinued operation. See Note 2.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Corporation’s accounting policies conform to accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include assessing the carrying value of long-lived assets including intangibles and assets of discontinued operations held for sale, valuing the assets and obligations related to employee benefit plans, accounting for loss contingencies associated with claims and lawsuits, and accounting for income taxes. Actual results could differ from those estimates. A summary of the significant accounting policies followed by the Corporation is presente
d below.
Basis of Presentation
The financial information included herein reflects the consolidated financial position of the Corporation as of December 31, 2018, and 2017, and the consolidated results of its operations and cash flows for the years then ended. The Corporation has presented the assets and liabilities of ASW and its operating results and cash flows as discontinued operations in the accompanying financial statements as of and for the year ended December 31, 2018, and 2017. All footnotes exclude balances and activity of ASW unless otherwise noted. Additionally, certain prior year balances in the accompanying consolidated statement of operations and segment information for the year ended December 31 2017, have been recast to conform to the current year presentation for the adoption of Accounting Standards Update (“ASU”) 2018-14,
Changes to the Disclosure Requirements for Defined Benefit Plans.
22
Consolidation
The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of all majority owned subsidiaries and joint ventures over which the Corporation exercises control and, when applicable, entities for which the Corporation has a controlling financial interest or is the primary beneficiary. Investments in joint ventures where the Corporation owns 20% to 50% of the voting stock and has the ability to exercise significant influence over the operating and financial policies of the joint venture are accounted for using the equity method of accounting. Investments in joint ventures where the Corporation does not have the ability to exercise significant influence over the operating and financial policies of the joint venture are accounted for using the cost method of accounting. Investments in joint ventures are reviewed for impairment whenever events or circumstances indicate the carrying amount of the investment may not be recoverable. If the estimated fair value of the investment is less than the carrying amount and such decline is determined to be “other than temporary,” then the investment may not be fully recoverable potentially resulting in a write-down of the investment value. Intercompany accounts and transactions are eliminated.
Cash and Cash Equivalents
Securities with purchased original maturities of three months or less are considered to be cash equivalents. The Corporation maintains cash and cash equivalents at various financial institutions which may exceed federally insured amounts.
Inventories
Inventories are valued at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. Cost includes the cost of raw materials, direct labor and overhead for those items manufactured but not yet sold or for which control has not yet transferred to the customer. Fixed production overhead is allocated to inventories based on normal capacity of the production facilities. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to inventories is not increased as a consequence of abnormally low production or plant idling. Costs for abnormal amounts of spoilage, handling costs and freight costs are charged to expense when incurred. Cost of domestic raw materials, work-in-process and finished goods inventories is primarily determined by the last-in, first-out (LIFO) method. Cost of domestic supplies and foreign inventories is determined primarily by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment purchased new is recorded at cost with depreciation computed using the straight-line method over the following estimated useful lives: land improvements – 15 to 20 years, buildings – 25 to 50 years and machinery and equipment – 3 to 25 years. Property, plant and equipment acquired as part of a business combination is recorded at its estimated fair value with depreciation computed using the straight-line method over the estimated remaining useful lives based in part on third-party valuations. Expenditures that extend economic useful lives are capitalized. Routine maintenance is charged to expense. Gains or losses are recognized on retirements or disposals. Property, plant and equipment are reviewed for impairment at least annually, as of October 1, or whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If the undiscounted cash flows generated from the use and eventual disposition of the assets are less than their carrying value, then the asset value may not be fully recoverable potentially resulting in a write-down of the asset value. Estimates of future cash flows are based on expected market conditions over the remaining useful life of the primary asset(s). In addition, the remaining depreciation period for the impaired asset would be reassessed and, if necessary, revised. Proceeds from government grants are recorded as a reduction in the purchase price of the underlying assets and amortized against depreciation over the lives of the related assets.
Intangible Assets
Intangible assets primarily consist of developed technology, customer relationships and trade name. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful life, which is determined by identifying the period over which most of the cash flows are expected to be generated. Additionally, intangible assets, both finite and indefinite lived, are reviewed for impairment at least annually, as of October 1, or whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. For finite-lived intangible assets, if the undiscounted cash flows attributable to the assets are less than their carrying value, then the asset value may not be fully recoverable, potentially resulting in a write-down of the asset value. For indefinite-lived intangible assets, if the discounted cash flows attributable to the assets are less than their carrying value, then the asset value may not be fully recoverable, potentially resulting in a write-down of the asset value. Also, if the estimate of an intangible asset’s remaining useful life changes, the remaining carrying value of the intangible asset will be amortized prospectively over the revised remaining useful life.
23
Assets
of Discontinued Operations
H
eld for
S
ale
Assets are classified as “held for sale” when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets are classified as “held for sale” in the accompanying consolidated balance sheet. Assets classified as “held for sale” are reported at the lower of their carrying value or fair value less costs to sell. Depreciation of assets ceases upon designation as “held for sale”.
Debt Issuance Costs
Debt issuance costs are amortized as interest expense over the scheduled maturity period of the debt. The costs related to the line-of-credit arrangement are amortized over the term of the arrangement, regardless of whether there are any outstanding borrowings. Unamortized debt issuance costs are either recognized as a direct deduction from the carrying amount of the related debt or, if related to a line-of-credit facility, as an other noncurrent asset on the consolidated balance sheet.
Product Warranty
A warranty that ensures basic functionality is an assurance type warranty. A warranty that goes beyond ensuring basic functionality is considered a service type warranty. The Corporation provides assurance type warranties; it does not provide service type warranties.
Provisions for assurance type warranties are recognized at the time the underlying sale is recorded. The provision is based on historical experience as a percentage of sales adjusted for potential claims when a liability is probable and for known claims.
Employee Benefit Plans
Funded Status
If the fair value of the plan assets exceeds the projected benefit obligation, the over-funded projected benefit obligation is recognized as an asset (prepaid pensions within other noncurrent assets) on the consolidated balance sheet. Conversely, if the projected benefit obligation exceeds the fair value of the plan assets, the under-funded projected benefit obligation is recognized as a liability (employee benefit obligations) on the consolidated balance sheet. Gains and losses arising from the difference between actuarial assumptions and actual experience and unamortized prior service costs are recorded as a separate component of accumulated other comprehensive loss.
Net Periodic Pension and Other Postretirement Costs
Net periodic pension and other postretirement costs includes service cost, interest cost, expected rate of return on the market-related value of plan assets, amortization of prior service costs, and recognized actuarial gains or losses. When actuarial gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are amortized to net periodic pension and other postretirement costs over the average remaining service period of the employees expected to receive benefits under the plan or over the remaining life expectancy of the employees expected to receive benefits if “all or almost all” of the plan’s participants are inactive. When actuarial gains or losses are less than 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are included in net periodic pension and other postretirement costs indirectly as a result of lower/higher interest costs arising from a decrease/increase in the projected benefit obligation. The market-related value of plan assets is determined using a five-year moving average which recognizes gains or losses in the fair market value of assets at the rate of 20% per year.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes changes in assets and liabilities from non-owner sources including foreign currency translation adjustments, unamortized prior service costs and unrecognized actuarial gains and losses associated with employee benefit plans, changes in the fair value of derivatives designated and effective as cash flow hedges, and, through December 31, 2017, unrealized holding gains and losses on securities designated as available for sale. Effective January 1, 2018, the Corporation adopted the provisions of ASU 2016-01,
Recognition and Measurement of Financial Assets and Liabilities
, which requires changes in unrealized holding gains and losses on securities designated as available for sale to be recorded through net income (loss) versus other comprehensive income (loss). The impact of the adoption of ASU 2016-01 is summarized under Recently Implemented Accounting Pronouncements in Note 1.
24
Certain components of other comprehensive income (loss) are presented net of income tax. Foreign currency translation adjustments exclude the effect of income tax since earnings of non-U.S. subsidi
aries are deemed to be reinvested for an indefinite period of time.
Reclassification adjustments are amounts which are realized during the year and, accordingly, are deducted from other comprehensive income (loss) in the period in which they are included in net income (loss) or when a transaction no longer qualifies as a cash flow hedge. Foreign currency translation adjustments are included in net income (loss) upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. With respect to employee benefit plans, unamortized prior service costs are included in net income (loss), either immediately upon curtailment of the employee benefit plan or over the average remaining service period or life expectancy of the employees expected to receive benefits, and unrecognized actuarial gains and losses are included in net income (loss) indirectly as a result of lower/higher interest costs arising from a decrease/increase in the projected benefit obligation. Prior to the adoption of ASU 2016-01, unrealized holding gains and losses on securities were included in net income (loss) when the underlying security was sold. Changes in the fair value of derivatives are included in net income (loss) when the projected sale occurs or, if a foreign currency purchase contract, over the estimated useful life of the underlying asset.
Foreign Currency Translation
Assets and liabilities of the Corporation’s foreign operations are translated at year-end exchange rates and the statements of operations are translated at the average exchange rates for the year. Gains or losses resulting from translating foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive loss until the entity is sold or substantially liquidated.
Revenue Recognition
Revenue from sales is recognized when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectability is reasonably assured, and control of the product has transferred to the customer. Persuasive evidence of an arrangement identifies the final understanding between the parties as to the specific nature and terms of the agreed-upon transaction that creates enforceable obligations. It can be in the form of an executed purchase order from the customer, combined with an order acknowledgment from the Corporation, a sales agreement or longer-term supply agreement between the customer 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 manufacturing of product which is satisfied upon transfer of control of the product to the customer.
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. In certain circumstances, the Corporation may require a deposit from the customer, a letter of credit, or another form of assurance for payment. An allowance for doubtful accounts is maintained based on historical experience. Payment terms are standard to the industry and generally require payment 30 days after control transfers to the customer.
Transfer of control is assessed based on alternative use of the product manufactured and, under the terms of the sales agreement, an 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).
There are no customer-acceptance provisions other than customer inspection and testing prior to shipment. Post-shipment obligations are insignificant.
Amounts billed to the customer for shipping and handling are recorded within net sales and the related costs are recorded within costs of products sold (excluding depreciation and amortization). Amounts billed for taxes assessed by various government authorities (e.g., sales tax, value-added tax, etc.) are excluded from the determination of net income (loss) and instead are recorded as a liability until remitted to the government authority.
25
Stock-Based Compensation
Stock-based compensation, such as stock options, restricted stock units and performance shares, is recognized over the vesting period based upon the fair value of the award at the date of grant. For stock options, the fair value is determined by the Black Scholes option pricing model and is expensed over the vesting period of three years. For restricted stock units, the fair value is equal to the closing price of the Corporation’s common stock on the New York Stock Exchange (“NYSE”) on the date of grant and is expensed over the vesting period, typically three years. For performance share awards that vest subject to a performance condition, the fair value is equal to the closing price of the Corporation’s stock on the NYSE on the date of grant. For performance share awards that vest subject to a market condition, fair value is determined using a Monte Carlo simulation model. The fair value of performance share awards is expensed over the performance period when it is probable that the performance condition will be achieved.
Derivative Instruments
Derivative instruments which include forward exchange (for foreign currency sales and purchases) and futures contracts are recorded on the consolidated balance sheet as either an asset or a liability measured at their fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. To the extent that a derivative is designated and effective as a cash flow hedge of an exposure to future changes in value, the change in the fair value of the derivative is deferred in accumulated other comprehensive loss. Any portion considered to be ineffective, including that arising from the unlikelihood of an anticipated transaction to occur, is reported as a component of earnings (other income/expense) immediately.
Upon occurrence of the anticipated sale, the foreign currency sales contract designated and effective as a cash flow hedge is de-designated as a fair value hedge and the change in fair value previously deferred in accumulated other comprehensive loss is reclassified to earnings (net sales) with subsequent changes in fair value recorded as a component of earnings (other income/expense). Upon occurrence of the anticipated purchase, the foreign currency purchase contract is settled and the change in fair value deferred in accumulated other comprehensive loss is reclassified to earnings (depreciation and amortization expense) over the life of the underlying assets. Upon settlement of a futures contract, the change in fair value deferred in accumulated other comprehensive loss is reclassified to earnings (costs of products sold, excluding depreciation and amortization) when the corresponding inventory is sold and revenue is recognized. To the extent that a derivative is designated and effective as a hedge of an exposure to changes in fair value, the change in the derivative’s fair value will be offset in the statement of operations by the change in the fair value of the item being hedged and is recorded as a component of earnings (other income/expense). Cash flows associated with the derivative instruments are recorded as a component of operating activities on the consolidated statement of cash flows.
The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy of inputs is used to determine fair value measurements with three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities and are considered the most reliable evidence of fair value. Level 2 inputs are observable prices that are not quoted on active exchanges. Level 3 inputs are unobservable inputs used for measuring the fair value of assets or liabilities.
Legal Costs
Legal costs expected to be incurred in connection with loss contingencies are accrued when such costs are probable and estimable.
Income Taxes
Income taxes are recognized during the year in which transactions enter into the determination of financial statement income. Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book carrying amount and the tax basis of assets and liabilities including net operating loss carryforwards. A valuation allowance is provided against a deferred income tax asset when it is “more likely than not” the asset will not be realized. Similarly, if a determination is made that it is “more likely than not” the deferred income tax asset will be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded. Penalties and interest are recognized as a component of the income tax provision.
In January 2018, the Financial Accounting Standards Board (the “FASB”) released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Cuts and Jobs Act (the “Tax Reform”). The GILTI provisions impose a
26
tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.
Any taxes on GILTI inclusions are accounted for as period costs.
Tax benefits are recognized in the financial statements for tax positions taken or expected to be taken in a tax return when it is “more likely than not” that the tax authorities will sustain the tax position solely on the basis of the position’s technical merits. Consideration is given primarily to legislation and statutes, legislative intent, regulations, rulings and case law as well as their applicability to the facts and circumstances of the tax position when assessing the sustainability of the tax position. In the event a tax position no longer meets the “more likely than not” criteria, the tax benefit is reversed by recognizing a liability and recording a charge to earnings. Conversely, if a tax position subsequently meets the “more likely than not” criteria, a tax benefit would be recognized by reducing the liability and recording a credit to earnings.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per common share is similar to basic earnings per common share except that the denominator is increased to include the dilutive effect of the net additional common shares that would have been outstanding assuming exercise of outstanding stock awards, calculated using the treasury stock method. The computation of diluted earnings per share would not assume the exercise of an outstanding stock award if the effect on earnings per common share would be antidilutive. Similarly, the computation of diluted earnings per share would not assume the exercise of outstanding stock awards if the Corporation incurred a net loss since the effect on earnings per common share would be antidilutive. The weighted average number of common shares outstanding assuming exercise of dilutive stock awards was 12,447,919 for 2018, and 12,330,401 for 2017. Weighted-average outstanding stock awards excluded from the diluted earnings per common share calculation, since the effect would have been antidilutive, were 904,086 for 2018, and 1,013,008 for 2017.
Recently Implemented Accounting Pronouncements
In August 2018,
the FASB
issued ASU 2018-14,
Changes to the Disclosure Requirements for Defined Benefit Plans
, which modifies the disclosure requirements for defined benefit and other postretirement plans. The amended guidance eliminates certain disclosures associated with accumulated other comprehensive income (loss), plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs. Additionally, new disclosure requirements have been added to address significant gains and losses related to changes in benefit obligations. The guidance becomes effective for interim and annual periods beginning after
December 15, 2020; however, early adoption is permitted. All amendments are required to be adopted on a retrospective basis for all periods presented. The Corporation adopted the provisions of ASU 2018-14 in its 2018 accounts (see Note 9). The new guidance did not affect the Corporation’s financial position, operating results or liquidity.
In August 2018, the FASB issued ASU 2018-13,
Changes to the Disclosure Requirements for Fair Value Measurement
, which requires several changes to the hierarchy associated with Level 1, 2 and 3 fair value measurements and the related disclosure requirements. The guidance becomes effective for interim and annual periods beginning after December 15, 2019; however, early adoption is permitted. The Corporation adopted the provisions of ASU 2018-13 in its 2018 accounts (see Note 13). The new guidance did not affect the Corporation’s financial position, operating results or liquidity.
In January 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income
, which allows for a reclassification from accumulated other comprehensive income (loss) to retained earnings for the stranded tax effects resulting from the Tax Reform. A stranded tax effect is defined as the difference in the tax effect of amounts recognized as other comprehensive income (loss) items, using the income tax rate in effect at the time of recognition and the newly enacted income tax rate. The new guidance is relevant only to the reclassification of the income tax effects of the Tax Reform; accordingly, the underlying guidance that requires the effect of a change in tax laws or rates be included in income is not affected. As a result, $6,088 was reclassified between accumulated other comprehensive loss and retained earnings for the year ended December 31, 2017.
In May 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting
, which provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. No awards were modified in 2018; accordingly, the amended guidance did not affect the Corporation’s 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
27
permit
s only 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 reco
gnized 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 post
retirement 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
9
) as the estimate to apply retrospectively. The Corporation has historically
capitalized the service cost component of net periodic benefit cost to inventory, when applicable, and will continue to do so prospectively. The guidance did not affect the Corporation’s liquidity.
The effect of the retrospective guidance on the consolidated statements of operations for the year ended December 31, 2017, was as follows:
|
|
|
Originally Presented
(1)
|
|
|
Reclassification for
ASU 2017-07
|
|
|
As Adjusted
|
|
|
Costs of products sold (excluding depreciation and amortization)
|
|
$
|
316,704
|
|
|
$
|
279
|
|
|
$
|
316,983
|
|
|
Selling and administrative
|
|
|
59,886
|
|
|
|
278
|
|
|
|
60,164
|
|
|
Loss from continuing operations
|
|
|
(13,212
|
)
|
|
|
(557
|
)
|
|
|
(13,769
|
)
|
|
Other – net
|
|
|
(1,278
|
)
|
|
|
557
|
|
|
|
(721
|
)
|
|
Other income (expense)
|
|
|
(4,230
|
)
|
|
|
557
|
|
|
|
(3,673
|
)
|
|
Loss from continuing operations before income taxes and gain on sale of joint
venture
|
|
|
(17,442
|
)
|
|
|
0
|
|
|
|
(17,442
|
)
|
The effect of the retrospective guidance on the operating results of the segments for the year ended December 31, 2017, was as follows:
|
|
|
Originally Presented
|
|
|
Reclassification for
ASU 2017-07
|
|
|
As Adjusted
|
|
|
Forged and Cast Engineered Products - operating loss
(1)
|
|
$
|
(5,669
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
(6,887
|
)
|
|
Air and Liquid Processing - operating income
|
|
|
10,427
|
|
|
|
255
|
|
|
|
10,682
|
|
|
Corporate costs
|
|
|
(17,970
|
)
|
|
|
406
|
|
|
|
(17,564
|
)
|
|
|
(1)
|
Originally Presented figures have been recast for discontinued operations. See Note 2.
|
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 impact the presentation of its cash flow statement, and it did not affect the Corporation’s financial position, operating results or liquidity.
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
|
)
|
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 and its related amendments outline a single comprehensive model to account for revenue from customer contracts and establish principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. In accordance with Topic 606, a company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration a company expects to be entitled to receive in exchange for those goods or services. 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
28
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 retained earnings as of January 1, 2018, 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
di
sclosures.
In connection with the adoption of Topic 606, as of January 1, 2018, the Corporation elected the following practical expedients:
|
|
•
|
to exclude the effects of a significant financing component from the amount of promised consideration 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 the product will be one year or less;
|
|
|
•
|
to exclude any amounts collected from customers for sales and similar taxes from the transaction price;
|
|
|
•
|
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 assess whether promised goods or services are performance obligations only if they are material in the context of the contract with the customer.
|
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 present more accurately 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, and is not expected to have a significant effect on the Corporation’s financial position, operating results or liquidity.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize a right-of-use (“ROU”) asset and lease liability for all leases other than those with a term less than one year and to disclose key information about certain leasing arrangements. The lease liability will be equal to the present value of lease payments. A ROU asset will be based on the lease liability adjusted for qualifying initial direct costs. The guidance becomes effective for the Corporation beginning January 1, 2019, and can be implemented on either a full or modified retrospective basis. The Corporation will use the modified retrospective method (a cumulative adjustment to its January 1, 2019 retained earnings); consequently, its comparative period financial statements will continue to be in accordance with the previous lease guidance in ASC Topic 840 “
Leases
.” ASU 2016-02 also provides an election for a package of practical expedients which permits an entity to not reassess whether any expired or existing contracts contain leases, to carryforward the existing lease classification, and to not reassess initial direct costs associated with existing leases. The Corporation applied these practical expedients as part of its adoption. The Corporation currently expects that the adoption of the guidance will result in an increase to its consolidated assets and liabilities of approximately $5,000–$7,500. It does not expect the new guidance to have a material effect on its results of operations or cash flows at adoption or thereafter.
NOTE 2 – DISCONTINUED OPERATIONS AND DISPOSITION:
In 2016, the Corporation purchased the stock of ASW, a specialty steel producer based in Canada. The acquisition supported the Corporation’s diversification efforts in the open-die forging market. In October 2018, the Board of Directors of the Corporation approved the sale of ASW. Loss of significant U.S. business due to a combination of tariffs imposed by the United States on imports of steel products and loss of a key customer due to a plant closure have resulted in significant losses for the Canadian operation in 2018. While the Corporation will continue to service the open-die forged products market, it will not have a dedicated supply of required specialty steel through a back-end integration of ASW. Additionally, the Corporation will no longer manufacture and supply primary specialty steels to customers in the non-roll opened and closed die forgings and rebar markets and will exit the Canadian market.
Collectively, the sale of ASW represents a strategic shift that will have a major impact on the Corporation’s operations and financial results. As of December 31, 2018, the asset held for sale and discontinued operations criteria were met. Accordingly, as set forth in ASC 205,
Presentation of Financial Statements
, the assets and liabilities of ASW have been presented separately as assets and
29
liabilities of discontinued operations
in the accompanying consolidated balance sheet
s
as of December 31, 2018, and 2017
.
The assets and liabilities of ASW are classified as cur
rent as of December 31, 2018, because
the Corporation expects to complete the sale in 2019
.
Additionally, the operating results and cash flows of ASW have been presented
as
discontinued operations
,
for the current and prior year
s, in the accompanying conso
lidated statements of operations and statements of cash flows
.
Previously, the operating results of ASW
were included in the operating results of the Forged and Cast Engineered Products segment.
The assets and liabilities of ASW were as follows as of December 31, 2018, and 2017:
|
|
|
2018
|
|
|
2017
|
|
|
Cash and cash equivalents
|
|
$
|
1,124
|
|
|
$
|
2,044
|
|
|
Receivables
|
|
|
6,928
|
|
|
|
5,161
|
|
|
Inventories
|
|
|
13,764
|
|
|
|
14,109
|
|
|
Other assets
|
|
|
1,708
|
|
|
|
1,044
|
|
|
Property, plant and equipment, net
|
|
|
11,714
|
|
|
|
0
|
|
|
Estimated charge for impairment
|
|
|
(15,000
|
)
|
|
|
0
|
|
|
Current assets of discontinued operations
|
|
|
20,238
|
|
|
|
22,358
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
0
|
|
|
|
10,847
|
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
585
|
|
|
Noncurrent assets of discontinued operations
|
|
|
0
|
|
|
|
11,432
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
20,238
|
|
|
$
|
33,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,890
|
|
|
$
|
12,036
|
|
|
Accrued payrolls and employee benefits
|
|
|
178
|
|
|
|
440
|
|
|
Other current liabilities
|
|
|
390
|
|
|
|
648
|
|
|
Current liabilities of discontinued operations
|
|
|
9,458
|
|
|
|
13,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
9,458
|
|
|
$
|
13,124
|
|
The following table presents the major classes of ASW’s line items constituting the “(loss) income from discontinued operations, net of tax” in the consolidated statements of operations for the years ended December 31:
|
|
|
2018
|
|
|
2017
|
|
|
Net sales
|
|
$
|
63,740
|
|
|
$
|
81,283
|
|
|
Costs of products sold (excluding depreciation and amortization)
|
|
|
68,381
|
|
|
|
75,005
|
|
|
Selling and administrative
|
|
|
2,441
|
|
|
|
1,424
|
|
|
Depreciation and amortization
|
|
|
1,311
|
|
|
|
1,011
|
|
|
Gain on disposal of assets
|
|
|
(153
|
)
|
|
|
0
|
|
|
Charge for impairment
|
|
|
15,000
|
|
|
|
0
|
|
|
(Loss) income from discontinued operations
|
|
|
(23,240
|
)
|
|
|
3,843
|
|
|
Other income (expense)
|
|
|
(661
|
)
|
|
|
(94
|
)
|
|
(Loss) income from discontinued operations before income taxes
|
|
|
(23,901
|
)
|
|
|
3,749
|
|
|
Income tax provision
|
|
|
0
|
|
|
|
0
|
|
|
(Loss) income from discontinued operations, net of tax
|
|
$
|
(23,901
|
)
|
|
$
|
3,749
|
|
Net sales for the years ended December 31, 2018, and 2017, include $22,805 and $34,037, respectively, of product sold by ASW to Union Electric Steel Corporation (“UES”), a subsidiary of the Corporation. Costs of products sold (excluding depreciation and amortization) approximated the same. In connection with the sale, the Corporation expects to enter into a longer-term supply agreement for the supply of steel ingots. The charge for impairment was calculated based on estimated proceeds and adjusts the carrying value of ASW to its estimated fair value less costs to sell. As of December 31, 2018, the asset held for sale and discontinued operations criteria were met; accordingly, the fair value of ASW was measured at December 31, 2018, using unobservable, Level 3 inputs.
On October 31, 2018, the Corporation sold certain net assets of the Vertical Seal division of Akers National Roll Company (“Vertical Seal”), a subsidiary of the Corporation, to Roser Technologies, Inc. and WIR II, LLC for approximately net book value, or $7,200. As
30
part of the Forged and Cast Engineered Products segment,
Vertical Seal
manufactured custom-designed
parts and provided specialty services to rolling mill customers located throughout North America. The sale of
Vertical Seal did
not qualify as a discontinued operation as it
did
not represent a strategic shift that has (or will have) a major effect on the
Corporation’s operations and financial results.
NOTE 3 – INVENTORIES:
|
|
|
2018
|
|
|
2017
|
|
|
Raw materials
|
|
$
|
19,615
|
|
|
$
|
20,594
|
|
|
Work-in-progress
|
|
|
42,339
|
|
|
|
42,113
|
|
|
Finished goods
|
|
|
20,650
|
|
|
|
19,232
|
|
|
Supplies
|
|
|
11,592
|
|
|
|
11,513
|
|
|
Inventories
|
|
$
|
94,196
|
|
|
$
|
93,452
|
|
At December 31, 2018, and 2017, approximately 36% and 49%, respectively, of the inventories were valued using the LIFO method. The LIFO reserve approximated $(26,058) and $(16,063) at December 31, 2018, and 2017, respectively. During each of the years, inventory quantities decreased for certain locations resulting in a liquidation of LIFO layers which were at lower costs. The effect of the liquidations was to decrease costs of products sold (excluding depreciation and amortization) by approximately $2,159 and $490 for 2018 and 2017, respectively. There was no income tax expense recognized in the consolidated statements of operations due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the jurisdiction where the income was recognized. See Note 19. Accordingly, the effect of the liquidations reduced net loss by approximately $2,159, or $0.17 per common share, for 2018 and approximately $490, or $0.04 per common share, for 2017.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT:
|
|
|
2018
|
|
|
2017
|
|
|
Land and land improvements
|
|
$
|
10,207
|
|
|
$
|
10,443
|
|
|
Buildings
|
|
|
65,425
|
|
|
|
66,403
|
|
|
Machinery and equipment
|
|
|
332,378
|
|
|
|
332,957
|
|
|
Construction-in-process
|
|
|
3,499
|
|
|
|
4,193
|
|
|
Other
|
|
|
6,813
|
|
|
|
7,189
|
|
|
|
|
|
418,322
|
|
|
|
421,185
|
|
|
Accumulated depreciation
|
|
|
(232,661
|
)
|
|
|
(217,052
|
)
|
|
Property, plant and equipment, net
|
|
$
|
185,661
|
|
|
$
|
204,133
|
|
The majority of the assets of the Corporation, except real property including the land and building of UES-UK, is pledged as collateral for the Corporation’s revolving credit facility (see Note 8). Land and buildings of UES-UK, equal to approximately $2,672 (£2,098) at December 31, 2018, are held as collateral by the trustees of the UES-UK defined benefit pension plan (see Note 9). The gross value of assets under capital lease and the related accumulated amortization approximated $3,716 and $1,340, respectively, as of December 31, 2018, and $4,082 and $1,101, respectively, as of December 31, 2017.
NOTE 5 – INTANGIBLE ASSETS:
|
|
|
2018
|
|
|
2017
|
|
|
Customer relationships
|
|
$
|
6,234
|
|
|
$
|
6,543
|
|
|
Developed technology
|
|
|
4,322
|
|
|
|
4,429
|
|
|
Trade name
|
|
|
2,497
|
|
|
|
2,696
|
|
|
|
|
|
13,053
|
|
|
|
13,668
|
|
|
Accumulated amortization
|
|
|
(3,828
|
)
|
|
|
(2,647
|
)
|
|
Intangible assets, net
|
|
$
|
9,225
|
|
|
$
|
11,021
|
|
31
The following summarizes changes in intangible assets for the year
s
ended December 31:
|
|
|
2018
|
|
|
2017
|
|
|
Balance at the beginning of the year
|
|
$
|
11,021
|
|
|
$
|
11,601
|
|
|
Changes in intangible assets (Vertical Seal)
|
|
|
(177
|
)
|
|
|
0
|
|
|
Amortization of intangible assets
|
|
|
(1,221
|
)
|
|
|
(1,219
|
)
|
|
Other, primarily impact from changes in foreign currency
exchange rates
|
|
|
(398
|
)
|
|
|
639
|
|
|
Balance at the end of the year
|
|
$
|
9,225
|
|
|
$
|
11,021
|
|
Intangible assets include an indefinite-lived trade name of $2,497 and $2,696 as of December 31, 2018, and 2017, respectively, that is not subject to amortization.
Changes during the year ended December 31, 2018, represent intangible assets of the Vertical Seal division of Akers National Roll Company which was sold in 2018.
Identifiable intangible assets are expected to be amortized over a weighted average period of approximately 12 years or $1,197 for 2019, $1,197 for 2020, $519 for 2021, $383 for 2022, $383 for 2023 and $3,049 thereafter.
NOTE 6 – INVESTMENTS IN JOINT VENTURES:
The Corporation has interests in three joint ventures:
|
|
•
|
Shanxi Åkers TISCO Roll Co., Ltd. (“ATR”) – a cast roll joint venture in China for which the Corporation accounts using the consolidated method of accounting. ATR principally manufactures and sells cast rolls for hot strip mills, steckel mills and medium plate mills.
|
|
|
•
|
Masteel Gongchang Roll Co., Ltd. (“MG”) – a forged roll joint venture in China for which the Corporation accounts using the cost method of accounting. MG principally manufactures and sells large forged backup rolls for hot and cold strip mills.
|
|
|
•
|
Jiangsu Gongchang Roll Co., Ltd (“Gongchang”) – a cast roll joint venture in China for which the Corporation accounts using the cost method of accounting. Gongchang principally manufactures and sells cast rolls for hot and cold strip mills, medium/heavy section mills and plate mills.
|
ATR
In 2007, Åkers AB, a subsidiary of UES, entered into an agreement with Taiyuan Iron & Steel Co., Ltd. (“TISCO”) to form ATR, with Åkers AB owning 59.88% and TISCO owning 40.12%. Since Åkers AB is the majority shareholder, has voting rights proportional to its ownership interest and exercises control over TISCO, Åkers AB is considered the primary beneficiary and, accordingly, accounts for its investment in ATR on the consolidated method of accounting.
MG
The Corporation has a 33% interest in MG which is recorded at cost, or approximately $835. The Corporation does not participate in the management or daily operation of MG, has not guaranteed any of its obligations and has no ongoing responsibilities to it. Dividends may be declared by the Board of Directors of the joint venture after allocation of after-tax profits to various “funds” equal to the minimum amount required under Chinese law. No dividends were declared or received in 2018 or 2017.
Gongchang
The Corporation has a 24% interest in Gongchang which is recorded at cost, or $1,340. The Corporation does not participate in the management or daily operation of Gongchang, has not guaranteed any of its obligations and has no ongoing responsibilities to it. Dividends may be declared by the Board of Directors of the joint venture after allocation of after-tax profits to various “funds” equal to the minimum amount required under Chinese law. Dividends of $377 were declared and received in 2018. No dividends were declared or received in 2017.
32
NOTE
7
– OTHER CURRENT LIABILITIES:
|
|
|
2018
|
|
|
2017
|
|
|
Customer-related liabilities
|
|
$
|
16,439
|
|
|
$
|
18,189
|
|
|
Accrued interest payable
|
|
|
2,333
|
|
|
|
2,697
|
|
|
Accrued sales commissions
|
|
|
1,637
|
|
|
|
2,301
|
|
|
Other
|
|
|
8,578
|
|
|
|
13,254
|
|
|
Other current liabilities
|
|
$
|
28,987
|
|
|
$
|
36,441
|
|
Customer-related liabilities include liabilities for product warranty claims and deposits received on future orders. The following summarizes changes in the liability for product warranty claims for the year ended December 31:
|
|
|
2018
|
|
|
2017
|
|
|
Balance at the beginning of the year
|
|
$
|
11,379
|
|
|
$
|
11,439
|
|
|
Satisfaction of warranty claims
|
|
|
(5,069
|
)
|
|
|
(3,941
|
)
|
|
Provision for warranty claims
|
|
|
3,564
|
|
|
|
3,287
|
|
|
Other, primarily impact from changes in foreign currency
exchange rates
|
|
|
(427
|
)
|
|
|
594
|
|
|
Balance at the end of the year
|
|
$
|
9,447
|
|
|
$
|
11,379
|
|
Customer deposits represent amounts collected from, or invoiced to, a customer in advance of revenue recognition, and are recorded as an other current liability on the balance sheet. 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:
|
|
2018
|
|
|
2017
|
|
|
Balance at beginning of the period
|
$
|
4,574
|
|
|
$
|
6,786
|
|
|
Satisfaction of performance obligations
|
|
(10,885
|
)
|
|
|
(15,089
|
)
|
|
Receipt of additional deposits
|
|
10,701
|
|
|
|
12,745
|
|
|
Other, primarily changes in foreign currency exchange rates
|
|
(86
|
)
|
|
|
132
|
|
|
Balance at end of the period
|
$
|
4,304
|
|
|
$
|
4,574
|
|
NOTE 8 – BORROWING ARRANGEMENTS:
|
|
|
2018
|
|
|
2017
|
|
|
Revolving Credit and Security Agreement
|
|
$
|
14,320
|
|
|
$
|
20,349
|
|
|
Sale and leaseback financing obligation
|
|
|
18,518
|
|
|
|
0
|
|
|
Promissory notes (and interest)
|
|
|
26,205
|
|
|
|
25,395
|
|
|
Industrial Revenue Bonds
|
|
|
13,311
|
|
|
|
13,311
|
|
|
Minority shareholder loan
|
|
|
4,056
|
|
|
|
5,325
|
|
|
Capital leases
|
|
|
1,199
|
|
|
|
1,773
|
|
|
Outstanding borrowings
|
|
|
77,609
|
|
|
|
66,153
|
|
|
Debt – current portion
|
|
|
(45,728
|
)
|
|
|
(19,335
|
)
|
|
Long-term debt
|
|
$
|
31,881
|
|
|
$
|
46,818
|
|
Future principal payments, assuming demand loans are called in 2019 and the Industrial Revenue Bonds are not able to be remarketed, are $45,728 for 2019, $1,990 for 2020, $16,162 for 2021, $1,796 for 2022, $1,646 for 2023, and $10,287 thereafter.
Revolving Credit and Security Agreement
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
33
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.
In 2018, the banks provided their consent to a sale and leaseback financing transaction, whereby UES sold certain of its real estate assets to Store Capital Acquisitions, LLC. In connection with providing the consent, the Credit Agreement was amended to increase the interest rate margin by one-half percent per annum for any borrowings, add certain additional reporting requirements regarding beneficial ownership of the Corporation, and update certain schedules to the Credit Agreement. All other material terms, conditions, and covenants with respect to the Credit Agreement remain unchanged.
Availability under the Credit Agreement is based on eligible accounts receivable, inventory and fixed assets. As amended, amounts outstanding under the credit facility bear interest at the Corporation’s option at either (i) LIBOR plus an applicable margin ranging between 1.75% to 2.25% based on the quarterly average excess availability or (ii) the base rate plus an applicable margin ranging between 0.75% to 1.25% 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 December 31, 2018, the Corporation had outstanding borrowings under the Credit Agreement of $14,320 (including £3,000 of European borrowings for its U.K. subsidiary and $4,500 of Canadian borrowings for ASW). Interest accrued on the outstanding balance during the year at an average rate of interest of approximately 3.34%. Additionally, the Corporation had utilized a portion of the credit facility for letters of credit (Note 10). As of December 31, 2018, remaining availability under the Credit Agreement approximated $35,000, net of availability reserves associated with proceeds from the sale and leaseback financing transaction
and the sale of certain net assets of Vertical Seal. The availability from these reserves was used toward the settlement of the promissory notes and interest paid on March 4, 2019.
Borrowings outstanding under the Credit Agreement are 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 December 31, 2018.
Sale and Leaseback Financing Obligation
In September 2018, UES completed a sale and leaseback financing transaction for certain of its real property, including the land and buildings of its manufacturing facilities in Valparaiso, Indiana and Burgettstown, Pennsylvania, and its manufacturing facility and corporate headquarters located in Carnegie, Pennsylvania (the “Properties”). Simultaneously with the sale, UES entered into a lease agreement pursuant to which UES would lease the Properties from the buyer. The lease provides for an initial term of 20 years; however, UES may extend the lease for four successive periods of approximately five years each. If fully extended, the lease would expire in September 2058. UES also has the option to repurchase the Properties, which it may exercise in 2025, for a price equal to the greater of (i) the Fair Market Value of the Properties, or (ii) 115% of Lessor’s Total Investment for the Facilities, with such terms defined in the lease agreement.
The sale and leaseback financing transaction does not qualify for sale and leaseback accounting due to UES’ ability to repurchase the Properties in 2025. Accordingly, the net asset value of the Properties is not removed and a gain or loss on the sale of the Properties is not recognized. Instead, proceeds are recognized as a debt obligation on the consolidated balance sheet.
Gross proceeds equaled $19,000. The initial annual payment approximates $1,646, due monthly in advance, which is included in debt – current portion on the consolidated balance sheet. Annual payments will increase each anniversary date by an amount equal to the lesser of 2% or 1.25% of the change in the consumer price index, as defined in the lease agreement. The effective interest rate approximated 6% for 2018.
Deferred financing fees of approximately $477 were incurred, which are recognized as a reduction of the financing obligation, and are being amortized over seven years.
Promissory Notes
In connection with a March 2016 acquisition, the Corporation issued three-year promissory notes amounting to $22,619. In 2018, the Corporation and the sellers mutually agreed to reduce the promissory notes by an amount owed to the Corporation resulting in a principal balance of $21,917. The notes bear interest at 6.5%, compounding annually, with principal and interest payable at maturity. As of December 31, 2018, accrued interest approximated $4,288, which is included in debt – current portion. As of December 31,
34
2017, accrued interest approximated $2,776, which was included in long-term debt.
Principal and accrued in
terest of $26,474 were paid on March 4, 2019.
Industrial Revenue Bonds
As of December 31, 2018, the Corporation had the following Industrial Revenue Bonds (IRBs) outstanding: (i) $4,120 tax-exempt IRB maturing in 2020, interest at a floating rate which averaged 1.47% during the current year; (ii) $7,116 taxable IRB maturing in 2027, interest at a floating rate which averaged 2.06% during the current year; and (iii) $2,075 tax-exempt IRB maturing in 2029, interest at a floating rate which averaged 1.46% during the current year. The IRBs are secured by letters of credit of equivalent amounts and are remarketed periodically at which time interest rates are reset. If the IRBs are not able to be remarketed, although considered remote by the Corporation and its bankers, the bondholders can seek reimbursement immediately from the letters of credit which serve as collateral for the bonds. Accordingly, the IRBs are recorded as current debt.
Minority Shareholder Loan
ATR has a loan outstanding with its minority shareholder. The loan originally matured in 2008 but has been renewed continually for one-year periods. Interest does not compound and has accrued on the outstanding balance, since inception, at the three-to-five-year loan interest rate set by the People’s Bank of China in effect at the time of renewal. The loan balance approximated $4,056 (RMB 27,901) at December 31, 2018, and $5,325 (RMB 34,655) at December 31, 2017. During 2018, ATR repaid $449 (RMB 3,090) in principal and $145 (RMB 1,000) in accrued interest, Additionally, the shareholders of ATR converted a portion of their loans outstanding with ATR to equity. The conversion was in proportion to their respective ownership interest, with TISCO converting $872 (RMB 6,000) of its loans to equity. The interest rate for 2018 approximated 5% and accrued interest as of December 31, 2018, and 2017, approximated $2,297 (RMB 15,800) and $2,682 (RMB 17,457) which is recorded in other current liabilities.
Capital Leases
The Corporation leases equipment under various noncancelable lease agreements ending 2019 to 2022. Effective interest rates range between 1.30% and 5.20%.
NOTE 9 – PENSION AND OTHER POSTRETIREMENT BENEFITS:
U.S. Pension Benefits
The Corporation has two
qualified domestic defined benefit pension plans that cover substantially all of its U.S. employees. Over the past few years, measures have been taken to freeze benefit accruals and participation in the plans and replace benefit accruals with employer contributions to defined contribution plans. As of December 31, 2018, all benefit accruals and participation in the plans have been curtailed except for two locations. The defined benefit pension plans remain covered by the Employee Retirement Income Security Act of 1974 (“ERISA”); accordingly, the Corporation’s policy is to fund at least the minimum actuarially computed annual contribution required under ERISA. Minimum contributions for 2018 approximated $1,211. No minimum contributions were required for 2017. Minimum contributions for 2019 are expected to approximate $1,260. Estimated benefit payments for subsequent years are $14,576 for 2019, $14,522 for 2020, $14,725 for 2021, $14,789 for 2022, $14,803 for 2023 and $73,146 for 2024 – 2028. The fair value of the plan assets as of December 31, 2018, and 2017, approximated $182,541 and $199,138, respectively, in comparison to accumulated benefit obligations of $226,618 and $245,317 for the same periods. Employer contributions to the defined contribution plans totaled $3,169 and $2,588 for 2018 and 2017, respectively, and are expected to approximate $2,943 in 2019.
The Corporation also maintains nonqualified defined benefit pension plans for selected executives in addition to the benefits provided under one of the Corporation’s qualified defined benefit pension plans. The objectives of the nonqualified plans are to provide supplemental retirement benefits or restore benefits lost due to limitations set by the Internal Revenue Service. The assets of the nonqualified plans are held in a grantor tax trust known as a “Rabbi” trust and are subject to claims of the Corporation’s creditors, but otherwise must be used only for purposes of providing benefits under the plans. No contributions were made to the trust in 2018 or 2017, and none are expected in 2019. The fair market value of the trust at December 31, 2018, and 2017, which is included in other noncurrent assets, was $3,659 and $4,204, respectively. The plan is treated as a non-funded pension plan for financial reporting purposes. Accumulated benefit obligations approximated $6,852 and $7,202 at December 31, 2018, and 2017, respectively. Estimated benefit payments for subsequent years, which would represent employer contributions, are approximately $445 for 2019, $464 for 2020, $489 for 2021, $511 for 2022, $519 for 2023 and $2,591 for 2024 – 2028.
Employees at one location participate in a multi-employer plan,
I.A.M. National Pension Fund,
in lieu of the Corporation’s defined benefit pension plans. A multi-employer plan generally receives contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements. The assets contributed by one employer may be used to fund the benefits provided to
35
employees of other employers in the pla
n because the plan assets, once contributed, are not restricted to individual employers. The latest report of summary plan information (for the 201
7
plan year) provided by
I.A.M. National Pension Fund
indicates:
|
|
•
|
More than 1,650 employer locations contribute to the plan;
|
|
|
•
|
Approximately 100,000 active employees participate in the plan; and
|
|
|
•
|
Assets of approximately $11.9 billion and a funded status of approximately 92%.
|
Less than 100 of the Corporation’s employees participate in the plan and contributions are based on a rate per hour. The Corporation’s contributions to the plan were less than $250 for 2018 and 2017 and represent less than five percent of total contributions to the plan by all contributing employers. Contributions are expected to approximate $279 in 2019.
Foreign Pension Benefits
Employees of UES-UK participated in a defined benefit pension plan that was curtailed effective December 31, 2004, and replaced with a defined contribution pension plan. The UES-UK plans are non-U.S. plans and therefore are not covered by ERISA. Instead, when necessary, the Trustees and UES-UK agree to a recovery plan that estimates the amount of employer contributions, based on U.K. regulations, necessary to eliminate the funding deficit of the plan with such estimates subject to change based on the future investment performance of the plan’s assets. The U.S. dollar equivalent of employer contributions to the defined benefit pension plan approximated $982 and $1,521 in 2018 and 2017, respectively. The plan is fully funded as of December 31, 2018; accordingly, no contributions are expected in 2019. The fair value of the plan’s assets as of December 31, 2018, and 2017, approximated $49,651 (£38,991) and $56,419 (£41,820), respectively, in comparison to accumulated benefit obligations of $47,459 (£37,269) and $57,540 (£42,650) for the same periods. Estimated benefit payments for subsequent years are $1,973 for 2019, $1,833 for 2020, $1,802 for 2021, $1,731 for 2022, $2,351 for 2023 and $11,766 for 2024 – 2028. Contributions to the defined contribution pension plan approximated $363 and $311 in 2018 and 2017, respectively, and are expected to approximate $391 in 2019.
The Corporation has two additional foreign defined benefit pension plans, which are unfunded. Projected and accumulated benefit obligations approximated $6,878 and $7,073 at December 31, 2018, and 2017, respectively. Estimated benefit payments for subsequent years, for both plans combined, are $276 for 2019, $288 for 2020, $289 for 2021, $282 for 2022, $274 for 2023 and $1,543 for 2024 – 2028.
Other Postretirement Benefits
The Corporation provides a monthly reimbursement of postretirement health care benefits for up to a 5-year period principally to the bargaining groups of two subsidiaries. The plans cover participants and their spouses who retire under an existing pension plan on other than a deferred vested basis and at the time of retirement have also rendered 10 or more years of continuous service irrespective of age. Retiree life insurance is provided to substantially all retirees.
The Corporation also provides life insurance and health care benefits to former employees of certain discontinued operations. This obligation had been estimated and provided for at the time of disposal.
The Corporation’s postretirement health care and life insurance plans are not funded or subject to any minimum regulatory funding requirements. Estimated benefit payments for subsequent years, which would represent employer contributions, are approximately $1,411 for 2019, $1,313 for 2020, $1,119 for 2021, $1,092 for 2022, $1,053 for 2023 and $5,577 for 2024-2028.
Significant Activity
In 2018, the Corporation offered a temporary early retirement incentive program to full-time salaried participants at certain locations that either met the eligibility requirements for an unreduced pension or attained age 55 and had 3.5 years of service under the plan. Participants selecting the early retirement incentive will receive an unreduced pension, a lump sum payment ranging between $10 and $25 dependent upon the participant’s combined age and years of service, and one year of health insurance benefits. The early retirement incentive program increased employee benefit obligations and associated expense by $1,476 and is recorded as a special termination benefit.
In connection with the ratification of a collective bargaining agreement for employees of the UES Harmon Creek Steelworkers Location, employee participation in a qualified domestic defined benefit pension plan was frozen effective May 31, 2018. Benefit accruals have been replaced with employer non-elective contributions to a defined contribution plan equaling 3% of compensation and a matching contribution of up to 4% of compensation. The plan freeze resulted in remeasurement of the liability, reducing the liability by $1,726, and a curtailment loss of $21.
36
Actuarial (gains) losses were comprised of the following components:
|
|
|
U.S. Pension
Benefits
|
|
|
Foreign Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Changes in assumptions
|
|
$
|
(16,642
|
)
|
|
$
|
12,566
|
|
|
$
|
(5,298
|
)
|
|
$
|
616
|
|
|
$
|
(914
|
)
|
|
$
|
(1,103
|
)
|
|
GMP equalization
|
|
|
0
|
|
|
|
0
|
|
|
|
982
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Change from RPI to CPI
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8,760
|
)
|
|
|
0
|
|
|
|
0
|
|
|
Other
|
|
|
(420
|
)
|
|
|
1,259
|
|
|
|
(1,446
|
)
|
|
|
190
|
|
|
|
(229
|
)
|
|
|
(1,067
|
)
|
|
Total actuarial (gains) losses
|
|
$
|
(17,062
|
)
|
|
$
|
13,825
|
|
|
$
|
(5,762
|
)
|
|
$
|
(7,954
|
)
|
|
$
|
(1,143
|
)
|
|
$
|
(2,170
|
)
|
Changes in assumptions used to determine plan liabilities, particularly for discount rates, increase (decrease) projected benefit obligations. A 1/4 percentage point decrease in the discount rate would increase projected and accumulated benefit obligations by approximately $8,300. Conversely, a 1/4 percentage point increase in the discount rate would decrease projected and accumulated benefit obligations by approximately $8,300.
In 2018, the High Court of Justice in the United Kingdom issued a ruling requiring equalization of benefits for participants under U.K. defined benefit pension plans. The inequities arose from statutory differences related to Guaranteed Minimum Pension (GMP) benefits that are included in U.K. defined benefit pension plans. The impact of the GMP equalization for the UES-UK defined benefit pension plan approximated $982, which was recognized as a prior service cost and will be amortized over the average remaining lifetime of the participants, or approximately 25 years at December 31, 2018.
In 2017, the Trustees of the UES-UK defined benefit pension plan and UES-UK agreed that, effective January 1, 2018, future increases to participants’ non-GMP pensions would be based on the increase in the Consumer Price Index (CPI) instead of the Retail Price Index (RPI). The effect of the change reduced employee benefit obligations by approximately $8,760 for the year ended December 31, 2017, and was recognized as past service cost to be amortized over the average remaining lifetime of the participants.
37
Reconciliations
The following provides a reconciliation of projected benefit obligations (“PBO”), plan assets and the funded status of the plans for the Corporation’s defined benefit plans calculated using a measurement date as of the end of the respective years.
|
|
|
U.S. Pension
Benefits
(a)
|
|
|
Foreign Pension
Benefits
(b)
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Change in projected benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBO at January 1
|
|
$
|
254,976
|
|
|
$
|
244,440
|
|
|
$
|
64,613
|
|
|
$
|
66,910
|
|
|
$
|
16,979
|
|
|
$
|
19,059
|
|
|
Service cost
|
|
|
1,225
|
|
|
|
1,651
|
|
|
|
477
|
|
|
|
150
|
|
|
|
457
|
|
|
|
492
|
|
|
Interest cost
|
|
|
8,473
|
|
|
|
8,413
|
|
|
|
1,391
|
|
|
|
1,845
|
|
|
|
494
|
|
|
|
571
|
|
|
Plan amendments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
165
|
|
|
Special termination benefits
|
|
|
1,350
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
126
|
|
|
|
0
|
|
|
Plan curtailments
|
|
|
(1,726
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Foreign currency exchange rate changes
|
|
|
0
|
|
|
|
0
|
|
|
|
(3,434
|
)
|
|
|
5,948
|
|
|
|
0
|
|
|
|
0
|
|
|
Actuarial (gains) losses
|
|
|
(17,062
|
)
|
|
|
13,825
|
|
|
|
(5,762
|
)
|
|
|
(7,954
|
)
|
|
|
(1,143
|
)
|
|
|
(2,170
|
)
|
|
Participant contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
104
|
|
|
|
92
|
|
|
Benefits paid from plan assets
|
|
|
(13,043
|
)
|
|
|
(12,950
|
)
|
|
|
(2,282
|
)
|
|
|
(1,813
|
)
|
|
|
0
|
|
|
|
0
|
|
|
Benefits paid by the Corporation
|
|
|
(403
|
)
|
|
|
(403
|
)
|
|
|
(666
|
)
|
|
|
(473
|
)
|
|
|
(1,207
|
)
|
|
|
(1,230
|
)
|
|
PBO at December 31
|
|
$
|
233,790
|
|
|
$
|
254,976
|
|
|
$
|
54,337
|
|
|
$
|
64,613
|
|
|
$
|
15,810
|
|
|
$
|
16,979
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
199,138
|
|
|
$
|
188,722
|
|
|
$
|
56,419
|
|
|
$
|
48,055
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Actual return on plan assets
|
|
|
(4,765
|
)
|
|
|
23,366
|
|
|
|
(2,477
|
)
|
|
|
3,998
|
|
|
|
0
|
|
|
|
0
|
|
|
Foreign currency exchange rate changes
|
|
|
0
|
|
|
|
0
|
|
|
|
(2,991
|
)
|
|
|
4,673
|
|
|
|
0
|
|
|
|
0
|
|
|
Corporate contributions
|
|
|
1,614
|
|
|
|
403
|
|
|
|
1,648
|
|
|
|
1,979
|
|
|
|
1,103
|
|
|
|
1,138
|
|
|
Participant contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
104
|
|
|
|
92
|
|
|
Gross benefits paid
|
|
|
(13,446
|
)
|
|
|
(13,353
|
)
|
|
|
(2,948
|
)
|
|
|
(2,286
|
)
|
|
|
(1,207
|
)
|
|
|
(1,230
|
)
|
|
Fair value of plan assets at December 31
|
|
$
|
182,541
|
|
|
$
|
199,138
|
|
|
$
|
49,651
|
|
|
$
|
56,419
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Funded status of the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$
|
182,541
|
|
|
$
|
199,138
|
|
|
$
|
49,651
|
|
|
$
|
56,419
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Less benefit obligations
|
|
|
233,790
|
|
|
|
254,976
|
|
|
|
54,337
|
|
|
|
64,613
|
|
|
|
15,810
|
|
|
|
16,979
|
|
|
Funded status at December 31
|
|
$
|
(51,249
|
)
|
|
$
|
(55,838
|
)
|
|
$
|
(4,686
|
)
|
|
$
|
(8,194
|
)
|
|
$
|
(15,810
|
)
|
|
$
|
(16,979
|
)
|
|
(a)
|
Includes the nonqualified defined benefit pension plan.
|
|
(b)
|
Includes the overfunded U.K. defined benefit pension plan and two smaller underfunded defined benefit pension plans.
|
The following provides a summary of amounts recognized in the consolidated balance sheets.
|
|
|
U.S. Pension
Benefits
|
|
|
Foreign Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Employee benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pensions
(a)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,192
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Accrued payrolls and employee benefits
(b)
|
|
|
(436
|
)
|
|
|
(432
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,395
|
)
|
|
|
(1,371
|
)
|
|
Employee benefit obligations
(c)
|
|
|
(50,813
|
)
|
|
|
(55,406
|
)
|
|
|
(6,878
|
)
|
|
|
(8,194
|
)
|
|
|
(14,415
|
)
|
|
|
(15,608
|
)
|
|
|
|
$
|
(51,249
|
)
|
|
$
|
(55,838
|
)
|
|
$
|
(4,686
|
)
|
|
$
|
(8,194
|
)
|
|
$
|
(15,810
|
)
|
|
$
|
(16,979
|
)
|
|
Accumulated other comprehensive loss:
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
45,041
|
|
|
$
|
47,252
|
|
|
$
|
22,149
|
|
|
$
|
25,914
|
|
|
$
|
(2,123
|
)
|
|
$
|
(1,211
|
)
|
|
Prior service cost (credit)
|
|
|
91
|
|
|
|
156
|
|
|
|
(7,402
|
)
|
|
|
(9,174
|
)
|
|
|
(12,202
|
)
|
|
|
(13,809
|
)
|
|
|
|
$
|
45,132
|
|
|
$
|
47,408
|
|
|
$
|
14,747
|
|
|
$
|
16,740
|
|
|
$
|
(14,325
|
)
|
|
$
|
(15,020
|
)
|
|
(a)
|
Represents the overfunded U.K. defined benefit pension plan which is recorded as a noncurrent asset in the consolidated balance sheet.
|
|
(
b
)
|
Recorded as a current liability in the consolidated balance sheet.
|
|
(
c
)
|
Recorded as a noncurrent liability in the consolidated balance sheet.
|
|
(
d
)
|
Amounts are pre-tax.
|
38
Investment Policies and Strategies
The investment policies and strategies are determined and monitored by the Board of Directors for the U.S. pension plans and by the Trustees (as appointed by UES-UK and the employees of UES-UK) for the UES-UK pension plan, each of whom employ their own investment managers to manage the plan’s assets in accordance with the policy guidelines. The U.S defined benefit pension plans follow a glide-path strategy whereby target asset allocations are rebalanced based on projected payment obligations and the funded status of the plans. Pension assets of the UES-UK plan are invested with the objective of maximizing long-term returns while minimizing material losses to meet future benefit obligations as they become due. Investments in equity securities are primarily in common stocks of publicly traded U.S. and international companies across a broad spectrum of industry sectors. Investments in fixed-income securities are principally A-rated or better bonds with maturities of less than ten years, preferred stocks and convertible bonds. The Corporation believes there are no significant concentrations of risk associated with the Plans’ assets.
Attempts to minimize risk include allowing temporary changes to the allocation mix in response to market conditions, diversifying investments among asset categories (e.g., equity securities, fixed-income securities, alternative investments, cash and cash equivalents) and within these asset categories (e.g., economic sector, industry, geographic distribution, size) and consulting with independent financial and legal counsels to assure that the investments and their expected returns and risks are consistent with the goals of the Board of Directors or Trustees.
With respect to the U.S. pension plans, the following investments are prohibited unless otherwise approved by the Board of Directors: stock of the Corporation, futures and options except for hedging purposes, unregistered or restricted stock, warrants, margin trading, short-selling, real estate excluding public or real estate partnerships, and commodities including art, jewelry and gold. The foreign pension plan invests in specific funds. Any investments other than those specifically identified would be considered prohibited.
The following summarizes target asset allocations (within +/-5% considered acceptable) and major asset categories. Certain investments are classified differently for target asset allocation purposes and external reporting purposes. In the latter part of 2018, the Corporation changed investment managers; accordingly, at December 31, 2018, there is temporarily a higher amount in cash and cash equivalents.
|
|
|
U.S. Pension Benefits
|
|
|
Foreign Pension Benefits
|
|
|
|
|
Target
Allocation
|
|
|
Percentage of Plan
Assets
|
|
|
Target
Allocation
|
|
|
Percentage of Plan
Assets
|
|
|
|
|
Dec. 31, 2018
|
|
|
2018
|
|
|
2017
|
|
|
Dec. 31, 2018
|
|
|
2018
|
|
|
2017
|
|
|
Equity Securities
|
|
|
45
|
%
|
|
|
25
|
%
|
|
|
58
|
%
|
|
|
44
|
%
|
|
|
50
|
%
|
|
|
49
|
%
|
|
Fixed-Income Securities
|
|
|
42
|
%
|
|
|
45
|
%
|
|
|
21
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
33
|
%
|
|
Alternative Investments
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
16
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
|
|
17
|
%
|
|
Other (primarily cash and cash equivalents)
|
|
|
3
|
%
|
|
|
20
|
%
|
|
|
5
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
Fair Value Measurement of Plan Assets
Equity securities, exchange-traded funds and mutual funds are actively traded on exchanges and price quotes for these investments are readily available. Similarly, fixed-income mutual funds consist of debt securities of U.S. and U.K. corporations and price quotes for these investments are readily available. Commingled funds are not traded publicly, but the underlying assets (such as stocks and bonds) held in these funds are traded on active markets and the prices for the underlying assets are readily observable. For securities not actively traded, the fair value may be based on third-party appraisals, discounted cash flow analysis, benchmark yields and inputs that are currently observable in markets for similar securities.
39
Investment Strategies
The significant investment strategies of the various funds are summarized below.
|
Fund
|
Investment Strategy
|
Primary Investment Objective
|
|
Temporary Investment Funds
|
Invests primarily in a diversified portfolio of investment grade money market instruments.
|
Achieve a market level of current income while maintaining stability of principal and liquidity.
|
|
Various Equity Funds
|
Each fund maintains a diversified holding in common stock of applicable companies (e.g., common stock of small capitalization companies if a small-cap fund, common stock of medium capitalization companies if a mid-cap fund, common stock of foreign corporations if an international fund, etc.).
|
Outperform the fund’s related index.
|
|
Various Fixed Income Funds
|
Invests primarily in a diversified portfolio of fixed-income securities of varying maturities or in commingled funds which invest in a diversified portfolio of fixed-income securities of varying maturities.
|
For the U.S. Plans – to achieve a rate of return that matches or exceeds the expected growth in plan liabilities.
For the Foreign Plan – to achieve capital growth by tracking closely the performance of the applicable FTSE index.
|
|
Alternative Investments – Managed Funds
|
Invests in equities and equity-like asset classes and strategies (such as public equities, venture capital, private equity, real estate, natural resources and
hedged strategies) and fixed-income securities approved by the Board of Directors of the Corporation.
|
Generate a minimum annual inflation adjusted return of 5% and outperform a traditional 70/30 equities/bond portfolio.
|
|
Alternative Investments – Hedge and Absolute Return Funds
|
Invests in a diversified portfolio of alternative investment styles and strategies approved by the Trustees of the UES-UK defined benefit pension plan.
|
Generate long-term capital appreciation while maintaining a low correlation with the traditional global financial markets.
|
40
Categories of Plan Assets
Asset categories based on the nature and risks of the U.S. Pension Benefit Plans’ assets as of December 31, 2018, are summarized below.
|
|
|
Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
891
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
891
|
|
|
Consumer staples
|
|
|
602
|
|
|
|
0
|
|
|
|
0
|
|
|
|
602
|
|
|
Energy
|
|
|
415
|
|
|
|
0
|
|
|
|
0
|
|
|
|
415
|
|
|
Financial
|
|
|
1,075
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,075
|
|
|
Healthcare
|
|
|
1,718
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,718
|
|
|
Industrials
|
|
|
780
|
|
|
|
0
|
|
|
|
0
|
|
|
|
780
|
|
|
Information technology
|
|
|
1,632
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,632
|
|
|
Materials
|
|
|
177
|
|
|
|
0
|
|
|
|
0
|
|
|
|
177
|
|
|
Mutual funds
|
|
|
36,883
|
|
|
|
0
|
|
|
|
0
|
|
|
|
36,883
|
|
|
Telecommunications
|
|
|
560
|
|
|
|
0
|
|
|
|
0
|
|
|
|
560
|
|
|
Utilities
|
|
|
264
|
|
|
|
0
|
|
|
|
0
|
|
|
|
264
|
|
|
Total Equity Securities
|
|
|
44,997
|
|
|
|
0
|
|
|
|
0
|
|
|
|
44,997
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
0
|
|
|
|
44,786
|
|
|
|
0
|
|
|
|
44,786
|
|
|
Treasury bonds
|
|
|
25,605
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25,605
|
|
|
Agency bonds
|
|
|
0
|
|
|
|
10,334
|
|
|
|
0
|
|
|
|
10,334
|
|
|
Total Fixed Income Securities
|
|
|
25,605
|
|
|
|
55,120
|
|
|
|
0
|
|
|
|
80,725
|
|
|
Alternative Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed funds
(a)
|
|
|
0
|
|
|
|
0
|
|
|
|
23,673
|
|
|
|
23,673
|
|
|
Total Alternative Investments
|
|
|
0
|
|
|
|
0
|
|
|
|
23,673
|
|
|
|
23,673
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(b)
|
|
|
33,146
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,146
|
|
|
Total Other
|
|
|
33,146
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,146
|
|
|
|
|
$
|
103,748
|
|
|
$
|
55,120
|
|
|
$
|
23,673
|
|
|
$
|
182,541
|
|
|
(a)
|
Includes approximately 74.0% in alternative investments (real assets, commodities and resources, absolute return funds) and 26.0% in cash and cash equivalents.
|
|
(b)
|
Includes investments in temporary funds.
|
41
Categories of Plan Assets
Asset categories based on the nature and risks of the U.S. Pension Benefit Plans’ assets as of December 31, 2017, are summarized below.
|
|
|
Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
$
|
637
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
637
|
|
|
Consumer staples
|
|
|
896
|
|
|
|
0
|
|
|
|
0
|
|
|
|
896
|
|
|
Energy
|
|
|
427
|
|
|
|
0
|
|
|
|
0
|
|
|
|
427
|
|
|
Financial
|
|
|
1,362
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,362
|
|
|
Healthcare
|
|
|
1,192
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,192
|
|
|
Industrials
|
|
|
819
|
|
|
|
0
|
|
|
|
0
|
|
|
|
819
|
|
|
Information technology
|
|
|
2,061
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,061
|
|
|
Materials
|
|
|
248
|
|
|
|
0
|
|
|
|
0
|
|
|
|
248
|
|
|
Mutual funds
|
|
|
91,258
|
|
|
|
0
|
|
|
|
0
|
|
|
|
91,258
|
|
|
Telecommunications
|
|
|
198
|
|
|
|
0
|
|
|
|
0
|
|
|
|
198
|
|
|
Utilities
|
|
|
204
|
|
|
|
0
|
|
|
|
0
|
|
|
|
204
|
|
|
Total Equity Securities
|
|
|
99,302
|
|
|
|
0
|
|
|
|
0
|
|
|
|
99,302
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
0
|
|
|
|
10,801
|
|
|
|
0
|
|
|
|
10,801
|
|
|
Mutual funds
|
|
|
18,884
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,884
|
|
|
Treasury bonds
|
|
|
6,976
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,976
|
|
|
Agency bonds
|
|
|
0
|
|
|
|
926
|
|
|
|
0
|
|
|
|
926
|
|
|
Total Fixed Income Securities
|
|
|
25,860
|
|
|
|
11,727
|
|
|
|
0
|
|
|
|
37,587
|
|
|
Alternative Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed funds
(a)
|
|
|
0
|
|
|
|
0
|
|
|
|
49,838
|
|
|
|
49,838
|
|
|
Total Alternative Investments
|
|
|
0
|
|
|
|
0
|
|
|
|
49,838
|
|
|
|
49,838
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(b)
|
|
|
11,012
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,012
|
|
|
Commingled funds
|
|
|
0
|
|
|
|
174
|
|
|
|
0
|
|
|
|
174
|
|
|
Other
(c)
|
|
|
2
|
|
|
|
0
|
|
|
|
1,223
|
|
|
|
1,225
|
|
|
Total Other
|
|
|
11,014
|
|
|
|
174
|
|
|
|
1,223
|
|
|
|
12,411
|
|
|
|
|
$
|
136,176
|
|
|
$
|
11,901
|
|
|
$
|
51,061
|
|
|
$
|
199,138
|
|
|
(a)
|
Includes approximately 47.3% in equity and equity-like asset securities, 41.1% in alternative investments (real assets, commodities and resources, absolute return funds) and 9.6% in fixed income securities and 2.0% in other, primarily cash and cash equivalents.
|
|
(b)
|
Includes investments in temporary funds.
|
|
(c)
|
Includes accrued receivables and pending broker settlements.
|
42
Asset categories based on the nature and risks of the Foreign Pension Benefit Plan’s assets as of
December 31, 2018
, are summarized below.
|
|
|
Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled Funds (U.K.)
|
|
$
|
0
|
|
|
$
|
3,949
|
|
|
$
|
0
|
|
|
$
|
3,949
|
|
|
Commingled Funds (International)
|
|
|
0
|
|
|
|
20,645
|
|
|
|
0
|
|
|
|
20,645
|
|
|
Total Equity Securities
|
|
|
0
|
|
|
|
24,594
|
|
|
|
0
|
|
|
|
24,594
|
|
|
Fixed-Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled Funds (U.K.)
|
|
|
0
|
|
|
|
17,332
|
|
|
|
0
|
|
|
|
17,332
|
|
|
Alternative Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge and Absolute Return Funds
|
|
|
0
|
|
|
|
0
|
|
|
|
7,569
|
|
|
|
7,569
|
|
|
Cash and cash equivalents
|
|
|
156
|
|
|
|
0
|
|
|
|
0
|
|
|
|
156
|
|
|
|
|
$
|
156
|
|
|
$
|
41,926
|
|
|
$
|
7,569
|
|
|
$
|
49,651
|
|
Asset categories based on the nature and risks of the Foreign Pension Benefit Plan’s assets as of December 31, 2017, are summarized below.
|
|
|
Quoted Prices in
Active Markets for
Identical Inputs
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled Funds (U.K.)
|
|
$
|
0
|
|
|
$
|
4,617
|
|
|
$
|
0
|
|
|
$
|
4,617
|
|
|
Commingled Funds (International)
|
|
|
0
|
|
|
|
23,015
|
|
|
|
0
|
|
|
|
23,015
|
|
|
Total Equity Securities
|
|
|
0
|
|
|
|
27,632
|
|
|
|
0
|
|
|
|
27,632
|
|
|
Fixed-Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled Funds (U.K.)
|
|
|
0
|
|
|
|
18,851
|
|
|
|
0
|
|
|
|
18,851
|
|
|
Alternative Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge and Absolute Return Funds
|
|
|
0
|
|
|
|
0
|
|
|
|
9,637
|
|
|
|
9,637
|
|
|
Cash and cash equivalents
|
|
|
299
|
|
|
|
0
|
|
|
|
0
|
|
|
|
299
|
|
|
|
|
$
|
299
|
|
|
$
|
46,483
|
|
|
$
|
9,637
|
|
|
$
|
56,419
|
|
The table below sets forth a summary of changes in the fair value of the Level 3 plan assets for U.S. and foreign pension plans for the year ended December 31, 2018.
|
|
|
U.S. Pension Benefits
|
|
Foreign Pension Benefits
|
|
|
|
|
2018
|
|
|
2017
|
|
2018
|
|
|
2017
|
|
|
Fair value as of January 1
|
|
$
|
49,838
|
|
|
$
|
33,830
|
|
$
|
9,637
|
|
|
$
|
8,593
|
|
|
Contributions
|
|
|
0
|
|
|
|
16,000
|
|
|
0
|
|
|
|
0
|
|
|
Withdrawals
|
|
|
(26,131
|
)
|
|
|
(5,364
|
)
|
|
(1,037
|
)
|
|
|
0
|
|
|
Realized gains (losses)
|
|
|
9,061
|
|
|
|
1,304
|
|
|
(436
|
)
|
|
|
0
|
|
|
Change in net unrealized (losses) gains
|
|
|
(9,095
|
)
|
|
|
4,068
|
|
|
(98
|
)
|
|
|
229
|
|
|
Other, primarily impact from changes in foreign currency
exchange rates
|
|
|
0
|
|
|
|
0
|
|
|
(497
|
)
|
|
|
815
|
|
|
Fair value as of December 31
|
|
$
|
23,673
|
|
|
$
|
49,838
|
|
$
|
7,569
|
|
|
$
|
9,637
|
|
Net Periodic Pension and Other Postretirement Benefit Costs
The actual return on the fair value of plan assets is included in determining the funded status of the plans. In determining net periodic pension costs, the expected long-term rate of return on the market-related value of plan assets is used. Differences between the actual return on plan assets and the expected long-term rate of return on plan assets are classified as part of unrecognized actuarial gains or losses and are recorded as a component of accumulated other comprehensive loss on the consolidated balance sheet. When these gains or losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are amortized to
43
net periodic pension and other postretirement costs over the average remaining service period or life expectancy of the employees expected to receive benefits under the plans. When the gains or losses are les
s than 10% of the greater of the projected benefit obligation or the market-related value of plan assets, they are included in net periodic pension and other postretirement costs indirectly as a result of lower/higher interest costs arising from a decrease
/increase in the projected benefit obligation.
Net periodic pension and other postretirement benefit costs include the following components for each of the years.
|
|
|
U.S. Pension
Benefits
|
|
|
Foreign Pension
Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Service cost
|
|
$
|
1,225
|
|
|
$
|
1,651
|
|
|
$
|
477
|
|
|
$
|
150
|
|
|
$
|
457
|
|
|
$
|
492
|
|
|
Interest cost
|
|
|
8,473
|
|
|
|
8,413
|
|
|
|
1,391
|
|
|
|
1,845
|
|
|
|
494
|
|
|
|
571
|
|
|
Expected return on plan assets
|
|
|
(13,282
|
)
|
|
|
(12,503
|
)
|
|
|
(2,580
|
)
|
|
|
(2,239
|
)
|
|
|
0
|
|
|
|
0
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
44
|
|
|
|
52
|
|
|
|
(336
|
)
|
|
|
0
|
|
|
|
(1,607
|
)
|
|
|
(1,607
|
)
|
|
Actuarial loss (gain)
|
|
|
1,471
|
|
|
|
4,111
|
|
|
|
727
|
|
|
|
751
|
|
|
|
(231
|
)
|
|
|
(24
|
)
|
|
Special termination benefits
|
|
|
1,350
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
126
|
|
|
|
0
|
|
|
Curtailment loss
|
|
|
21
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
$
|
(698
|
)
|
|
$
|
1,724
|
|
|
$
|
(321
|
)
|
|
$
|
507
|
|
|
$
|
(761
|
)
|
|
$
|
(568
|
)
|
Assumptions
Assumptions are reviewed on an annual basis. The expected long-term rate of return on plan assets is an estimate of average rates of earnings expected to be earned on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. Since these benefits will be paid over many years, the expected long-term rate of return is reflective of current investment returns and investment returns over a longer period. Consideration is also given to target and actual asset allocations, inflation and real risk-free return. The discount rates used in determining future pension obligations and other postretirement benefits for each of the plans are based on rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension and other postretirement benefits. High-quality fixed-income investments are defined as those investments which have received one of the two highest ratings given by a recognized rating agency with maturities of 10+ years.
The discount rates and weighted-average wage increases used to determine the benefit obligations as of December 31, 2018, and 2017, are summarized below.
|
|
|
U.S. Pension
Benefits
|
|
Foreign Pension
Benefits
|
|
Other Postretirement
Benefits
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Discount rate
|
|
4.23-4.34%
|
|
3.63-3.72%
|
|
3.00
|
|
2.45%
|
|
4.09-4.33%
|
|
3.46-3.69%
|
|
Wage increases
|
|
n/a
|
|
3.00%
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
In addition, the assumed health care cost trend rate at December 31, 2018, for other postretirement benefits is 6% for 2019 gradually decreasing to 4.75% in 2021. In selecting rates for current and long-term health care assumptions, the Corporation considers known health care cost increases, the design of the benefit programs, the demographics of its active and retiree populations and expectations of inflation rates in the future.
The following assumptions were used to determine net periodic pension and other postretirement benefit costs for the year ended December 31:
|
|
|
U.S. Pension
Benefits
|
|
Foreign Pension
Benefits
|
|
Other Postretirement
Benefits
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Discount rate
|
|
3.63-4.34%
|
|
4.02-4.25%
|
|
2.45%
|
|
2.50-2.65%
|
|
3.46-3.69%
|
|
3.90-4.13%
|
|
Expected long-term rate of return
|
|
6.95-7.50%
|
|
6.95-7.50%
|
|
4.65%
|
|
4.45%
|
|
n/a
|
|
n/a
|
|
Wages increases
|
|
n/a
|
|
3.00%
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
44
NOTE
10
– COMMITMENTS AND CONTINGENT LIABILITIES:
Outstanding standby and commercial letters of credit as of December 31, 2018, approximated $21,000, the majority of which serves as collateral for the IRB debt. In addition, outstanding surety bonds guaranteeing certain obligations of two of the Corporation’s foreign pension benefit plans approximated $4,000 (SEK 33,900) as of December 31, 2018.
Approximately 39% of the Corporation’s employees, including ASW, are covered by collective bargaining agreements that have expiration dates ranging from August 2019 to May 2022. Collective bargaining agreements expiring in 2019 (representing approximately 55% of the covered employees) will be negotiated with the intent to secure mutually beneficial, long-term arrangements.
See Note 12 regarding derivative instruments, Note 18 regarding litigation and Note 20 for environmental matters.
NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE LOSS:
Net change and ending balances for the various components of other comprehensive income (loss) and for accumulated other comprehensive loss as of and for the years ended December 31, 2017, and 2018, are summarized below.
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
Components
of Employee
Benefit Plans
|
|
|
Unrealized
Holding Gains
on Securities
|
|
|
Derivatives
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Balance at January 1, 2017
|
|
|
(22,973
|
)
|
|
|
(38,636
|
)
|
|
|
59
|
|
|
|
551
|
|
|
|
(60,999
|
)
|
|
Net Change
|
|
|
11,041
|
|
|
|
10,582
|
|
|
|
573
|
|
|
|
134
|
|
|
|
22,330
|
|
|
Impact from adoption of ASU 2018-02
|
|
|
0
|
|
|
|
(6,142
|
)
|
|
|
0
|
|
|
|
54
|
|
|
|
(6,088
|
)
|
|
Balance at December 31, 2017
|
|
|
(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
|
|
|
(6,710
|
)
|
|
|
3,294
|
|
|
|
0
|
|
|
|
(803
|
)
|
|
|
(4,219
|
)
|
|
Balance at December 31, 2018
|
|
$
|
(18,642
|
)
|
|
$
|
(30,902
|
)
|
|
$
|
0
|
|
|
$
|
(64
|
)
|
|
$
|
(49,608
|
)
|
On January 1, 2018, ASU 2016-01 became effective, which requires entities to record changes in fair value for certain investments in equity securities through net income (loss) versus other comprehensive income (loss). Accordingly, no amounts for changes in fair value of the Corporation’s marketable securities were reclassified from accumulated other comprehensive loss to net loss for the year ended December 31, 2018. For the year ended December 31, 2017, the Corporation reclassified an insignificant amount of realized gains from the sale of marketable securities to the consolidated statement of operations. Prior year amounts for the amortization of unrecognized employee benefit costs have been adjusted to include the effects of ASU 2017-07, which became effective on January 1, 2018. The following summarizes the line items affected on the consolidated statements of operations for components reclassified from accumulated other comprehensive loss for each of the years ended December 31. Amounts in parentheses represent credits to net loss.
|
|
|
2018
|
|
|
2017
|
|
|
Amortization of unrecognized employee benefit costs:
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
$
|
89
|
|
|
$
|
3,283
|
|
|
Income tax provision
|
|
|
0
|
|
|
|
0
|
|
|
Net of income tax
|
|
$
|
89
|
|
|
$
|
3,283
|
|
|
Realized gains from settlement of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (foreign currency purchase contracts)
|
|
$
|
(23
|
)
|
|
$
|
(31
|
)
|
|
Costs of products sold (excluding depreciation and
amortization) (futures contracts – copper and aluminum)
|
|
|
(67
|
)
|
|
|
(639
|
)
|
|
Total before income tax
|
|
|
(90
|
)
|
|
|
(670
|
)
|
|
Income tax provision
|
|
|
0
|
|
|
|
0
|
|
|
Net of income tax
|
|
$
|
(90
|
)
|
|
$
|
(670
|
)
|
There was no income tax expense (benefit) associated with the various components of other comprehensive income (loss) for either year 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 taxes since earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.
45
NOTE 1
2
– DERIVATIVE INSTRUMENTS:
Certain operations of the Corporation are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, foreign currency sales contracts are entered into which are designated as cash flow or fair value hedges. As of December 31, 2018, approximately $32,983 of anticipated foreign-denominated sales has been hedged which are covered by fair value contracts settling at various dates through January 2020.
Additionally, certain 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 December 31, 2018, approximately 51% or $2,547 of anticipated copper purchases over the next nine months and 56% or $507 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. The Corporation does not enter into derivative transactions for speculative purposes and, therefore, holds no derivative instruments for trading purposes.
The following summarizes location and fair value of the foreign currency sales contracts recorded on the consolidated balance sheets as of December 31:
|
|
|
Location
|
|
2018
|
|
|
2017
|
|
|
Fair value hedge contracts
|
|
Other current assets
|
|
$
|
44
|
|
|
$
|
961
|
|
|
|
|
Other current liabilities
|
|
|
950
|
|
|
|
89
|
|
|
|
|
Other noncurrent liabilities
|
|
|
70
|
|
|
|
1
|
|
|
Fair value hedged item
|
|
Receivables
|
|
|
232
|
|
|
|
(269
|
)
|
|
|
|
Other current assets
|
|
|
967
|
|
|
|
169
|
|
|
|
|
Other noncurrent assets
|
|
|
105
|
|
|
|
16
|
|
|
|
|
Other current liabilities
|
|
|
12
|
|
|
|
907
|
|
The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive loss. Amounts recognized as and reclassified from accumulated other comprehensive loss are recorded as a component of other comprehensive income (loss) and are summarized below. Amounts are after-tax, where applicable. Certain amounts recognized as comprehensive income (loss) for 2018 and 2017 have no tax effect due to the Corporation recording a valuation allowance against its deferred income tax assets in the related jurisdictions. See Note 19. The difference between the balances at December 31, 2017, and January 1, 2018, represents the impact from the adoption of ASU 2018-02.
|
For the Year Ended December 31, 2018
|
|
Beginning of
the Year
|
|
|
Recognized
|
|
|
Reclassified
|
|
|
End of
the Year
|
|
|
Foreign currency purchase contracts
|
|
$
|
239
|
|
|
$
|
0
|
|
|
$
|
23
|
|
|
$
|
216
|
|
|
Future contracts – copper and aluminum
|
|
|
500
|
|
|
|
(713
|
)
|
|
|
67
|
|
|
|
(280
|
)
|
|
Change in fair value
|
|
$
|
739
|
|
|
$
|
(713
|
)
|
|
$
|
90
|
|
|
$
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency purchase contracts
|
|
$
|
216
|
|
|
$
|
0
|
|
|
$
|
31
|
|
|
$
|
185
|
|
|
Future contracts – copper and aluminum
|
|
|
335
|
|
|
|
804
|
|
|
|
639
|
|
|
|
500
|
|
|
Change in fair value
|
|
$
|
551
|
|
|
$
|
804
|
|
|
$
|
670
|
|
|
$
|
685
|
|
46
The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive loss to earnings is summarized below. All amounts are pr
e-tax.
|
|
|
Location of
Gain (Loss)
in Statements
|
|
Estimated to be
Reclassified in
the Next
|
|
|
Year Ended December 31,
|
|
|
|
|
of Operations
|
|
12 Months
|
|
|
2018
|
|
|
2017
|
|
|
Foreign currency purchase contracts
|
|
Depreciation and amortization
|
|
$
|
27
|
|
|
$
|
23
|
|
|
$
|
31
|
|
|
Futures contracts – copper and
aluminum
|
|
Costs of products sold (excluding depreciation and amortization)
|
|
|
(280
|
)
|
|
|
67
|
|
|
|
639
|
|
Losses on foreign exchange transactions included in other expense approximated $(1,480) and $(747) for 2018 and 2017, respectively.
NOTE 13 – FAIR VALUE:
The following summarizes financial assets and liabilities reported at fair value on a recurring basis in the accompanying consolidated balance sheets at December 31:
|
2018
|
|
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
$
|
3,659
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,659
|
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
0
|
|
|
|
1,011
|
|
|
|
0
|
|
|
|
1,011
|
|
|
Other noncurrent assets
|
|
|
0
|
|
|
|
105
|
|
|
|
0
|
|
|
|
105
|
|
|
Other current liabilities
|
|
|
0
|
|
|
|
962
|
|
|
|
0
|
|
|
|
962
|
|
|
Other noncurrent liabilities
|
|
|
0
|
|
|
|
70
|
|
|
|
0
|
|
|
|
70
|
|
|
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 the “Rabbi” trust for the purpose of providing benefits under the 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 debt approximates its carrying value. Additionally, the fair value of trade receivables and trade payables approximates their carrying value.
NOTE 14 – REVENUE:
Net sales by geographic area for the years ended December 31, 2018, and 2017, are outlined below. When disaggregating revenue, consideration was given to information regularly reviewed by the chief operating decision maker to evaluate the financial performance of the operating segments and make resource allocation decisions.
|
|
|
Net Sales
(1)
|
|
|
Geographic Areas:
|
|
2018
|
|
|
2017
|
|
|
United States
|
|
$
|
209,536
|
|
|
$
|
194,982
|
|
|
Foreign
|
|
|
209,896
|
|
|
|
190,173
|
|
|
|
|
$
|
419,432
|
|
|
$
|
385,155
|
|
47
|
|
|
Net Sales by Product Line
(2)
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Forged and cast mill rolls
|
|
$
|
270,241
|
|
|
$
|
254,638
|
|
|
Forged engineered products
|
|
|
59,289
|
|
|
|
42,645
|
|
|
Heat exchange coils
|
|
|
26,761
|
|
|
|
28,998
|
|
|
Centrifugal pumps
|
|
|
35,868
|
|
|
|
35,607
|
|
|
Air handling systems
|
|
|
27,273
|
|
|
|
23,267
|
|
|
|
|
$
|
419,432
|
|
|
$
|
385,155
|
|
|
(1)
|
Net sales are attributed to countries based on location of the customer. Sales to individual countries were less than 10% of consolidated net sales for each of the years.
|
|
(
2
)
|
For 2018 and 2017, no customers within the Forged and Cast Engineered Products exceeded 10% of its net sales. For the Air and Liquid Processing segment, one customer accounted for 13% of its net sales in 2018 and no customers exceeded 10% of net sales for 2017.
|
NOTE 15 – STOCK-BASED COMPENSATION:
In May 2016, the shareholders of the Corporation approved the adoption of the Ampco-Pittsburgh Corporation 2016 Omnibus Incentive Plan (the “Incentive Plan”), which authorizes the issuance of up to 1,100,000 shares of the Corporation’s common stock for awards under the Incentive Plan. The Incentive Plan replaces the 2011 Omnibus Incentive Plan (the “Predecessor Plan”). No new awards will be granted under the Predecessor Plan. Any awards outstanding under the Predecessor Plan will remain subject to and be paid under the Predecessor Plan, and any shares subject to outstanding awards under the Predecessor Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares (equal to 140,251 shares at December 31, 2018) will automatically become available for issuance 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. The number of shares of common stock issued to non-employee directors was 72,170 and 50,000 in 2018 and 2017, respectively.
The Compensation Committee has granted time-vesting restricted stock units (RSUs) and performance-vesting restricted stock units (PSUs) to select individuals. Each RSU represents the right to receive one share of common stock of the Corporation at a future date after the RSU has become earned and vested, subject to the terms and conditions of the RSU award agreement. The RSUs typically vest over a three-year period. The PSUs can be earned depending upon the achievement of a performance or market condition and a time-vesting condition as follows:
(i) achievement of a targeted return on invested capital or a basic earnings per share during the performance period beginning in the year of grant and continuing for two subsequent years; (ii) achievement of a three-year cumulative relative total shareholder return as ranked against other companies included in the Corporation’s peer group; and (iii) remaining continuously employed with the Corporation through the end of the year following three years from the date of grant. Earlier vesting of the stock units is permitted under certain conditions, such as upon a change of control of the Corporation, or as approved by the Board of Directors.
The grant date fair value for the RSUs equals the closing price of the Corporation’s common stock on the NYSE on the date of grant. The grant date fair value for PSUs subject to a market condition is determined using a Monte Carlo simulation model and the grant date fair value for PSUs that vest subject to a performance condition is equal to the closing price of the Corporation’s stock on the NYSE on the date of grant. The determination of the fair value of these awards takes into consideration the likelihood of achievement of the market or performance condition and is adjusted for subsequent changes in the estimated or actual outcome of the condition. Unrecognized compensation expense associated with the RSUs and PSUs equaled $2,246 at December 31, 2018, and is expected to be recognized over a weighted average period of approximately 2 years.
48
A summary of outstanding incentive options (RSUs and PSUs) as of
December 31, 201
7
,
and 201
8
,
and activity for the year
s
then
ende
d
, is as follows:
|
|
|
Number of
RSUs
|
|
|
Weighted
Average
Fair
Value
|
|
|
Number of
PSUs
|
|
|
Weighted
Average
Fair
Value
|
|
|
Outstanding at January 1, 2017
|
|
|
155,845
|
|
|
$
|
17.53
|
|
|
|
39,348
|
|
|
$
|
21.62
|
|
|
Granted
|
|
|
76,473
|
|
|
|
14.00
|
|
|
|
97,788
|
|
|
|
14.93
|
|
|
Converted to common stock
|
|
|
(58,677
|
)
|
|
|
17.25
|
|
|
|
0
|
|
|
N/A
|
|
|
Forfeited/cancelled
|
|
|
(14,935
|
)
|
|
|
16.76
|
|
|
|
(34,622
|
)
|
|
|
14.99
|
|
|
Outstanding at December 31, 2017
|
|
|
158,706
|
|
|
|
16.00
|
|
|
|
102,514
|
|
|
|
17.47
|
|
|
Granted
|
|
|
117,501
|
|
|
|
9.70
|
|
|
|
94,703
|
|
|
|
10.06
|
|
|
Converted to common stock
|
|
|
(83,786
|
)
|
|
|
16.38
|
|
|
|
0
|
|
|
N/A
|
|
|
Forfeited/cancelled
|
|
|
(19,716
|
)
|
|
|
13.65
|
|
|
|
(70,630
|
)
|
|
|
18.79
|
|
|
Outstanding at December 31, 2018
|
|
|
172,705
|
|
|
$
|
11.77
|
|
|
|
126,587
|
|
|
$
|
11.19
|
|
A summary of outstanding stock options as of December 31, 2017, and 2018, and activity for the years then ended, is as follows:
|
|
|
Number of
Shares Under
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life In
Years
|
|
|
Intrinsic
Value
|
|
|
Outstanding at January 1, 2017
|
|
|
1,005,836
|
|
|
$
|
24.07
|
|
|
|
4.2
|
|
|
$
|
0
|
|
|
Granted
|
|
|
0
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(190,501
|
)
|
|
|
26.03
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
815,335
|
|
|
|
23.61
|
|
|
|
3.3
|
|
|
|
0
|
|
|
Granted
|
|
|
0
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(209,750
|
)
|
|
|
32.47
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
605,585
|
|
|
$
|
20.54
|
|
|
|
2.8
|
|
|
$
|
0
|
|
|
Exercisable at December 31, 2018
|
|
|
605,585
|
|
|
$
|
20.54
|
|
|
|
2.8
|
|
|
$
|
0
|
|
|
Vested or expected to vest at December 31, 2018
|
|
|
605,585
|
|
|
$
|
20.54
|
|
|
|
2.8
|
|
|
$
|
0
|
|
Stock-based compensation expense for all awards, including expense for shares to be issued to non-employee directors, approximated $2,115 and $2,400 for 2018 and 2017, respectively. There was no income tax benefit recognized in the consolidated statements of operations due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the jurisdiction where the expense was recognized. See Note 19.
NOTE 16 – OPERATING LEASES:
The Corporation leases certain factory and office space and certain equipment. Operating lease expense was $1,412 in 2018 and $1,244 in 2017. Operating lease payments for subsequent years are $582 for 2019, $426 for 2020, $374 for 2021, $355 for 2022, $345 for 2023 and $4,249 thereafter.
NOTE 17 – RESEARCH AND DEVELOPMENT COSTS:
Expenditures relating to the development of new products, identification of products or process alternatives and modifications and improvements to existing products and processes are expensed as incurred. These expenses approximated $2,664 for 2018 and $3,386 for 2017.
NOTE 18 – LITIGATION:
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
49
Service Workers International Union, AFL-CIO) alleged that the defendants breached collective bargaining agre
ements 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.
The Third Circuit Court of Appeals reversed the District Court’s decision to compel arbitr
ation on August 29, 2018. The plaintiffs filed a petition for rehearing, which was denied. Rather than litigating the merits of the case at the United States District Court for the Western District of Pennsylvania, the Corporation reached a settlement agre
ement in principle with the plaintiffs, which remains subject to approval by the court. As expected, the final resolution of this settlement agreement will not have a material adverse effect on our results of operations, financial position, liquidity or ca
pital 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.
Asbestos Claims
The following table reflects approximate information about the claims for Asbestos Liability against Air & Liquid and the Corporation for the two years ended December 31, 2018, and 2017:
|
|
|
2018
|
|
|
2017
|
|
|
Total claims pending at the beginning of the period
|
|
|
6,907
|
|
|
|
6,618
|
|
|
New claims served
|
|
|
1,338
|
|
|
|
1,365
|
|
|
Claims dismissed
|
|
|
(1,123
|
)
|
|
|
(718
|
)
|
|
Claims settled
|
|
|
(350
|
)
|
|
|
(358
|
)
|
|
Total claims pending at the end of the period
(1)
|
|
|
6,772
|
|
|
|
6,907
|
|
|
Gross settlement and defense costs (in 000’s)
|
|
$
|
24,324
|
|
|
$
|
21,431
|
|
|
Average gross settlement and defense costs per claim resolved (in 000’s)
|
|
$
|
16.51
|
|
|
$
|
19.92
|
|
|
(1)
|
Included as “open claims” are approximately 668 and 479 claims in 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”), which was acquired by Howden. 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
50
asserted through 2013 as of December 31, 2006.
HR&A’s analysis has been periodically updated since that time. In 2018, the Corporation engaged Nathan
Associates
Inc. (“Nathan”) to update t
he liability valuation, and additional reserves were established by the Corporation as of December 31, 2018, for Asbestos Liability claims pending or projected to be asserted through
2052
. The methodology used by Nathan in its projection in 2018 of the ope
rating 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
:
|
|
•
|
interpretation of a widely accepted forecast of the population likely to have been exposed to asbestos;
|
|
|
•
|
epidemiological studies estimating the number of people likely to develop asbestos-related diseases;
|
|
|
•
|
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, 2016, to August 19, 2018;
|
|
|
•
|
an analysis of pending cases, by type of injury claimed and jurisdiction where the claim is filed;
|
|
|
•
|
an analysis of claims resolution history from January 1, 2016, to August 19, 2018, to determine the average settlement value of claims, by type of injury claimed and jurisdiction of filing; and
|
|
|
•
|
an adjustment for inflation in the future average settlement value of claims, at an annual inflation rate based on the Congressional Budget Office’s ten year forecast of inflation.
|
Using this information, Nathan estimated in 2018 the number of future claims for Asbestos Liability that would be filed through the year 2052, as well as the settlement or indemnity costs that would be incurred to resolve both pending and future unasserted claims through 2052. 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 Liability. In developing the estimate, the Corporation considered Nathan’s projection for settlement or indemnity costs for Asbestos Liability and management’s projection of associated defense costs (based on the current defense to indemnity cost ratio), as well as a number of additional factors. These additional factors included the Settlement Agreements 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 Liability. 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 2052.
With the assistance of Nathan, the Corporation extended its estimate of the Asbestos Liability, including the costs of settlement and defense costs relating to currently pending claims and future claims projected to be filed against the Corporation through the estimated final date by which the Corporation expects to have settled all asbestos-related claims in 2052. The Corporation’s previous estimate was for asbestos claims filed or projected to be filed against the Corporation through 2026. Our ability to reasonably estimate this liability through the expected final date of settlement for all asbestos-related claims of this litigation instead of a ten-year period was based on several factors:
|
|
•
|
There have been generally favorable trends developments in the trend of case law which has been a contributing factor in stabilizing the asbestos claims activity and related settlement and defense costs;
|
|
|
•
|
There have been significant actions taken by certain state legislatures and courts that have reduced the number and type of claims that can proceed to trial;
|
|
|
•
|
The Corporation has coverage-in-place agreements with almost all of its excess insurers which enables the Corporation to project a stable relationship between settlement and defense costs paid by the Corporation and reimbursements from its insurers; and
|
|
|
•
|
Annual settlements with respect to groups of cases with certain plaintiff firms have helped to stabilize indemnity payments and defense costs.
|
Taking these factors into consideration, the Corporation believes there is greater predictability of outcomes from settlements, a reduction in the volatility of defense costs, and it has gained substantial experience as an asbestos defendant. As a result, the
51
Corporation believes the uncertainty in estimating the Asbestos Liabili
ty beyond 10 years has been reduced and it now has sufficient information to estimate the Asbestos Liability through 205
2
, the
estimated final date by which the Corporation expects to have settled all asbestos-related claims
.
The Corporation’s reserve at December 31, 2018, for the total costs, including defense costs, for Asbestos Liability claims pending or projected to be asserted through 2052, was $227,922. Defense costs are estimated at 80% of settlement costs. The Corporation’s receivable at December 31, 2018, 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, 2018, and the probable payments and reimbursements relating to the estimated indemnity and defense costs for pending and unasserted future Asbestos Liability claims, was $152,508.
The following table summarizes activity relating to insurance recoveries for each of the years ended December 31, 2018, and 2017.
|
|
|
2018
|
|
|
2017
|
|
|
Insurance receivable – asbestos, beginning of the year
|
|
$
|
100,342
|
|
|
$
|
115,945
|
|
|
Settlement and defense costs paid by insurance carriers
|
|
|
(17,420
|
)
|
|
|
(15,603
|
)
|
|
Changes in estimated coverage
|
|
|
69,586
|
|
|
|
0
|
|
|
Insurance receivable – asbestos, end of the year
|
|
$
|
152,508
|
|
|
$
|
100,342
|
|
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 amounts recorded by the Corporation for Asbestos Liability and insurance receivable 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 Nathan’s calculations vary significantly from actual results. Key variables in these assumptions are identified above and include the number and type of new claims to be filed each year, the average cost of disposing of each such new claim, average annual defense costs, compliance by relevant parties with the terms of the Settlement Agreements, and the solvency risk with respect to the relevant insurance carriers. Other factors that may affect the Corporation’s Asbestos Liability and ability to recover under its insurance policies include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, and the passage of state or federal tort reform legislation.
The Corporation intends to evaluate its estimated Asbestos Liability and related insurance receivable 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 receivable 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.
NOTE 19 – INCOME TAXES:
On December 22, 2017, the U.S. federal government enacted the Tax Reform, to become effective as of January 1, 2018, which, among other things, 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. In response to the Tax Reform, Staff Accounting Bulletin No. 118 (SAB 118) was issued 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. Accordingly, for 2017, the Corporation recorded provisional amounts for certain effects of the Tax Reform by making 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 income tax balances. In 2018, the Corporation recorded adjustments to the provisional amounts and completed its accounting for tax effects of the Tax Reform.
In 2017, the Tax Reform negatively impacted the Corporation’s income tax provision by approximately $1,565, principally related to the one-time repatriation transition tax offset by income tax benefits resulting from 100% bonus depreciation. Originally, there was no cash outlay due to the Tax Reform; however, it reduced the amount of the Corporation’s carry back refund that it would have been
52
able to receive. Additionally, there was no significant impact from remeasuring its U.S. deferred income tax assets and liabilities at the new enacted statutory income tax rate since these net deferred income tax assets were fully valued
.
After further guidance was issued in 2018 from the Internal Revenue Service, the Corporation elected with the filing of its 2017 U.S. Corporate income tax return to record separately the one-time repatriation transition tax liability of approximately $2,369 which, as permitted, will be remitted over eight years. As a result, the Corporation increased its income tax receivable related to the carry back of the 2017 net operating loss and generated AMT credits by the combined amount of $1,419. Lastly, the Corporation further increased the 2017 U.S. federal net operating loss carryforward by approximately $741; however, there was no net tax impact as this deferred tax asset is fully valued. During 2018, the Corporation received approximately $3,500 of U.S. federal income tax refunds.
(Loss) income from continuing operations before income taxes and gain on sale of joint venture is comprised of the following:
|
|
|
2018
|
|
|
2017
|
|
|
Domestic
|
|
$
|
(48,169
|
)
|
|
$
|
(16,988
|
)
|
|
Foreign
|
|
|
4,362
|
|
|
|
(454
|
)
|
|
Loss from continuing operations before income taxes and gain on sale of
joint venture
|
|
$
|
(43,807
|
)
|
|
$
|
(17,442
|
)
|
At December 31, 2018, the Corporation has federal net operating loss carryforwards of $18,745, of which $12,011 can be carried forward indefinitely, but will be limited to 80 percent of taxable income in any given year. The balance of $6,734 will begin to expire in 2035. Additionally, at December 31, 2018, the Corporation had state net operating loss carryforwards of $40,550, which begin to expire in 2019, foreign net operating loss carryforwards from continuing operations of $52,332, which begin to expire in 2019, and capital loss carryforwards of $768, which do not expire.
The income tax provision (benefit) for continuing operations consisted of the following:
|
|
|
2018
|
|
|
2017
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,166
|
|
|
$
|
(4,698
|
)
|
|
State
|
|
|
73
|
|
|
|
(440
|
)
|
|
Foreign
|
|
|
839
|
|
|
|
606
|
|
|
Current income tax provision (benefit)
|
|
|
2,078
|
|
|
|
(4,532
|
)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(10,881
|
)
|
|
|
1,259
|
|
|
State
|
|
|
(2,189
|
)
|
|
|
(112
|
)
|
|
Foreign
|
|
|
3,350
|
|
|
|
1,876
|
|
|
Increase in valuation allowance
|
|
|
7,910
|
|
|
|
154
|
|
|
Deferred income tax (benefit) provision
|
|
|
(1,810
|
)
|
|
|
3,177
|
|
|
Total income tax provision (benefit)
|
|
$
|
268
|
|
|
$
|
(1,355
|
)
|
During 2018, the Corporation released the valuation allowance previously established against the net deferred income tax assets of ATR on the basis that it was “more likely than not” the assets would be realized due to continued earnings and forecasts sufficient to utilize the net deferred income tax assets.
53
The difference between statutory U.S. federal income tax and the Corporation’s effective income tax was as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Computed at statutory rate
|
|
$
|
(8,943
|
)
|
|
$
|
(5,635
|
)
|
|
Tax differential on non-U.S. earnings
|
|
|
56
|
|
|
|
(108
|
)
|
|
State income taxes
|
|
|
(2,131
|
)
|
|
|
(398
|
)
|
|
Meals and entertainment
|
|
|
76
|
|
|
|
138
|
|
|
Alternative minimum tax credits
|
|
|
(433
|
)
|
|
|
0
|
|
|
Increase in valuation allowance
|
|
|
7,910
|
|
|
|
154
|
|
|
Repatriation transition tax impact
|
|
|
1,383
|
|
|
|
3,284
|
|
|
Adjustments to net operating losses
|
|
|
1,879
|
|
|
|
0
|
|
|
Reclassification of discontinued operations increase in valuation
allowance
|
|
|
0
|
|
|
|
930
|
|
|
Other – net
|
|
|
471
|
|
|
|
280
|
|
|
Total income tax provision (benefit)
|
|
$
|
268
|
|
|
$
|
(1,355
|
)
|
Deferred income tax assets and liabilities as of December 31, 2018, and 2017, are summarized below. Unremitted earnings of the Corporation’s non-U.S. subsidiaries and affiliates are deemed to be permanently reinvested and, accordingly, no deferred income tax liability has been recorded. If the Corporation were to remit any foreign earnings to the U.S., the estimated tax impact would be insignificant.
|
|
|
2018
|
|
|
2017
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Employment – related liabilities
|
|
$
|
10,667
|
|
|
$
|
10,971
|
|
|
Pension liability – foreign
|
|
|
996
|
|
|
|
1,633
|
|
|
Pension liability – domestic
|
|
|
8,527
|
|
|
|
9,004
|
|
|
Liabilities related to discontinued operations
|
|
|
144
|
|
|
|
186
|
|
|
Capital loss carryforwards
|
|
|
305
|
|
|
|
308
|
|
|
Asbestos-related liability
|
|
|
18,894
|
|
|
|
12,179
|
|
|
Net operating loss – domestic
|
|
|
3,936
|
|
|
|
674
|
|
|
Net operating loss – state
|
|
|
3,057
|
|
|
|
2,782
|
|
|
Net operating loss – foreign
|
|
|
9,514
|
|
|
|
12,232
|
|
|
Inventory related
|
|
|
3,905
|
|
|
|
2,711
|
|
|
Impairment charge associated with investment in MG
|
|
|
1,050
|
|
|
|
1,155
|
|
|
Other
|
|
|
3,208
|
|
|
|
3,357
|
|
|
Gross deferred income tax assets
|
|
|
64,203
|
|
|
|
57,192
|
|
|
Valuation allowance
|
|
|
(33,881
|
)
|
|
|
(26,933
|
)
|
|
|
|
|
30,322
|
|
|
|
30,259
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(25,420
|
)
|
|
|
(26,784
|
)
|
|
Intangible assets – finite life
|
|
|
(1,181
|
)
|
|
|
(1,564
|
)
|
|
Intangible assets – indefinite life
|
|
|
(550
|
)
|
|
|
(605
|
)
|
|
Other
|
|
|
(147
|
)
|
|
|
(149
|
)
|
|
Gross deferred income tax liabilities
|
|
|
(27,298
|
)
|
|
|
(29,102
|
)
|
|
Net deferred income tax assets
|
|
$
|
3,024
|
|
|
$
|
1,157
|
|
Unrecognized tax benefits and changes in unrecognized tax benefits for the years ended December 31, 2018, and 2017, are insignificant. If the unrecognized tax benefits were recognized, the effect on the Corporation’s effective income tax rate would also be insignificant. The amount of penalties and interest recognized in the consolidated balance sheets as of December 31, 2018, and 2017, and in the consolidated statements of operations for 2018 and 2017 is insignificant.
The Corporation is subject to taxation in the United States, various states and foreign jurisdictions, and remains subject to examination by tax authorities for tax years 2015 – 2018. The Corporation is currently under audit by the Internal Revenue Service of its consolidated federal tax returns for the 2014 – 2016 tax years. Additionally, the Corporation’s subsidiary, UES, is currently under audit by the Pennsylvania Department of Revenue for the 2015 and 2016 tax years. No material changes are anticipated.
54
NOTE 20 – ENVIRONMENTAL MAT
TERS:
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 remedial actions and environmental compliance measures of approximately $324 at December 31, 2018, is considered adequate based on information known to date.
NOTE 21 – RELATED PARTIES:
ATR has a loan outstanding with its minority shareholder. The loan originally matured in 2008 but has been renewed continually for one-year periods. Interest does not compound and has accrued on the outstanding balance, since inception, at the three-to-five-year loan interest rate set by the People’s Bank of China in effect at the time of renewal. The loan balance approximated $4,056 (RMB 27,901) at December 31, 2018, and $5,325 (RMB 34,655) at December 31, 2017. During 2018, ATR repaid $449 (RMB 3,090) in principal and $145 (RMB 1,000) in accrued interest. Additionally, the shareholders converted a portion of their loans outstanding with ATR to equity. The conversion was in proportion to their respective ownership interest, with TISCO converting $872 (RMB 6,000) of its loans to equity. The interest rate for 2018 approximated 5%, and accrued interest approximated $2,297 (RMB 15,800) and $2,682 (RMB 17,457) as of December 31, 2018, and 2017, which is recorded in other current liabilities. Purchases from ATR’s minority shareholder and its affiliates, which were in the ordinary course of business, approximated $11,248 (RMB 77,356) and $7,752 (RMB 52,418) in 2018 and 2017, respectively. Excluding the loan and interest outstanding, the amount payable to ATR’s minority shareholder and its affiliates approximated $208 (RMB 1,429) and $296 (RMB 1,929) at December 31, 2018, and 2017, respectively. Sales to ATR’s minority shareholder and its affiliates, which were in the ordinary course of business, approximated $11,697 (RMB 77,464) and $8,564 (RMB 57,909) for 2018 and 2017, respectively. No amounts were due from ATR’s minority shareholder or its affiliates as of December 31, 2018, or 2017.
NOTE 22 – BUSINESS SEGMENTS:
The Corporation organizes its business into two operating segments—Forged and Cast Engineered Products and Air and Liquid Processing. Summarized financial information concerning the Corporation’s reportable segments is shown in the following tables. Corporate assets included under Identifiable Assets represent primarily cash and cash equivalents and other items not allocated to reportable segments. Long-lived assets exclude deferred income tax assets. Corporate costs are comprised of operating costs of the corporate office and other costs not allocated to the segments. The accounting policies are the same as those described in Note 1.
|
|
|
Net Sales
|
(Loss) Income from Continuing Operations Before Income
Taxes and Gain on Sale of
Joint Venture
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Forged and Cast Engineered Products
|
|
$
|
329,530
|
|
|
$
|
297,283
|
|
|
$
|
(6,605
|
)
|
|
$
|
(6,887
|
)
|
|
Air and Liquid Processing
(1)
|
|
|
89,902
|
|
|
|
87,872
|
|
|
|
(22,129
|
)
|
|
|
10,682
|
|
|
Total Reportable Segments
|
|
|
419,432
|
|
|
|
385,155
|
|
|
|
(28,734
|
)
|
|
|
3,795
|
|
|
Corporate costs, including other income (expense)
|
|
0
|
|
|
0
|
|
|
|
(15,073
|
)
|
|
|
(21,237
|
)
|
|
Consolidated total
|
|
$
|
419,432
|
|
|
$
|
385,155
|
|
|
$
|
(43,807
|
)
|
|
$
|
(17,442
|
)
|
|
|
|
Capital Expenditures
|
Depreciation and
Amortization Expense
|
Identifiable Assets
(2)
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Forged and Cast Engineered Products
|
|
$
|
8,801
|
|
|
$
|
12,277
|
|
|
$
|
20,189
|
|
|
$
|
20,113
|
|
|
$
|
348,017
|
|
|
$
|
380,437
|
|
|
Air and Liquid Processing
|
|
|
911
|
|
|
|
560
|
|
|
|
996
|
|
|
|
1,072
|
|
|
|
187,449
|
|
|
|
132,341
|
|
|
Corporate
|
|
|
7
|
|
|
|
174
|
|
|
|
194
|
|
|
|
191
|
|
|
|
15,415
|
|
|
|
19,031
|
|
|
|
|
$
|
9,719
|
|
|
$
|
13,011
|
|
|
$
|
21,379
|
|
|
$
|
21,376
|
|
|
$
|
550,881
|
|
|
$
|
531,809
|
|
55
|
|
|
Long-Lived Assets
(3)
|
|
(Loss) Income from Continuing Operations Before Income
Taxes and Gain on Sale of
Joint Venture
|
|
Geographic Areas:
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
|
United States
|
|
$
|
268,731
|
|
|
$
|
235,646
|
|
|
|
$
|
(48,234
|
)
|
|
$
|
(18,122
|
)
|
|
|
Foreign
|
|
|
71,334
|
|
|
|
76,684
|
|
|
|
$
|
4,427
|
|
|
$
|
680
|
|
|
|
|
|
$
|
340,065
|
|
|
$
|
312,330
|
|
|
|
$
|
(43,807
|
)
|
|
$
|
(17,442
|
)
|
|
|
(1)
|
(Loss) income from continuing operations before income taxes and gain on sale of joint venture for the Air and Liquid Processing segment for 2018 includes a charge of $32,910 for the estimated costs of asbestos-related litigation through 2052, the estimated final date by which the Corporation expects to have settled all asbestos-related claims, net of estimated insurance recoveries.
|
|
(2)
|
Identifiable assets exclude assets of discontinued operations.
Identifiable assets for the Forged and Cast Engineered Products segment include investments in joint ventures of $2,175 at December 31, 2018, and 2017. The change in the identifiable assets of the Air and Liquid Processing segment relates primarily to the movement in asbestos-related insurance receivables, the balances of which equaled $152,508 and $100,342 at December 31, 2018, and 2017, respectively.
|
|
(3)
|
Foreign long-lived assets represent primarily assets of the foreign operations, excluding assets of discontinued operations. Long-lived assets of the U.S. include noncurrent asbestos-related insurance receivables of $135,508 and $87,342 for 2018 and 2017, respectively.
|
56
QUARTERLY INFORMATION – UNAUDITED
Not applicable.
57
