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AMPCO PITTSBURGH CORP - Quarter Report: 2022 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022 

OR

 

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

 

For the transition period from                      to                     

Commission File Number 1-898

 

AMPCO-PITTSBURGH CORPORATION

 

 

 

Pennsylvania

25-1117717

(State of

Incorporation)

(I.R.S. Employer

Identification No.)

726 Bell Avenue, Suite 301

Carnegie, Pennsylvania 15106

(Address of principal executive offices)

(412) 456-4400

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1 par value

AP

New York Stock Exchange

Series A Warrants to purchase shares of Common Stock

AP WS

NYSE American Exchange

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

   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Emerging growth company

 

 

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

   If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  

   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

On November 9, 2022, 19,403,519 common shares were outstanding.

 

 

 

 


 

AMPCO-PITTSBURGH CORPORATION

INDEX

 

 

 

 

 

Page No.

Part I 

 

Financial Information:

 

 

 

 

 

 

 

 

 

 

 

Item 1 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2022, and December 31, 2021

 

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2022, and 2021

 

4

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2022, and 2021

 

 

5

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity – Three and Nine Months Ended September 30, 2022, and 2021

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2022, and 2021

 

7

 

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

 

 

 

 

Item 2 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

 

 

 

 

Item 3 

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

 

 

 

 

 

Item 4 

 

Controls and Procedures

 

28

 

 

 

 

 

 

 

Part II 

 

Other Information:

 

 

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

 

29

 

 

 

 

 

 

 

 

 

Item 1A 

 

Risk Factors

 

29

 

 

 

 

 

 

 

 

 

Item 6 

 

Exhibits

 

29

 

 

 

 

 

 

 

Signatures

 

30

 

 

 

 

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par value)

 

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,190

 

 

$

10,337

 

Receivables, less allowance for doubtful accounts of $906 as of September 30,

   2022, and $1,240 as of December 31, 2021

 

 

76,341

 

 

 

68,829

 

Receivables from related parties (Note 17)

 

 

1,881

 

 

 

0

 

Inventories

 

 

92,511

 

 

 

88,198

 

Insurance receivable – asbestos

 

 

16,000

 

 

 

16,000

 

Other current assets

 

 

5,775

 

 

 

4,933

 

Total current assets

 

 

204,698

 

 

 

188,297

 

Property, plant and equipment, net

 

 

153,028

 

 

 

158,563

 

Operating lease right-of-use assets

 

 

3,547

 

 

 

4,056

 

Insurance receivable – asbestos

 

 

97,549

 

 

 

105,297

 

Deferred income tax assets

 

 

2,622

 

 

 

2,176

 

Intangible assets, net

 

 

4,970

 

 

 

6,204

 

Investments in joint ventures

 

 

2,175

 

 

 

2,175

 

Prepaid pensions

 

 

10,516

 

 

 

11,963

 

Other noncurrent assets

 

 

5,260

 

 

 

6,901

 

Total assets

 

$

484,365

 

 

$

485,632

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

37,584

 

 

$

43,105

 

Accounts payable to related parties (Note 17)

 

 

891

 

 

 

1,125

 

Accrued payrolls and employee benefits

 

 

12,628

 

 

 

15,954

 

Debt – current portion

 

 

15,376

 

 

 

20,007

 

Operating lease liabilities – current portion

 

 

630

 

 

 

641

 

Asbestos liability – current portion

 

 

23,000

 

 

 

23,000

 

Other current liabilities

 

 

29,174

 

 

 

21,210

 

Total current liabilities

 

 

119,283

 

 

 

125,042

 

Employee benefit obligations

 

 

54,167

 

 

 

62,114

 

Asbestos liability

 

 

142,631

 

 

 

157,314

 

Long-term debt

 

 

82,914

 

 

 

40,912

 

Noncurrent operating lease liabilities

 

 

2,917

 

 

 

3,415

 

Deferred income tax liabilities

 

 

3,626

 

 

 

3,858

 

Other noncurrent liabilities

 

 

808

 

 

 

1,171

 

Total liabilities

 

 

406,346

 

 

 

393,826

 

Commitments and contingent liabilities (Note 8)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock – par value $1; authorized 40,000 shares; issued and outstanding

    19,403 shares as of September 30, 2022, and 19,184 shares as of December 31,

    2021

 

 

19,403

 

 

 

19,184

 

Additional paid-in capital

 

 

175,504

 

 

 

174,561

 

Retained deficit

 

 

(53,172

)

 

 

(56,066

)

Accumulated other comprehensive loss

 

 

(72,324

)

 

 

(55,106

)

Total Ampco-Pittsburgh shareholders’ equity

 

 

69,411

 

 

 

82,573

 

Noncontrolling interest

 

 

8,608

 

 

 

9,233

 

Total shareholders’ equity

 

 

78,019

 

 

 

91,806

 

Total liabilities and shareholders’ equity

 

$

484,365

 

 

$

485,632

 

See Notes to Condensed Consolidated Financial Statements.

 

3


 

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

97,228

 

 

$

78,624

 

 

$

289,696

 

 

$

253,727

 

Net sales to related parties (Note 17)

 

 

2,419

 

 

 

2,561

 

 

 

6,959

 

 

 

6,686

 

Total net sales

 

 

99,647

 

 

 

81,185

 

 

 

296,655

 

 

 

260,413

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of products sold (excluding depreciation and amortization)

 

 

84,378

 

 

 

67,990

 

 

 

250,685

 

 

 

213,011

 

Selling and administrative

 

 

11,089

 

 

 

10,910

 

 

 

31,941

 

 

 

34,538

 

Depreciation and amortization

 

 

4,206

 

 

 

4,279

 

 

 

13,133

 

 

 

13,515

 

Loss on disposal of assets

 

 

48

 

 

 

367

 

 

 

47

 

 

 

334

 

Total operating costs and expenses

 

 

99,721

 

 

 

83,546

 

 

 

295,806

 

 

 

261,398

 

(Loss) income from operations

 

 

(74

)

 

 

(2,361

)

 

 

849

 

 

 

(985

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment-related income

 

 

507

 

 

 

14

 

 

 

513

 

 

 

1,079

 

Interest expense

 

 

(1,486

)

 

 

(834

)

 

 

(3,684

)

 

 

(2,672

)

Other income – net

 

 

3,174

 

 

 

2,006

 

 

 

7,019

 

 

 

4,694

 

Total other income

 

 

2,195

 

 

 

1,186

 

 

 

3,848

 

 

 

3,101

 

Income (loss) before income taxes

 

 

2,121

 

 

 

(1,175

)

 

 

4,697

 

 

 

2,116

 

Income tax provision

 

 

(987

)

 

 

(291

)

 

 

(1,432

)

 

 

(2,044

)

Net income (loss)

 

 

1,134

 

 

 

(1,466

)

 

 

3,265

 

 

 

72

 

Less: Net income attributable to noncontrolling interest

 

 

288

 

 

 

123

 

 

 

371

 

 

 

431

 

Net income (loss) attributable to Ampco-Pittsburgh

 

$

846

 

 

$

(1,589

)

 

$

2,894

 

 

$

(359

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to Ampco-

   Pittsburgh common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.08

)

 

$

0.15

 

 

$

(0.02

)

Diluted

 

$

0.04

 

 

$

(0.08

)

 

$

0.15

 

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,396

 

 

 

19,093

 

 

 

19,291

 

 

 

18,905

 

Diluted

 

 

19,522

 

 

 

19,093

 

 

 

19,473

 

 

 

18,905

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income (loss)

 

$

1,134

 

 

$

(1,466

)

 

$

3,265

 

 

$

72

 

Other comprehensive loss, net of income tax where applicable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments for changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(8,745

)

 

 

(2,499

)

 

 

(19,787

)

 

 

(2,041

)

Unrecognized employee benefit costs (including effects of foreign currency translation)

 

 

891

 

 

 

275

 

 

 

1,441

 

 

 

247

 

Fair value of cash flow hedges

 

 

(251

)

 

 

(8

)

 

 

(809

)

 

 

547

 

Reclassification adjustments for items included in net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized employee benefit costs

 

 

281

 

 

 

457

 

 

 

833

 

 

 

1,371

 

Settlements of cash flow hedges

 

 

367

 

 

 

(304

)

 

 

108

 

 

 

(1,024

)

Other comprehensive loss

 

 

(7,457

)

 

 

(2,079

)

 

 

(18,214

)

 

 

(900

)

Comprehensive loss

 

 

(6,323

)

 

 

(3,545

)

 

 

(14,949

)

 

 

(828

)

Less: Comprehensive (loss) income attributable to noncontrolling interest

 

 

(269

)

 

 

124

 

 

 

(625

)

 

 

534

 

Comprehensive loss attributable to Ampco-Pittsburgh

 

$

(6,054

)

 

$

(3,669

)

 

$

(14,324

)

 

$

(1,362

)

 

See Notes to Condensed Consolidated Financial Statements.


5


 

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands)

 

Three Months Ended September 30, 2022

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Noncontrolling

Interest

 

 

Total

 

Balance at July 1, 2022

 

$

19,355

 

 

$

174,868

 

 

$

(54,018

)

 

$

(65,424

)

 

$

8,877

 

 

$

83,658

 

Stock-based compensation

 

 

 

 

 

 

684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

684

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

846

 

 

 

 

 

 

 

288

 

 

 

1,134

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,900

)

 

 

(557

)

 

 

(7,457

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(269

)

 

 

(6,323

)

Shareholder exercise of warrants (Note 9)

 

 

48

 

 

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Issuance of common stock excluding excess tax benefits of $0

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Balance at September 30, 2022

 

$

19,403

 

 

$

175,504

 

 

$

(53,172

)

 

$

(72,324

)

 

$

8,608

 

 

$

78,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2021

 

$

19,076

 

 

$

173,446

 

 

$

(42,141

)

 

$

(67,618

)

 

$

8,845

 

 

$

91,608

 

Stock-based compensation

 

 

 

 

 

 

515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

515

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

(1,589

)

 

 

 

 

 

 

123

 

 

 

(1,466

)

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,080

)

 

 

1

 

 

 

(2,079

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124

 

 

 

(3,545

)

Shareholder exercise of warrants (Note 9)

 

 

16

 

 

 

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91

 

Issuance of common stock excluding excess tax benefits of $0

 

 

2

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

Balance at September 30, 2021

 

$

19,094

 

 

$

174,026

 

 

$

(43,730

)

 

$

(69,698

)

 

$

8,969

 

 

$

88,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

$

19,184

 

 

$

174,561

 

 

$

(56,066

)

 

$

(55,106

)

 

$

9,233

 

 

$

91,806

 

Stock-based compensation

 

 

 

 

 

 

1,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,512

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

2,894

 

 

 

 

 

 

 

371

 

 

 

3,265

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,218

)

 

 

(996

)

 

 

(18,214

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(625

)

 

 

(14,949

)

Shareholder exercise of warrants (Note 9)

 

 

48

 

 

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Issuance of common stock excluding excess tax benefits of $0

 

 

171

 

 

 

(521

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(350

)

Balance at September 30, 2022

 

$

19,403

 

 

$

175,504

 

 

$

(53,172

)

 

$

(72,324

)

 

$

8,608

 

 

$

78,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

$

18,312

 

 

$

170,318

 

 

$

(43,371

)

 

$

(68,695

)

 

$

8,435

 

 

$

84,999

 

Stock-based compensation

 

 

 

 

 

 

1,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,543

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

(359

)

 

 

 

 

 

 

431

 

 

 

72

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,003

)

 

 

103

 

 

 

(900

)

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

534

 

 

 

(828

)

Shareholder exercise of warrants (Note 9)

 

 

575

 

 

 

2,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,308

 

Issuance of common stock excluding excess tax benefits of $0

 

 

207

 

 

 

(568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(361

)

Balance at September 30, 2021

 

$

19,094

 

 

$

174,026

 

 

$

(43,730

)

 

$

(69,698

)

 

$

8,969

 

 

$

88,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

6


S

AMPCO-PITTSBURGH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Net cash flows used in operating activities

 

$

(20,405

)

 

$

(4,398

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(13,003

)

 

 

(11,982

)

Proceeds from sale of property, plant and equipment

 

 

3

 

 

 

249

 

Purchases of long-term marketable securities

 

 

(496

)

 

 

(31

)

Proceeds from sale of long-term marketable securities

 

 

980

 

 

 

243

 

Net cash flows used in investing activities

 

 

(12,516

)

 

 

(11,521

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

43,000

 

 

 

19,016

 

Payments on revolving credit facility

 

 

(27,283

)

 

 

(8,500

)

Proceeds from sale and leaseback financing arrangement

 

 

15,500

 

 

 

0

 

Payments on sale and leaseback financing arrangements

 

 

(264

)

 

 

(176

)

Proceeds from equipment financing facility

 

 

4,014

 

 

 

0

 

Proceeds from related party debt (Note 17)

 

 

5,776

 

 

 

0

 

Repayments of related party debt (Note 17)

 

 

(4,251

)

 

 

(1,065

)

Repayments of debt

 

 

(480

)

 

 

(489

)

Proceeds from shareholder exercise of warrants (Note 9)

 

 

0

 

 

 

3,308

 

Debt issuance costs

 

 

(104

)

 

 

(485

)

Net cash flows provided by financing activities

 

 

35,908

 

 

 

11,609

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,134

)

 

 

(281

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,853

 

 

 

(4,591

)

Cash and cash equivalents at beginning of period

 

 

10,337

 

 

 

16,842

 

Cash and cash equivalents at end of period

 

$

12,190

 

 

$

12,251

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

Income tax payments

 

$

959

 

 

$

1,344

 

Interest payments

 

$

3,896

 

 

$

1,810

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment in current liabilities

 

$

1,009

 

 

$

1,339

 

Finance lease right-of-use assets exchanged for lease liabilities

 

$

1,105

 

 

$

1,250

 

Operating lease right-of-use assets exchanged for lease liabilities

 

$

191

 

 

$

53

 

 

See Notes to Condensed Consolidated Financial Statements.

 

7


 

AMPCO-PITTSBURGH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except share amounts)

 

Overview of the Business

Ampco-Pittsburgh Corporation (the “Corporation”) manufactures and sells 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 (“FCEP”) segment and the Air and Liquid Processing (“ALP”) segment. This segment presentation is consistent with how the Corporation’s chief operating decision maker evaluates financial performance and makes resource allocation and strategic decisions about the business.

The FCEP segment produces forged hardened steel rolls, cast rolls and forged engineered products (“FEP”). Forged hardened steel rolls are used primarily in cold 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. FEP principally are sold to customers in the steel distribution market, oil and gas industry and the aluminum and plastic extrusion industries. The segment has operations in the United States, England, Sweden, and Slovenia and equity interests in three joint venture companies in China. Collectively, the segment primarily competes with European, Asian and North American 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 ALP 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 manufacturing. 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.

While the Corporation is operating at more normal levels following the emergence of the coronavirus (“COVID-19”) pandemic in 2020, lingering effects continue, some of which are being exacerbated by the Russia-Ukraine conflict, including periodic disruptions to the global supply chain, global inflationary pressures and delays in receiving and shipping product due to the lack of transportation. The Corporation is actively monitoring, and will continue to actively monitor, the pandemic and the Russia-Ukraine conflict and the potential impact on its operations, financial condition, liquidity, suppliers, industry, and workforce.

Note 1 – Unaudited Condensed Consolidated Financial Statements

The unaudited condensed consolidated balance sheet as of September 30, 2022, the unaudited condensed consolidated statements of operations, comprehensive loss and shareholders’ equity for the three and nine months ended September 30, 2022, and 2021, and cash flows for the nine months ended September 30, 2022, and 2021, have been prepared by the Corporation. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the operating results expected for the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.

Recently Issued Accounting Pronouncements 

In September 2022, the Financial Accounting Standards Board (the “FASB”) issued ASU 2022-04, Liabilities – Supplier Finance Programs, which requires certain disclosures related to supplier finance programs including the nature of the program, activity during the period, changes from period to period, and potential magnitude. The guidance becomes effective for the Corporation on January 1, 2023, including interim periods. The Corporation is currently evaluating the impact the guidance will have on its disclosures in its periodic filings.  

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which adds a new impairment model, known as the current expected credit loss (“CECL”) model, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies it to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. The guidance originally became effective for the Corporation on January 1, 2020; however, since the Corporation meets the definition of a Smaller Reporting Company, as defined by the Securities and Exchange Commission (“SEC”), the effective date was subsequently revised to fiscal years beginning after December 15, 2022. The Corporation is currently evaluating the impact the guidance will have on its financial position and operating results. It will not, however, affect the Corporation’s liquidity.

8


Note 2 – Inventories

At September 30, 2022, and December 31, 2021, approximately 39% and 35%, respectively, of the inventories were valued using the LIFO method with the remaining inventories valued using the FIFO method. Inventories were comprised of the following:

 

 

 

September 30,

2022

 

 

December 31,

2021

 

Raw materials

 

$

30,720

 

 

$

22,332

 

Work-in-process

 

 

37,946

 

 

 

37,447

 

Finished goods

 

 

16,591

 

 

 

18,093

 

Supplies

 

 

7,254

 

 

 

10,326

 

Inventories

 

$

92,511

 

 

$

88,198

 

 

Note 3 – Property, Plant and Equipment

Property, plant and equipment were comprised of the following:

 

 

September 30,

2022

 

 

December 31,

2021

 

Land and land improvements

 

$

9,687

 

 

$

10,377

 

Buildings

 

 

60,635

 

 

 

63,166

 

Machinery and equipment

 

 

342,973

 

 

 

345,118

 

Construction-in-process

 

 

16,100

 

 

 

11,019

 

Other

 

 

6,763

 

 

 

6,798

 

 

 

 

436,158

 

 

 

436,478

 

Accumulated depreciation and amortization

 

 

(283,130

)

 

 

(277,915

)

Property, plant and equipment, net

 

$

153,028

 

 

$

158,563

 

The land and building of Union Electric Steel UK Limited, an indirect subsidiary of the Corporation (“UES-UK”), equal to $2,362 (£2,122) at September 30, 2022, are held as collateral by the trustees of the UES-UK defined benefit pension plan (Note 7). Machinery and equipment purchased with proceeds from the equipment finance facility (Note 6), equal to $4,014 at September 30, 2022, are included in construction-in-process and pledged as collateral for the facility. The remaining assets, other than real property, of the Corporation are pledged as collateral for the Corporation’s revolving credit facility (Note 6).

Certain land and land improvements and buildings were included sale and leaseback financing transactions (Note 6). Title to these assets lie with the lender; however, since the transactions qualified as financing transactions, versus sales, the assets remain recorded on the Corporation’s consolidated balance sheet.

The gross value of assets under finance leases and the related accumulated amortization approximated $4,188 and $1,287, respectively, as of September 30, 2022, and $3,882 and $1,263, respectively, at December 31, 2021. Depreciation expense approximated $4,117 and $4,210, including depreciation of assets under finance leases of approximately $77 and $124, for the three months ended September 30, 2022, and 2021, respectively. Depreciation expense approximated $12,854 and $13,071, including depreciation of assets under finance leases of approximately $337 and $342, for the nine months ended September 30, 2022, and 2021, respectively.

Note 4 – Intangible Assets

Intangible assets were comprised of the following:

 

 

September 30,

2022

 

 

December 31,

2021

 

Customer relationships

 

$

5,138

 

 

$

5,850

 

Developed technology

 

 

3,662

 

 

 

4,201

 

Trade name

 

 

2,028

 

 

 

2,442

 

 

 

 

10,828

 

 

 

12,493

 

Accumulated amortization

 

 

(5,858

)

 

 

(6,289

)

Intangible assets, net

 

$

4,970

 

 

$

6,204

 

9


 

Changes in intangible assets consisted of the following:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of the period

$

5,431

 

 

$

6,654

 

 

$

6,204

 

 

$

7,217

 

Amortization of intangible assets

 

(89

)

 

 

(69

)

 

 

(279

)

 

 

(444

)

Other, primarily impact from changes in foreign currency exchange rates

 

(372

)

 

 

(148

)

 

 

(955

)

 

 

(336

)

Balance at end of the period

$

4,970

 

 

$

6,437

 

 

$

4,970

 

 

$

6,437

 

 

Note 5 – Other Current Liabilities

Other current liabilities were comprised of the following:

 

 

September 30,

2022

 

 

December 31,

2021

 

Customer-related liabilities

 

$

18,245

 

 

$

12,548

 

Accrued interest payable

 

 

829

 

 

 

1,772

 

Accrued sales commissions

 

 

1,683

 

 

 

1,864

 

Other

 

 

8,417

 

 

 

5,026

 

Other current liabilities

 

$

29,174

 

 

$

21,210

 

Customer-related liabilities primarily include liabilities for product warranty claims and deposits received on future orders. The Corporation provides a limited warranty on its products, known as assurance-type warranties, and may issue credit notes or replace products free of charge for valid claims. A warranty is considered an assurance-type warranty if it provides the customer with assurance that the product will function as intended. Historically, warranty claims have been insignificant. The Corporation records a provision for product warranties at the time the underlying sale is recorded. The provision is based on historical experience as a percentage of sales adjusted for probable known claims.

Changes in the liability for product warranty claims consisted of the following:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of the period

$

6,759

 

 

$

7,840

 

 

$

7,331

 

 

$

8,105

 

Satisfaction of warranty claims

 

(1,100

)

 

 

(923

)

 

 

(2,226

)

 

 

(2,668

)

Provision for warranty claims, net

 

(22

)

 

 

632

 

 

 

1,078

 

 

 

2,141

 

Other, primarily impact from changes in foreign currency exchange rates

 

(357

)

 

 

(135

)

 

 

(903

)

 

 

(164

)

Balance at end of the period

$

5,280

 

 

$

7,414

 

 

$

5,280

 

 

$

7,414

 

Customer deposits represent amounts collected from, or invoiced to, a customer in advance of revenue recognition. The liability for customer deposits is reversed when the Corporation satisfies its performance obligations and control of the inventory transfers to the customer, typically when title transfers. Performance obligations related to customer deposits are expected to be satisfied in less than one year.

Changes in customer deposits consisted of the following:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of the period

$

11,626

 

 

$

6,068

 

 

$

4,328

 

 

$

6,507

 

Satisfaction of performance obligations

 

(673

)

 

 

(3,601

)

 

 

(6,375

)

 

 

(10,360

)

Receipt of additional deposits

 

602

 

 

 

1,622

 

 

 

13,831

 

 

 

7,956

 

Other, primarily impact from changes in foreign currency exchange rates

 

(78

)

 

 

(23

)

 

 

(307

)

 

 

(37

)

Balance at end of the period

$

11,477

 

 

$

4,066

 

 

$

11,477

 

 

$

4,066

 

 

10


 

Note 6 – Debt

Borrowings were comprised of the following:

 

 

September 30,

2022

 

 

December 31,

2021

 

Revolving credit facility

 

$

45,461

 

 

$

29,744

 

Sale and leaseback financing obligations

 

 

36,303

 

 

 

20,546

 

Industrial Revenue Bonds

 

 

9,191

 

 

 

9,191

 

Equipment financing facility

 

 

4,014

 

 

 

0

 

Minority shareholder loan (see Note 17)

 

 

1,525

 

 

 

0

 

Finance lease liabilities

 

 

1,796

 

 

 

1,438

 

Outstanding borrowings

 

 

98,290

 

 

 

60,919

 

Debt – current portion

 

 

(15,376

)

 

 

(20,007

)

Long-term debt

 

$

82,914

 

 

$

40,912

 

The current portion of debt includes primarily a swing loan under the revolving credit facility and the Industrial Revenue Bonds (“IRBs”). By definition, swing loans are temporary advances under the revolving credit facility and short term in nature. Accordingly, swing loans are classified as a current liability until the amount is either repaid, as customers remit payments, or, if elected by the Corporation, refinanced as a longer-term loan under the revolving credit facility. The swing loans equaled $1,461 and $8,744 at September 30, 2022, and December 31, 2021, respectively. Although the IRBs begin to become due in 2027, the bonds can be put back to the Corporation on short notice if they are not able to be remarketed, which is considered remote by the Corporation; accordingly, the IRBs are classified as a current liability.

Revolving Credit Facility

The Corporation is a party to a revolving credit security agreement with a syndicate of banks that was amended on June 29, 2021 (the “First Amended and Restated Security Agreement”), and subsequently amended on December 17, 2021, and May 26, 2022. The First Amended and Restated Security Agreement, as subsequently amended, provides for a senior secured asset-based revolving credit facility of $100,000, that can be increased to $130,000 at the option of the Corporation and with the approval of the lenders, and an allowance of $20,000 for new equipment financing but, otherwise, restricts the Corporation from incurring additional indebtedness outside of the agreement, unless approved by the banks. The revolving credit facility includes sub-limits for letters of credit not to exceed $40,000 and European borrowings not to exceed $30,000, of which up to $7,500 may be allocated for Swedish borrowings. The maturity date for the revolving credit facility is June 29, 2026, and, subject to other terms and conditions of the agreement, would become due on that date.

Availability under the revolving credit facility is based on eligible accounts receivable, inventory and fixed assets. Domestic borrowings from the credit facility bear interest, at the Corporation’s option, at either (i) LIBOR plus an applicable margin ranging between 2.00% to 2.50% based on the quarterly average excess availability or (ii) the alternate base rate plus an applicable margin ranging between 1.00% to 1.50% based on the quarterly average excess availability. European borrowings denominated in euros, pound sterling or krona bear interest at the Successor Rate as defined in the First Amended and Restated Security Agreement. As of September 30, 2022, and December 31, 2021, there were no European borrowings outstanding. Additionally, the Corporation is required to pay a commitment fee of 0.25% based on the daily unused portion of the credit facility.

As of September 30, 2022, the Corporation had outstanding borrowings under the credit facility of $45,461. The average interest rate approximated 4% for each of the three and nine months ended September 30, 2022, and 2021. The Corporation also utilizes a portion of the credit facility for letters of credit (Note 8). As of September 30, 2022, remaining availability under the credit facility approximated $35,622, net of standard availability reserves. At September 30, 2021, deferred financing fees of $485 were incurred related to the First Amended and Restated Security Agreement and are being amortized over the remaining term of the agreement.

Borrowings outstanding under revolving credit facility are collateralized by a first priority perfected security interest in substantially all assets of the Corporation and its subsidiaries (other than real property). Additionally, the revolving credit facility 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 and guaranties, and acquisitions and divestures. In addition, the Corporation must maintain a certain level of excess availability or otherwise maintain a minimum fixed charge coverage ratio of not less than 1.05 to 1.00. The Corporation was in compliance with the applicable bank covenants as of September 30, 2022.

Sale and Leaseback Financing Obligations

On August 30, 2022, Air & Liquid completed a sale and leaseback financing transaction with Store Capital Acquisitions, LLC (“STORE”), valued at approximately $15,500, for certain of its real property, including its manufacturing facilities in Lynchburg, Virginia and Amherst, Virginia (collectively, the “ALS Properties”). Previously, in September 2018, Union Electric Steel Corporation (“UES”), an indirect subsidiary of the Corporation, completed a sale and leaseback financing transaction with STORE for certain of its real property, including its manufacturing facilities in Valparaiso, Indiana and Burgettstown, Pennsylvania, and its manufacturing facility and corporate headquarters located in Carnegie, Pennsylvania (the “UES Properties”).

11


In connection with the August 2022 sale and leaseback financing transaction, UES and STORE entered into an Amended and Restated Master Lease Agreement (the “Restated Lease”), which amended and restated the existing lease agreement between UES and STORE. Pursuant to the Restated Lease, UES will lease the ALS Properties and the UES Properties (collectively, the Properties), subject to the terms and conditions of the Restated Lease, and will sublease the ALS Properties to Air & Liquid on the same terms as the Restated Lease. The Restated Lease provides for an initial term of 20 years; however, UES may extend the lease for the Properties for four successive periods of five years each. If fully extended, the Restated Lease would expire in August 2062. UES also has the option to repurchase the Properties, which it may, and intends to, exercise in 2032, for a price equal to the greater of (i) the Fair Market Value of the Properties, or (ii) 115% of Lessor’s Total Investment, with such terms defined in the Restated Lease.

Annual payments for the Properties are equal to $2,939 (the “Base Annual Rent”), payable in equal monthly installments. On October 1, 2022, and each anniversary date through August 2052, the Base Annual Rent will increase each anniversary date by an amount equal to the lesser of 2.2% or 1.25% of the change in the consumer price index, as defined in the Restated Lease. The Base Annual Rent during the remaining ten years of the Restated Lease will be equal to the Fair Market Rent, as defined in the Restated Lease.

In connection with the execution of the Restated Lease, UES and STORE entered into a Disbursement Agreement dated August 30, 2022 (the “Disbursement Agreement”), pursuant to which STORE agreed to provide up to $2,500 to UES towards certain improvements in the Carnegie, Pennsylvania manufacturing facility. As of September 30, 2022, no amounts were outstanding under the Disbursement Agreement. The Base Annual Rent under the Restated Lease will be adjusted to repay any amounts advanced under the Disbursement Agreement, at the time of the advance, with such advances to be repaid over the initial term of the Restated Lease of 20 years. Advances under the Disbursement Agreement will be secured by the capital improvements.

The Restated Lease and the Disbursement Agreement contain certain representations, warranties, covenants, obligations, conditions, indemnification provisions and termination provisions customary for those types of agreements.

The effective interest rate approximated 8% for each of the three and nine months ended September 30, 2022, and 2021. Deferred financing fees of $104 were incurred related to the sale and leaseback of the ALS Properties and are being amortized over the initial term of the Restated Lease of 20 years.

See Note 19 for completion of a sale and leaseback financing transaction between Air & Liquid and STORE for certain of its real property, including its manufacturing facility in North Tonawanda, New York, in October 2022.

Industrial Revenue Bonds (“IRBs”)

The Corporation has two IRBs outstanding: (i) $7,116 taxable IRB maturing in 2027 and (ii) $2,075 tax-exempt IRB maturing in 2029. Interest accrues on the IRBs at a floating rate which approximated 2.4% and 1.4% for the three and nine months ended September 30, 2022, and 1% for the three and nine months ended September 30, 2021. The IRBs are secured by letters of credit of equivalent amounts and are remarketed periodically at which time the interest rates are reset. If the IRBs are not able to be remarketed, although considered a remote possibility by the Corporation, the bondholders can seek reimbursement immediately from the letters of credit; accordingly, the IRBs are recorded as current debt on the condensed consolidated balance sheets.

Equipment Financing Facility

On September 29, 2022, UES and Clarus Capital Funding I, LLC (“Clarus”) entered into a Master Loan and Security Agreement, pursuant to which UES can borrow up to $20,000 to finance certain equipment purchases associated with the FCEP capital program, including progress payments and reimbursement of deposits made to date. Each borrowing will constitute a secured loan transaction (each, a “Term Loan”). Each Term Loan will convert to a Term Note on the earlier of (i) the date in which the associated equipment is placed in service or (ii) December 31, 2023. Each Term Note will have a term of 84 months in arrears fully amortizing and will commence on the date of the Term Note.

Interest on each Term Loan will accrue at an annual fixed rate of 8%, payable monthly. Interest on each Term Note will accrue at a fixed rate to be calculated by Clarus as like-term swap rate, as reported in ICE Benchmark, or such other information service available to Clarus, for the week ending immediately prior to the commencement date for such Term Note, plus 4.5%.

The Term Loans and Term Notes will be secured by a first priority security interest in and to all of UES’s rights, title and interests in the underlying equipment.

At September 30, 2022, $4,014 was outstanding as Term Loans.

Note 7 – Pension and Other Postretirement Benefits

Contributions to the Corporation’s employee benefit plans were as follows:

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

U.S. defined benefit pension plans

 

$

236

 

 

$

0

 

Foreign defined benefit pension plans

 

 

388

 

 

 

483

 

Other postretirement benefits (e.g., net payments)

 

 

359

 

 

 

469

 

U.K. defined contribution pension plan

 

 

193

 

 

 

248

 

U.S. defined contribution plan

 

 

2,778

 

 

 

2,320

 

12


 

Net periodic pension and other postretirement benefit costs included the following components:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

U.S. Defined Benefit Pension Plans

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

13

 

 

$

60

 

 

$

38

 

 

$

182

 

Interest cost

 

 

1,546

 

 

 

1,337

 

 

 

4,639

 

 

 

4,012

 

Expected return on plan assets

 

 

(3,302

)

 

 

(3,248

)

 

 

(9,905

)

 

 

(9,746

)

Amortization of prior service cost

 

 

2

 

 

 

6

 

 

 

5

 

 

 

17

 

Amortization of actuarial loss

 

 

558

 

 

 

658

 

 

 

1,674

 

 

 

1,974

 

Net benefit income

 

$

(1,183

)

 

$

(1,187

)

 

$

(3,549

)

 

$

(3,561

)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Foreign Defined Benefit Pension Plans

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

85

 

 

$

111

 

 

$

223

 

 

$

285

 

Interest cost

 

 

256

 

 

 

207

 

 

 

821

 

 

 

626

 

Expected return on plan assets

 

 

(463

)

 

 

(485

)

 

 

(1,484

)

 

 

(1,461

)

Amortization of prior service credit

 

 

(65

)

 

 

(77

)

 

 

(210

)

 

 

(231

)

Amortization of actuarial loss

 

 

75

 

 

 

162

 

 

 

242

 

 

 

489

 

Net benefit income

 

$

(112

)

 

$

(82

)

 

$

(408

)

 

$

(292

)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Other Postretirement Benefit Plans

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

59

 

 

$

61

 

 

$

176

 

 

$

183

 

Interest cost

 

 

55

 

 

 

45

 

 

 

165

 

 

 

136

 

Amortization of prior service credit

 

 

(299

)

 

 

(258

)

 

 

(897

)

 

 

(773

)

Amortization of actuarial loss (gain)

 

 

6

 

 

 

(19

)

 

 

19

 

 

 

(58

)

Net benefit income

 

$

(179

)

 

$

(171

)

 

$

(537

)

 

$

(512

)

 

Note 8 – Commitments and Contingent Liabilities

Outstanding standby and commercial letters of credit as of September 30, 2022, equaled $18,664, of which approximately one-half serves as collateral for the IRB debt. Outstanding surety bonds as of September 30, 2022, approximated $3,000 (SEK 33,900), which guarantee certain obligations under a credit insurance arrangement for certain of the Corporation’s foreign pension commitments.

The Corporation has undertaken a $27,000 capital program to upgrade existing equipment at certain of its FCEP locations. The capital program is anticipated to be completed by December 31, 2023. At September 30, 2022, commitments for future capital expenditures, including those associated with the FCEP capital program, approximated $19,300.

See Note 11 for derivative instruments, Note 15 for litigation and Note 16 for environmental matters.

Note 9 – Equity Rights Offering

In September 2020, the Corporation completed an equity-rights offering, issuing 5,507,889 shares of its common stock and 12,339,256 Series A warrants to existing shareholders. The shares of common stock and warrants are classified as equity instruments in the condensed consolidated statements of shareholders’ equity. Each Series A warrant provides the holder with the right to purchase 0.4464 shares of common stock at an exercise price of $2.5668, or $5.75 per whole share of common stock, and expires on August 1, 2025. For the nine months ended September 30, 2021, the Corporation received proceeds of $3,308 from shareholders who exercised 1,288,910 Series A warrants, equating to the issuance of 575,361 common shares.

In May 2022, the Corporation filed a Tender Offer and Prospectus Supplement (the “Offer”) with the SEC pursuant to which the exercise price of each tendered Series A warrant was temporarily reduced. During the Offer period, the holders of Series A warrants were given the opportunity to exercise their Series A warrants at a temporarily reduced cash exercise price of $1.7856 per Series A warrant (or $4.00 per whole share of common stock). The Offer expired on July 15, 2022. The Corporation raised $193 in gross proceeds resulting from 108,375 Series A warrants tendered. Series A warrants that were not exercised during the Offer period reverted to their original terms including the right to purchase 0.4464 shares of common stock at an exercise price of $2.5668, or $5.75 per whole share of common stock. Stock issuance costs approximated $193 through September 30, 2022, and were recorded against the proceeds in additional paid in capital.

 

Note 10 – Accumulated Other Comprehensive Loss

Net change and ending balances for the various components of accumulated other comprehensive loss as of and for the nine months ended September 30, 2022, and 2021, are summarized below. All amounts are net of tax where applicable.

13


 

 

Foreign

Currency

Translation

 

 

Unrecognized

Employee

Benefit Costs

 

 

Cash Flow

Hedges

 

 

Total

Accumulated Other

Comprehensive Loss

 

 

Less:

Noncontrolling

Interest

 

 

Accumulated Other

Comprehensive Loss

Attributable to Ampco-Pittsburgh

 

Balance at January 1, 2022

 

$

(14,322

)

 

$

(40,563

)

 

$

277

 

 

$

(54,608

)

 

$

498

 

 

$

(55,106

)

Net change

 

 

(19,787

)

 

 

2,274

 

 

 

(701

)

 

 

(18,214

)

 

 

(996

)

 

 

(17,218

)

Balance at September 30, 2022

 

$

(34,109

)

 

$

(38,289

)

 

$

(424

)

 

$

(72,822

)

 

$

(498

)

 

$

(72,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

$

(11,371

)

 

$

(57,652

)

 

$

589

 

 

$

(68,434

)

 

$

261

 

 

$

(68,695

)

Net change

 

 

(2,041

)

 

 

1,618

 

 

 

(477

)

 

 

(900

)

 

 

103

 

 

 

(1,003

)

Balance at September 30, 2021

 

$

(13,412

)

 

$

(56,034

)

 

$

112

 

 

$

(69,334

)

 

$

364

 

 

$

(69,698

)

 

The following summarizes the line items affected on the condensed consolidated statements of operations for components reclassified from accumulated other comprehensive loss. Amounts in parenthesis represent credits to net income.

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Amortization of unrecognized employee benefit costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income – net

$

277

 

 

$

472

 

 

$

833

 

 

$

1,418

 

Income tax provision

 

4

 

 

 

(15

)

 

 

0

 

 

 

(47

)

Net of tax

$

281

 

 

$

457

 

 

$

833

 

 

$

1,371

 

Settlements of cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization (foreign currency purchase contracts)

$

(7

)

 

$

(6

)

 

$

(20

)

 

$

(20

)

Costs of products sold (excluding depreciation and

amortization) (futures contracts – copper and aluminum)

 

386

 

 

 

(298

)

 

 

132

 

 

 

(1,004

)

Total before income tax

 

379

 

 

 

(304

)

 

 

112

 

 

 

(1,024

)

Income tax benefit

 

(12

)

 

 

0

 

 

 

(4

)

 

 

0

 

Net of tax

$

367

 

 

$

(304

)

 

$

108

 

 

$

(1,024

)

The income tax effect associated with the various components of other comprehensive loss for the three and nine months ended September 30, 2022, and 2021, is summarized below. Amounts in parentheses represent credits to net income when reclassified to earnings. Certain amounts have no tax effect due to the Corporation having a valuation allowance recorded against the deferred income tax assets for the jurisdiction where the income or 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.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income tax effect associated with changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized employee benefit costs

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Fair value of cash flow hedges

 

$

(7

)

 

$

0

 

 

$

(25

)

 

$

0

 

Income tax effect associated with reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized employee benefit costs

 

$

4

 

 

$

(15

)

 

$

0

 

 

$

(47

)

Settlement of cash flow hedges

 

$

(12

)

 

$

0

 

 

$

(4

)

 

$

0

 

 

Note 11 – Derivative Instruments

Certain divisions of the ALP segment are subject to risk from increases in the price of commodities (copper and aluminum) used in the production of inventory. To minimize this risk, futures contracts are entered into which are designated as cash flow hedges. At September 30, 2022, approximately 33%, or $2,196, of anticipated copper purchases over the next 10 months and 40%, or $812, of anticipated aluminum purchases over the next 10 months are hedged. At September 30, 2021, approximately 43%, or $2,593, of anticipated copper purchases over the next eight months and 56%, or $637, of anticipated aluminum purchases over the next six months were hedged.

The Corporation periodically enters into purchase commitments to cover a portion of its anticipated natural gas and electricity usage. The commitments qualify as normal purchases and, accordingly, are not reflected on the condensed consolidated balance sheets. At September 30, 2022, the Corporation has purchase commitments covering approximately 25%, or $941, of anticipated natural gas usage through December 31, 2023, for one of its subsidiaries and approximately 28%, or $1,674, of anticipated electricity usage through December 31, 2025, for two of its subsidiaries. Purchases of natural gas and electricity under previously existing commitments equaled $438 and $2,676 for the three and nine months ended September 30, 2022, respectively. There were no purchases of natural gas or electricity under previously existing commitments for the three and nine months ended September 30, 2021.

14


 

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 were settled, the underlying fixed assets were placed in service and the change in fair value of the foreign currency purchase contract deferred in accumulated other comprehensive loss began being amortized to earnings (depreciation and amortization) over the life of the underlying assets.

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

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

Gains (losses) on foreign exchange transactions included in other income – net equaled $1,809 and $3,368 for the three and nine months ended September 30, 2022, respectively, and $369 and $(705) for the three and nine months ended September 30, 2021, respectively.

The change in the fair value of the cash flow contracts is recorded as a component of accumulated other comprehensive loss. The balances as of September 30, 2022, and 2021, and the amounts recognized as and reclassified from accumulated other comprehensive loss for each of the periods are summarized below. Amounts are after tax where applicable. Certain amounts recognized as comprehensive income (loss) or reclassified from accumulated other comprehensive loss have no tax effect due to the Corporation having a valuation allowance recorded against the deferred income tax assets for the jurisdiction where the income or expense is recognized.

Three Months Ended September 30, 2022

 

Beginning of

the Period

 

 

Recognized

 

 

Reclassified

 

 

End of

the Period

 

Foreign currency purchase contracts

 

$

122

 

 

$

0

 

 

$

7

 

 

$

115

 

Futures contracts – copper and aluminum

 

 

(662

)

 

 

(251

)

 

 

(374

)

 

 

(539

)

 

 

$

(540

)

 

$

(251

)

 

$

(367

)

 

$

(424

)

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency purchase contracts

 

$

148

 

 

$

0

 

 

$

6

 

 

$

142

 

Futures contracts – copper and aluminum

 

 

276

 

 

 

(8

)

 

 

298

 

 

 

(30

)

 

 

$

424

 

 

$

(8

)

 

$

304

 

 

$

112

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency purchase contracts

 

$

135

 

 

$

0

 

 

$

20

 

 

$

115

 

Futures contracts – copper and aluminum

 

 

142

 

 

 

(809

)

 

 

(128

)

 

 

(539

)

 

 

$

277

 

 

$

(809

)

 

$

(108

)

 

$

(424

)

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency purchase contracts

 

$

162

 

 

$

0

 

 

$

20

 

 

$

142

 

Futures contracts – copper and aluminum

 

 

427

 

 

 

547

 

 

 

1,004

 

 

 

(30

)

 

 

$

589

 

 

$

547

 

 

$

1,024

 

 

$

112

 

The change in fair value reclassified or expected to be reclassified from accumulated other comprehensive loss to earnings is summarized below. All amounts are pre-tax.

 

 

Location of Gain (Loss)

in Statements

 

Estimated to

be Reclassified

in the Next Twelve Months

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

of Operations

 

12 Months

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Foreign currency purchase contracts

 

Depreciation and amortization

 

$

28

 

 

$

7

 

 

$

6

 

 

$

20

 

 

$

20

 

 

Futures contracts – copper and aluminum

 

Costs of products sold

(excluding depreciation and amortization)

 

$

(557

)

 

$

(386

)

 

$

298

 

 

$

(132

)

 

$

1,004

 

 

 

15


 

Note 12 – Fair Value

The Corporation’s financial assets and liabilities that are reported at fair value in the condensed consolidated balance sheets as of September 30, 2022, and December 31, 2021, were as follows:

 

 

Quoted Prices

in Active

Markets for

Identical Inputs

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

As of September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent assets

 

$

3,276

 

 

$

0

 

 

$

0

 

 

$

3,276

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent assets

 

$

4,860

 

 

$

0

 

 

$

0

 

 

$

4,860

 

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 futures contracts is based on market quotations. The fair values of the debt and borrowings approximate their carrying values. Additionally, the fair values of trade receivables and trade payables approximate their carrying values.

Note 13 – Net Sales and Income (Loss) Before Income Taxes

Net sales and income (loss) before income taxes by geographic area for the three and nine months ended September 30, 2022, and 2021, are outlined below. When disaggregating revenue, consideration is 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. Substantially all foreign net sales for each of the periods is attributable to the FCEP segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Net Sales

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

 

$

56,535

 

 

$

44,859

 

 

$

164,167

 

 

$

133,233

 

Foreign

 

 

 

43,112

 

 

 

36,326

 

 

 

132,488

 

 

 

127,180

 

 

 

 

$

99,647

 

 

$

81,185

 

 

$

296,655

 

 

$

260,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Income (Loss) Before Income Taxes

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States (1)

 

$

(1,134

)

 

$

(2,201

)

 

$

437

 

 

$

(3,472

)

Foreign

 

 

3,255

 

 

 

1,026

 

 

 

4,260

 

 

 

5,588

 

 

 

$

2,121

 

 

$

(1,175

)

 

$

4,697

 

 

$

2,116

 

(1)

Includes Corporate costs of $2,929 and $2,420 for the three months ended September 30, 2022, and 2021, respectively, and $8,435 and $8,938 for the nine months ended September 30, 2022, and 2021, respectively, which represent operating costs of the corporate office not allocated to the segments.

Net sales by product line for the three and nine months ended September 30, 2022, and 2021, were as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Forged and cast mill rolls

$

66,653

 

 

$

53,778

 

 

$

193,946

 

 

$

177,918

 

FEP

 

8,858

 

 

 

7,401

 

 

 

35,902

 

 

 

17,640

 

Heat exchange coils

 

8,532

 

 

 

6,527

 

 

 

22,483

 

 

 

18,482

 

Air handling systems

 

8,457

 

 

 

6,383

 

 

 

22,133

 

 

 

21,235

 

Centrifugal pumps

 

7,147

 

 

 

7,096

 

 

 

22,191

 

 

 

25,138

 

 

$

99,647

 

 

$

81,185

 

 

$

296,655

 

 

$

260,413

 

 

Note 14 – Stock-Based Compensation

The Ampco-Pittsburgh Corporation 2016 Omnibus Incentive Plan, as amended (the “Incentive Plan”), authorizes the issuance of up to 2,700,000 shares of the Corporation’s common stock for awards under the Incentive Plan. Awards under the Incentive Plan may include incentive stock options and 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 the shares, or if the shares are issued under the Incentive Plan and thereafter are forfeited

16


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 the director’s retainer for board service.

Stock-based compensation expense, including expense associated with equity-based awards granted to non-employee members of the Board of Directors, for the three and nine months ended September 30, 2022, equaled $684 and $1,512, respectively, and for the three and nine months ended September 30, 2021, equaled $515 and $1,543, respectively. The income tax benefit recognized in the condensed consolidated statements of operations was not significant due to the Corporation having a valuation allowance recorded against its deferred income tax assets for the majority of the jurisdictions where the expense was recognized.

Note 15 – Litigation

The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses from time to time and are also subject to asbestos litigation as described below.

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 (the “Asbestos Liability”). Air & Liquid, and in some cases the Corporation, are defendants (among a number of defendants, often in excess of 50 defendants) in claims filed in various state and federal courts.

Asbestos Claims

The following table reflects approximate information about the number of claims for Asbestos Liability against Air & Liquid and the Corporation for the nine months ended September 30, 2022, and 2021 (number of claims not in thousands). The majority of the settlement and defense costs were 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.

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Total claims pending at the beginning of the period

 

 

6,097

 

 

 

5,891

 

New claims served

 

 

978

 

 

 

943

 

Claims dismissed

 

 

(220

)

 

 

(525

)

Claims settled

 

 

(288

)

 

 

(301

)

Total claims pending at the end of period (1)

 

 

6,567

 

 

 

6,008

 

Administrative closures (2)

 

 

(2,908

)

 

 

(2,914

)

Total active claims at the end of the period

 

 

3,659

 

 

 

3,094

 

Gross settlement and defense costs paid in period (in 000’s)

 

$

14,683

 

 

$

14,329

 

Avg. gross settlement and defense costs per claim resolved (in 000’s) (3)

 

$

28.90

 

 

$

17.35

 

(1)

Included as “total claims pending” are approximately 658 and 661 claims at September 30, 2022, and 2021, respectively, classified in various jurisdictions as “inactive” or transferred to a state or federal judicial panel on multi-district litigation.

(2)

Administrative closures include (i) those claims that were filed six or more years ago, (ii) claims that were previously classified in various jurisdictions as “inactive,” and (iii) claims that were transferred to a state or federal judicial panel on multi-district litigation. Collectively, these claims are unlikely to result in any liability to the Corporation.

(3)

Claims resolved do not include claims that were administratively closed.

Asbestos Insurance

The Corporation and Air & Liquid are parties to a series of settlement agreements (“Settlement Agreements”) with insurers that have coverage obligations for the 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 the Asbestos Liability. The Settlement Agreements encompass the majority of insurance policies that provide coverage for claims for the Asbestos Liability.

17


The Settlement Agreements include acknowledgements that Howden North America, Inc. (“Howden”) is entitled to coverage under policies covering the 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 sub-limits 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 the Products. 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 the Asbestos Liability.

Asbestos Valuations

At December 31, 2006, with the assistance of a nationally recognized expert in the valuation of asbestos liabilities, the Corporation recorded its initial reserve for the Asbestos Liability. Since then, the Corporation and the nationally recognized expert in the valuation of asbestos liabilities have reviewed the Asbestos Liability and the underlying assumptions on a regular basis to determine whether any adjustment to the Asbestos Liability or the underlying assumptions were necessary. When warranted, the Asbestos Liability was adjusted to consider the current trends and new information that became available and, if reasonably estimable, to extend the valuation of asbestos liabilities further into the future. In 2018, the valuation was extended to include claims projected to be asserted through 2052, the estimated final date by which the Corporation expects to have settled all asbestos-related claims.

In conjunction with the regular updates of the estimated Asbestos Liability, the Corporation also develops an estimate of defense costs expected to be incurred with settling the Asbestos Liability and probable insurance recoveries for the Asbestos Liability and defense costs. In developing the estimate of probable defense costs, the Corporation considers several factors including, but not limited to, current and historical defense-to-indemnity cost ratios. In developing the estimate of probable insurance recoveries, the Corporation considers the expert’s projection of settlement costs for the Asbestos Liability and management’s projection of associated defense costs. In addition, the Corporation consults with its outside legal counsel on insurance matters and a nationally recognized insurance consulting firm that it retains to assist with certain policy allocation matters. The Corporation also considers a number of other factors including the Settlement Agreements in effect, policy exclusions, policy limits, policy provisions regarding coverage for defense costs, attachment points, gaps in the coverage, policy exhaustions, the nature of the underlying claims for the Asbestos Liability, estimated erosion of insurance limits on account of claims against Howden associated with the Products, prior impairment of policies, insolvencies among the insurance carriers, and creditworthiness of the remaining insurers based on publicly available information. Based on these factors, the Corporation estimates the probable insurance recoveries for the Asbestos Liability and defense costs for the corresponding timeframe of the Asbestos Liability.

In the fourth quarter of 2021, primarily as a result of identified changes in claim data and availability of new information, the Corporation engaged GNARUS Advisors LLC (“GNARUS”) to update the estimated Asbestos Liability. The methodology used by GNARUS in its updated projection was substantially the same methodology employed previously, which has been accepted by numerous courts, 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, 2018, to July 31, 2021;

 

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

 

an analysis of claims resolution history from January 1, 2018, to July 31, 2021, to determine the average settlement value of claims, by type of injury claimed and jurisdiction of filing.

Based on this analysis, the Corporation recorded an increase to its estimated Asbestos Liability of $23,333 for claims pending or projected to be asserted through 2052 bringing the Corporation’s reserve for Asbestos Liability to $180,314 at December 31, 2021. The increase was primarily attributable to recent claim experience, including a higher expected proportion of mesothelioma claims which typically have a higher settlement value, offset by a lower defense-to-indemnity cost ratio (reduced to 70% from 80% based on experience over the past five years) and elimination of an inflationary factor based on historical experience over the past 10+ years which provided no evidence that inflationary pressures influenced settlement averages. In addition, the Corporation increased its estimated insurance receivable at December 31, 2021, by $16,672 for the estimated insurance recoveries attributable to the claims for which the Asbestos Liability reserve had been established and the portion of defense costs covered by the Settlement Agreements bringing the insurance receivable to $121,297 at December 31, 2021.  

18


The following table summarizes activity relating to Asbestos Liability for the nine months ended September 30, 2022, and 2021.

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Asbestos liability, beginning of the year

 

$

180,314

 

 

$

180,196

 

Settlement and defense costs paid

 

 

(14,683

)

 

 

(14,329

)

Asbestos liability, end of the period

 

$

165,631

 

 

$

165,867

 

The following table summarizes activity relating to insurance recoveries for the nine months ended September 30, 2022, and 2021.

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Insurance receivable – asbestos, beginning of the year

 

$

121,297

 

 

$

117,937

 

Settlement and defense costs paid by insurance carriers

 

 

(7,748

)

 

 

(8,224

)

Insurance receivable – asbestos, end of the period

 

$

113,549

 

 

$

109,713

 

The balance of the insurance receivable does not assume any recovery from insolvent carriers. 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 insolvencies among the relevant insurance carriers, or that the assumed percentage recoveries for certain carriers will prove correct.

The amounts recorded for the 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 the experts’ calculations vary significantly from actual results. Key variables in these assumptions are identified above and also include the number and nature of new claims to be filed each year, the average cost of disposing of each 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 Asbestos Liability and ability to recover under the Corporation’s 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 continue to evaluate the 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 adjusting its current reserve; however, the Corporation is currently unable to estimate such future adjustments. Adjustments, if any, to the Corporation’s estimate of the Asbestos Liability and/or insurance receivable could be material to the operating results for the periods in which the adjustments to the liability or receivable are recorded and to the Corporation’s consolidated financial position and liquidity.

Note 16 – Environmental Matters

The Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned and periodically incurs costs to maintain compliance with environmental laws and regulations. Environmental exposures are difficult to assess and estimate for numerous reasons, including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. The undiscounted potential liability for remedial actions and environmental compliance measures approximated $100 at September 30, 2022, and December 31, 2021.

Note 17 – Related Parties

Shanxi Åkers TISCO Roll Co., Ltd. (“ATR”) periodically has loans outstanding with its minority shareholder. At September 30, 2022, ATR’s outstanding loan balance with its minority shareholder approximated $1,525 (RMB 10,852). At December 31, 2021, no loans were outstanding. For the nine months ended September 30, 2022, borrowings approximated $5,776 (RMB 38,470) and repayments approximate $4,251 (RMB 27,618). For the nine months ended September 30, 2021, no additional amounts were borrowed and repayments on previously existing loans approximated $1,065 (RMB 6,901).

Interest on borrowings accrues at the three-to-five-year loan interest rate set by the People’s Bank of China, which approximated 5% for each of the three and nine months ended September 30, 2022, and 2021. For the nine months ended September 30, 2022, ATR paid $943 (RMB 6,241) of interest. For the nine months ended September 30, 2021, no interest was paid. Accrued interest approximated $696 (RMB 4,950) and $1,713 (RMB 10,901) as of September 30, 2022, and December 31, 2021, respectively, and is recorded in other current liabilities on the condensed consolidated balance sheets.

Purchases from ATR’s minority shareholder and its affiliates, which were in the ordinary course of business, approximated $1,020 (RMB 7,539) and $6,838 (RMB 45,251) for the three and nine months ended September 30, 2022, respectively, and $2,537 (RMB 16,394) and $8,794 (RMB 56,889) for the three and nine months ended September 30, 2021, respectively. The amount payable to

19


ATR’s minority shareholder and its affiliates for purchases approximated $891 (RMB 6,337) and $1,125 (RMB 7,157) at September 30, 2022, and December 31, 2021, respectively.

Sales to ATR’s minority shareholder and its affiliates, which were in the ordinary course of business, approximated $2,419 (RMB 16,620) and $6,959 (RMB 46,049) for the three and nine months ended September 30, 2022, respectively, and $2,561 (RMB 16,553) and $6,686 (RMB 43,251) for the three and nine months ended September 30, 2021, respectively. The amount receivable from ATR’s minority shareholder and its affiliates for sales approximated $1,881 (RMB 13,387) at September 30, 2022. No amounts were receivable from ATR’s minority shareholder and its affiliates at December 31, 2021. Additionally, customer deposits received from ATR’s minority shareholder and its affiliates on future orders approximated $526 (RMB 3,746) and $616 (RMB 3,921) at September 30, 2022, and December 31, 2021, respectively, and are recorded in other current liabilities on the condensed consolidated balance sheets.

Note 18 – Business Segments

Presented below are the net sales and income (loss) before income taxes for the Corporation’s two business segments.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and Cast Engineered Products

$

75,511

 

 

$

61,179

 

 

$

229,848

 

 

$

195,558

 

Air and Liquid Processing

 

24,136

 

 

 

20,006

 

 

 

66,807

 

 

 

64,855

 

Total Reportable Segments

$

99,647

 

 

$

81,185

 

 

$

296,655

 

 

$

260,413

 

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and Cast Engineered Products

$

(62

)

 

$

(2,832

)

 

$

1,107

 

 

$

688

 

Air and Liquid Processing

 

2,917

 

 

 

2,891

 

 

 

8,177

 

 

 

7,265

 

Total Reportable Segments

 

2,855

 

 

 

59

 

 

 

9,284

 

 

 

7,953

 

Other expense, including corporate costs

 

(734

)

 

 

(1,234

)

 

 

(4,587

)

 

 

(5,837

)

Total

$

2,121

 

 

$

(1,175

)

 

$

4,697

 

 

$

2,116

 

 

 

 

Note 19 – Subsequent Event

On October 14, 2022, Air & Liquid completed a sale and leaseback financing transaction with STORE, valued at $4,500 for its real property, including its manufacturing facility, located in North Tonawanda, New York. Net proceeds, after transaction-related costs, approximated $4,444. In connection with the sale and leaseback financing transaction, UES and STORE amended the Restated Lease.

 

 

 

20


 

ITEM  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in thousands, except share and per share amounts)

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by us or on behalf of Ampco-Pittsburgh Corporation (the “Corporation”). Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q, as well as the condensed consolidated financial statements and notes hereto, may include, but are not limited to, statements about operating performance, trends and events that we expect or anticipate will occur in the future, statements about sales and production levels, restructurings, the impact from global pandemics (including COVID-19) and international conflicts, profitability and anticipated expenses, inflation, the global supply chain, future proceeds from the exercise of outstanding warrants, and cash outflows. All statements in this document other than statements of historical fact are statements that are, or could be, deemed “forward-looking statements” within the meaning of the Act and words such as “may,” “will,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “forecast,” and other terms of similar meaning that indicate future events and trends are also generally intended to identify forward-looking statements. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations, and involve risks and uncertainties. For us, these risks and uncertainties include, but are not limited to:

 

economic downturns, cyclical demand for our products and insufficient demand for our products,

 

excess global capacity in the steel industry,

 

fluctuations in the value of the U.S. dollar relative to other currencies,

 

increases in commodity prices or insufficient hedging against increases in commodity prices, reductions in electricity and natural gas supply or shortages of key production materials for us or our customers,

 

limitations in availability of capital to fund our strategic plan,

 

inability to maintain adequate liquidity to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations,

 

inability to obtain necessary capital or financing on satisfactory terms to acquire capital expenditures that may be necessary to support our growth strategy,

 

inoperability of certain equipment on which we rely,

 

liability of our subsidiaries for claims alleging personal injury from exposure to asbestos-containing components historically used in certain products of our subsidiaries,

 

changes in the existing regulatory environment,

 

inability to successfully restructure our operations,

 

consequences of global pandemics (including COVID-19) and international conflicts,

 

work stoppage or another industrial action on the part of any of our unions,

 

inability to satisfy the continued listing requirements of the New York Stock Exchange or the NYSE American Exchange,

 

potential attacks on information technology infrastructure and other cyber-based business disruptions,

 

failure to maintain an effective system of internal control, and

 

those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by us, particularly in Item 1A, Risk Factors, in Part I of our latest Annual Report on Form 10-K for the year ended December 31, 2021.

We cannot guarantee any future results, levels of activity, performance or achievements. In addition, there may be events in the future that we are not able to predict accurately or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. Except as required by applicable law, we assume no obligation, and disclaim any obligation, to update forward-looking statements whether as a result of new information, events or otherwise.


21


 

The Business

Ampco-Pittsburgh Corporation and its subsidiaries (collectively, 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 (“FCEP”) segment and the Air and Liquid Processing (“ALP”) segment. This segment presentation is consistent with how the Corporation’s chief operating decision maker evaluates financial performance and makes resource allocation and strategic decisions about the business.

The FCEP segment produces forged hardened steel rolls, cast rolls and forged engineered products (“FEP”). Forged hardened steel rolls are used primarily in cold 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. FEP principally are sold to customers in the steel distribution market, oil and gas industry and the aluminum and plastic extrusion industries. The segment has operations in the United States, England, Sweden, and Slovenia, 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 ALP 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 manufacturing. 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.

Executive Overview

While the Corporation is operating at more normal levels following the emergence of the coronavirus (“COVID-19”) pandemic in 2020, lingering effects continue, some of which are being exacerbated by the Russia-Ukraine conflict, including:

 

Periodic disruptions to the global supply chain for the Corporation and its customers,

 

Global inflationary pressures and

 

Delays in receiving and shipping product due to the lack of transportation.

The Corporation is actively monitoring, and will continue to actively monitor, the pandemic and the Russia-Ukraine conflict and the potential impact on its operations, financial condition, liquidity, suppliers, industry, and workforce.

For the FCEP segment, roll market conditions have recovered to pre-pandemic levels. The FEP market also has strengthened with increasing demand from the steel distribution and oil and gas markets, on rising oil prices. Although the segment continues to be adversely impacted by escalating costs, particularly for raw and ancillary materials, energy and transportation, price increases and changes to surcharge policies announced in the fourth quarter of 2021 are absorbing a significant portion of these costs, albeit on a lag. Approximately 75% of customer orders include a commodity surcharge. The primary focus for this segment is to maintain a strong position in the roll and FEP markets, diversify and develop FEP for use in other industries, complete operational and efficiency improvements at its facilities, and upgrade existing equipment with a goal of reducing costs, improving reliability and increasing FEP capacity and capabilities.

For the ALP segment, the businesses are benefitting from increasing demand but, similarly, are facing increasing production and transportation costs and supply chain issues. The segment has been implementing price increases for certain of its products to help mitigate these inflationary effects. The focus for this segment is to grow revenues, strengthen engineering and manufacturing capabilities and continue to improve its sales distribution network.

22


Selected Financial Information

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and Cast Engineered Products

 

$

75,511

 

 

$

61,179

 

 

$

14,332

 

 

$

229,848

 

 

$

195,558

 

 

$

34,290

 

Air and Liquid Processing

 

 

24,136

 

 

 

20,006

 

 

 

4,130

 

 

 

66,807

 

 

 

64,855

 

 

 

1,952

 

Consolidated

 

$

99,647

 

 

$

81,185

 

 

$

18,462

 

 

$

296,655

 

 

$

260,413

 

 

$

36,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and Cast Engineered Products

 

$

(62

)

 

$

(2,832

)

 

$

2,770

 

 

$

1,107

 

 

$

688

 

 

$

419

 

Air and Liquid Processing

 

 

2,917

 

 

 

2,891

 

 

 

26

 

 

 

8,177

 

 

 

7,265

 

 

 

912

 

Corporate costs

 

 

(2,929

)

 

 

(2,420

)

 

 

(509

)

 

 

(8,435

)

 

 

(8,938

)

 

 

503

 

Consolidated

 

$

(74

)

 

$

(2,361

)

 

$

2,287

 

 

$

849

 

 

$

(985

)

 

$

1,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

2022

 

 

December 31,

2021

 

 

Change

 

Backlog:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and Cast Engineered Products

 

 

 

 

 

 

 

 

 

 

 

 

 

$

227,534

 

 

$

223,321

 

 

$

4,213

 

Air and Liquid Processing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

106,117

 

 

 

69,233

 

 

 

36,884

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

$

333,651

 

 

$

292,554

 

 

$

41,097

 

Net sales approximated $99,647 and $81,185 for the three months ended September 30, 2022, and 2021, respectively, and $296,655 and $260,413 for the nine months ended September 30, 2022, and 2021, respectively. The increase primarily is attributable to higher sales for the FCEP segment. A discussion of net sales for the Corporation’s two segments is included below.

(Loss) income from operations approximated $(74) and $(2,361) for the three months ended September 30, 2022, and 2021, respectively, and $849 and $(985) for the nine months ended September 30, 2022, and 2021, respectively. Included in (loss) income from operations for the nine months ended September 30, 2022, is a charge of approximately $664 for excess COVID-19 subsidies received in 2020 but returned in 2022 (“the Refund of Excess COVID-19 Subsidies”) and a benefit of approximately $1,431 resulting from a change in how certain employees earn certain benefits (the “Change in Employee Benefit Policy”). A discussion of (loss) income from operations for the Corporation’s two segments is included below. Corporate costs decreased for the nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021, due to lower employee-related costs including lower incentive compensation and a portion of the benefit from the Change in Employee Benefit Policy being attributable to Corporate employees.

Backlog equaled $333,651 as of September 30, 2022, versus $292,554 as of December 31, 2021. Backlog represents the accumulation of firm orders on hand which: (i) are supported by evidence of a contractual arrangement, (ii) include a fixed and determinable sales price, (iii) have collectability that is reasonably assured, and (iv) generally are expected to ship within two years from the backlog reporting date. Backlog at a certain date may not be a direct measure of future revenue for a particular order because price increases, negotiated subsequently to the original order, are not included in backlog until the updated contract is received from the customer and certain surcharges are not determinable until the order is completed and ready for shipment to the customer. Approximately 60% of the backlog is expected to be released after 2022. A discussion of backlog by segment is included below.

Costs of products sold, excluding depreciation and amortization, as a percentage of net sales, for the three months ended September 30, 2022, and 2021, approximated 84.7% and 83.7%, respectively. While gross margins were slightly better for the FCEP segment for the third quarter of 2022 when compared to the third quarter of 2021, gross margins for the ALP segment were slightly less as a result of an unfavorable product mix. Costs of products sold, excluding depreciation and amortization, as a percentage of net sales, for the nine months ended September 30, 2022, and 2021, approximated 84.5% and 81.8%, respectively. The increase was primarily attributable to the FCEP segment which experienced higher costs, particularly for direct and indirect materials, energy and transportation when compared to the same period of the prior year. Although a portion of these costs are recovered via the variable-index surcharge, there is a lag between the time the costs are incurred and the time the variable-index surcharge is invoiced to the customer.

23


 

Selling and administrative expenses were comparable for the three months ended September 30, 2022, and 2021, and approximated $11,089 and $10,910, respectively. Selling and administrative expenses for the nine months ended September 30, 2022, and 2021, approximated $31,941 and $34,538, respectively, a decrease of $2,597. The decrease primarily is attributable to:

 

Lower exchange rates used to translate the selling and administrative costs of the Corporation’s foreign subsidiaries into the U.S. dollar, which reduced selling and administrative expenses by approximately $1,200 for nine months ended September 30, 2022, when compared to the prior year, and,

 

Benefit from the Change in Employee Benefit Policy, which reduced selling and administrative expenses by approximately $1,020 for the nine months ended September 30, 2022.

Investment-related income relates primarily to dividends from one of the Corporation’s Chinese joint ventures. In the third quarter of 2022, the Chinese joint venture declared a dividend which equaled $504 for the Corporation. In the second quarter of 2021, the Chinese joint venture declared a dividend which equaled $1,025 for the Corporation.

Interest expense approximated $1,486 and $834 for the three months ended September 30, 2022, and 2021, respectively, and $3,684 and $2,672 for the nine months ended September 30, 2022, and 2021, respectively. The increase for each of the current year periods when compared to the same periods of the prior year is principally due to higher average borrowings outstanding under the revolving credit facility and higher interest rates.

Other income – net is comprised of the following:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

2021

 

Change

 

 

2022

 

2021

 

Change

 

Net pension and other postretirement income

 

$

1,631

 

$

1,672

 

$

(41

)

 

$

4,931

 

$

5,015

 

$

(84

)

Gain (loss) on foreign exchange transactions

 

 

1,809

 

 

369

 

 

1,440

 

 

 

3,368

 

 

(705

)

 

4,073

 

Unrealized (loss) gain on Rabbi trust investments

 

 

(276

)

 

(56

)

 

(220

)

 

 

(1,292

)

 

359

 

 

(1,651

)

Other

 

 

10

 

 

21

 

 

(11

)

 

 

12

 

 

25

 

 

(13

)

 

 

$

3,174

 

$

2,006

 

$

1,168

 

 

$

7,019

 

$

4,694

 

$

2,325

 

Other income – net fluctuated period over period due to changes in foreign exchange gains and losses and, as a result of recent volatility in the financial markets, unrealized losses in the market value of the Rabbi trust investments.

Income tax provision for each of the periods includes income taxes associated with the Corporation’s profitable operations. An income tax benefit is not able to be recognized on losses of certain of the Corporation’s entities since it is “more likely than not” the asset will not be realized. Accordingly, changes in the income tax provision for each of the periods include the effects of changes in the pre-tax income of the Corporation’s profitable operations. In addition, the income tax provision for the three and nine months ended September 30, 2022, includes expense of $316 resulting from the revaluation of certain deferred tax assets associated with the Pennsylvania tax rate change. By comparison, the income tax provision for the nine months ended September 30, 2021, includes $523 of expense associated with the (i) restructuring of a foreign sales office and (ii) revaluation of the deferred income taxes of the Corporation’s U.K. entity following new legislation enacted in 2021, which will increase the U.K. corporate tax rate from 19% to 25% in 2023.

Net income attributable to Ampco-Pittsburgh and income (loss) per common share attributable to Ampco-Pittsburgh equaled $846 and $0.04 per common share and $2,894 and $0.15 per common share for the three and nine months ended September 30, 2022, respectively, and $(1,589) and $(0.08) per common share and $(359) and $(0.02) per common share for the three and nine months ended September 30, 2021, respectively.

Net income attributable to Ampco-Pittsburgh and income per common share attributable to Ampco-Pittsburgh for the nine months ended September 30, 2022, include a net benefit of $427 or $0.02 per common share for:

 

The after-tax benefit from the Change in Employee Benefit Policy of $1,407 offset by

 

The after-tax charge associated with the Refund of Excess COVID-19 Subsidies of $664 and

 

The revaluation of certain deferred income tax assets associated with the change in the Pennsylvania state income tax rate of $316.

Net (loss) attributable to Ampco-Pittsburgh and (loss) per common share attributable to Ampco-Pittsburgh for the nine months ended September 30, 2021, include net expense of $522 or $0.03 per common share for (i) the restructuring of a foreign sales office and (ii) the revaluation of the deferred income taxes of the Corporation’s U.K. entity following new legislation enacted in 2021, which will increase the U.K. corporate tax rate from 19% to 25% in 2023.

 

24


 

Net Sales and Operating Results by Segment

Forged and Cast Engineered Products

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forged and cast mill rolls

 

$

66,653

 

 

$

53,778

 

 

$

12,875

 

 

$

193,946

 

 

$

177,918

 

 

$

16,028

 

FEP

 

 

8,858

 

 

 

7,401

 

 

 

1,457

 

 

 

35,902

 

 

 

17,640

 

 

 

18,262

 

 

 

$

75,511

 

 

$

61,179

 

 

$

14,332

 

 

$

229,848

 

 

$

195,558

 

 

$

34,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Operations

 

$

(62

)

 

$

(2,832

)

 

$

2,770

 

 

$

1,107

 

 

$

688

 

 

$

419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

2022

 

 

December 31,

2021

 

 

Change

 

Backlog

 

 

 

 

 

 

 

 

 

 

 

 

 

$

227,534

 

 

$

223,321

 

 

$

4,213

 

Net sales increased for each of the current year periods when compared to the same periods of the prior year principally due to:

 

Higher pricing and variable-index surcharges passed through to customers as a result of higher raw material, energy and transportation costs, which increased net sales by $15,400 and $42,800 for the three and nine months ended September 30, 2022, respectively,

 

Higher volume of mill roll shipments primarily resulting from the timing of deliveries, which increased net sales by approximately $8,600 and $4,800 for the three and nine months ended September 30, 2022, respectively,

 

Higher volume of FEP shipments as a result of increased demand from the steel distribution and oil and gas markets, which increased net sales by approximately $4,600 for the nine months ended September 30, 2022, but decreased net sales by approximately $2,600 for the three months then ended,

 

Changes in product mix, which decreased net sales by $1,800 and $6,600 for the three and nine months ended September 30, 2022, respectively, and

 

Changes in exchanges rates used to translate net sales of the segment’s foreign subsidiaries into the U.S. dollar, which decreased net sales by approximately $5,300 and $11,300 for the three and nine months ended September 30, 2022, respectively.

Operating results for the current year periods improved when compared to the same periods of the prior year. While the segment continues to experience escalating costs for raw and ancillary materials, energy, transportation, direct labor and other items, a significant portion of these increases was recovered via the variable-index surcharge mechanism and higher pricing. The variable-index surcharge is known at the time of shipment and increases or decreases, as applicable, the selling price of the product for the corresponding changes in the published index cost of certain raw materials and energy. The variable-index surcharge is recognized as revenue when the corresponding sale of the inventory is recognized. However, since the cost of domestic raw materials, work-in-process and finished goods is primarily determined by the last-in, first-out method, the higher or lower costs of those certain raw materials and energy are recognized prior to the variable-index surcharge thus creating a lag between the time these costs are incurred and the time these costs are recovered.

For the three months ended September 30, 2022, the improved pricing and variable-indexed surcharge exceeded the higher raw material, energy and transportation costs by approximately $800 but, for the nine months ended September 30, 2022, under-recovered by approximately $2,100 when compared to the same period of the prior year.

In addition, (loss) income from operations improved for each of the current year periods when compared to the same periods of the prior year due to:

 

Higher volume of shipments, which had a net improvement on operating results of $1,400 and $1,500 for the three and nine months ended September 30, 2022, respectively,

 

Lower selling and administrative costs of approximately $700 and $2,100 for the three and nine months ended September 30, 2022, respectively, including the savings generated from the Change in Employee Benefit Policy of $562 for the nine months ended September 30, 2022,

 

Lower losses on the sale of equipment of approximately $300 for the three and nine months ended September 30, 2022, offset by

 

Expense associated with the Refund of Excess COVID-19 Subsidies in the second quarter of 2022 of $664, and

25


 

 

Changes in exchanges rates used to translate the operating results of the segment’s foreign subsidiaries into the U.S. dollar, which reduced operating results by approximately $360 and $620 for the three and nine months ended September 30, 2022, respectively.

Backlog increased slightly at September 30, 2022, from December 31, 2021, by $4,213. The backlog of orders for rolls increased at September 30, 2022, from December 31, 2021, by approximately $31,800 due to improved demand from flat-rolled steel and aluminum customers and improved pricing. The backlog of orders for FEP decreased at September 30, 2022, from December 31, 2021, by approximately $11,500 due to timing of receipt of new orders from customers. Lower foreign exchange rates used to translate the backlog of the Corporation’s foreign subsidiaries into the U.S. dollar also reduced backlog at September 30, 2022, when compared to backlog at December 31, 2021, by approximately $16,100. At September 30, 2022, approximately 59% of backlog is expected to ship after 2022.

Air and Liquid Processing

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

Change

 

 

2022

 

 

2021

 

 

Change

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heat exchange coils

 

$

8,532

 

 

$

6,527

 

 

$

2,005

 

 

$

22,483

 

 

$

18,482

 

 

$

4,001

 

Air handling systems

 

 

8,457

 

 

 

6,383

 

 

 

2,074

 

 

 

22,133

 

 

 

21,235

 

 

 

898

 

Centrifugal pumps

 

 

7,147

 

 

 

7,096

 

 

 

51

 

 

 

22,191

 

 

 

25,138

 

 

 

(2,947

)

 

 

$

24,136

 

 

$

20,006

 

 

$

4,130

 

 

$

66,807

 

 

$

64,855

 

 

$

1,952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from Operations

 

$

2,917

 

 

$

2,891

 

 

$

26

 

 

$

8,177

 

 

$

7,265

 

 

$

912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

2022

 

 

December 31,

2021

 

 

Change

 

Backlog

 

 

 

 

 

 

 

 

 

 

 

 

 

$

106,117

 

 

$

69,233

 

 

$

36,884

 

Net sales for the three and nine months ended September 30, 2022, improved over the comparable prior year periods by $4,130 and $1,952, respectively. More specifically,

 

Sales of heat exchange coils benefited from a higher volume of shipments to commercial and industrial customers and

 

Sales of air handling systems improved due to increased order intake, while

 

Sales of centrifugal pumps were adversely affected by supply chain delays for purchased components and customer delays.

Operating income benefitted from the higher sales but was offset by unfavorable product mix, particularly in the third quarter of 2022. Operating income for the for the nine months ended September 30, 2022, includes a benefit from the Change in Employee Benefit Policy of $680.

Backlog at September 30, 2022, increased from December 31, 2021, by $36,884 with backlog for each product line improving as a result of record-level order intake. In particular, the segment received a $9,600 order for a custom air handling unit project with a major healthcare provider which is expected to ship in 2023. At September 30, 2022, approximately 64% of backlog is expected to ship after 2022.

Non-GAAP Financial Measures

The Corporation presents non-GAAP adjusted (loss) income from operations, which is calculated as (loss) income from operations excluding the Refund of Excess COVID-19 Subsidies and the Change in Employee Benefit Policy. This non-GAAP financial measure is not based on any standardized methodology prescribed by accounting principles generally accepted in the United States of America (“GAAP”) and may not be comparable to similarly titled measures presented by other companies.

The Corporation has presented non-GAAP adjusted (loss) income from operations because it is a key measure used by the Corporation’s management and Board of Directors to understand and evaluate the Corporation’s operating performance and to develop operational goals for managing its business. This non-GAAP financial measure excludes significant charges or credits, that are one-time charges or credits, unrelated to the Corporation’s ongoing results of operations or beyond its control. Additionally, a portion of the incentive and compensation arrangements for certain employees is based on the Corporation’s business performance. The Corporation believes this non-GAAP financial measure helps identify underlying trends in its business that could otherwise be masked by the effect of the items that it excludes from adjusted (loss) income from operations. The Corporation also believes this non-GAAP financial measure provides useful information to management, shareholders and investors, and others in understanding and evaluating its operating results, enhancing the overall understanding of its past performance and future prospects and allowing for greater transparency with respect to key financial metrics used by the Corporation’s management in its financial and operational decision-making.

26


Adjusted (loss) income from operations is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are limitations related to the use of adjusted (loss) income from operations rather than (loss) income from operations, which is the nearest GAAP equivalent. Among other things, there can be no assurance that charges similar to the Refund of Excess COVID-19 Subsidies and benefits similar to the Change in Employee Benefit Policy will not occur in future periods.

The adjustments reflected in adjusted (loss) income from operations are pre-tax. The tax impact associated with the adjustments is not significant, approximately $24, due to the Corporation having a valuation allowance recorded against the deferred income tax assets for the majority of the jurisdictions where the expense and income are recognized.

The following is a reconciliation of (loss) income from operations to non-GAAP adjusted (loss) income from operations for the three and nine months ended September 30, 2022, and 2021, respectively:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(Loss) income from operations, as reported (GAAP)

 

$

(74

)

 

$

(2,361

)

 

$

849

 

 

$

(985

)

Refund of Excess COVID-19 Subsidies (1)

 

 

0

 

 

 

0

 

 

 

664

 

 

 

0

 

Change in Employee Benefit Policy (2)

 

 

0

 

 

 

0

 

 

 

(1,431

)

 

 

0

 

(Loss) income from operations, as adjusted (Non-GAAP)

 

$

(74

)

 

$

(2,361

)

 

$

82

 

 

$

(985

)

 

 

(1)

Represents excess COVID-19 subsidies received in 2020 and returned in 2022.

 

(2)

Represents a benefit resulting from a change in how certain employees earn certain benefits.

Liquidity and Capital Resources

 

 

Nine Months Ended September 30,

 

 

 

2022

 

2021

 

Change

 

Net cash flows used in operating activities

 

$

(20,405

)

$

(4,398

)

$

(16,007

)

Net cash flows used in investing activities

 

 

(12,516

)

 

(11,521

)

 

(995

)

Net cash flows provided by financing activities

 

 

35,908

 

 

11,609

 

 

24,299

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,134

)

 

(281

)

 

(853

)

Net increase (decrease) in cash and cash equivalents

 

 

1,853

 

 

(4,591

)

 

6,444

 

Cash and cash equivalents at beginning of period

 

 

10,337

 

 

16,842

 

 

(6,505

)

Cash and cash equivalents at end of period

 

$

12,190

 

$

12,251

 

$

(61

)

Net cash flows used in operating activities equaled $(20,405) and $(4,398) for the nine months ended September 30, 2022, and 2021, respectively. The significant change between the years primarily is due to the ongoing investment in trade working capital due to a higher level of business activity resulting from increased demand and, for inventories, higher costs associated with inflation and supply chain disruptions.

Net cash flows used in investing activities equaled $(12,516) and $(11,521) for the nine months ended September 30, 2022, and 2021, respectively. Capital expenditures for each of the periods were relatively comparable and related primarily to the FCEP segment. The Corporation has undertaken a significant capital program approximating $27,000 to upgrade existing equipment at certain of its FCEP locations, which is anticipated to be completed by December 31, 2023. At September 30, 2022, commitments for future capital expenditures, including those associated with the FCEP capital program, approximated $19,300.

Net cash flows provided by financing activities equaled $35,908 and $11,609 for the nine months ended September 30, 2022, and 2021, respectively. The change period over period primarily is due to:

 

Net borrowings from the Corporation’s revolving credit facility of $15,717 versus $10,516 in the prior year,

 

Proceeds from a sale and leaseback financing transaction completed in the third quarter of 2022 equaling $15,500,

 

Proceeds from an equipment financing facility completed in the third quarter of 2022, which provided proceeds of $4,014,

 

Net borrowings from one of the Corporation’s Chinese joint ventures from its minority shareholder of $1,525 for the nine months ended September 30, 2022, in comparison to repayments of $1,065 for the nine months ended September 30, 2021, offset by

 

Lower proceeds from shareholders exercising warrants for the Corporation’s common stock of $3,308.

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

As a result of the above, cash and cash equivalents increased by $1,853 during 2022 and ended the period at $12,190 in comparison to $10,337 at December 31, 2021. The majority of the Corporation’s cash and cash equivalents is held by its foreign operations. Domestic customer remittances are used to pay down borrowings under the Corporation’s revolving credit facility daily, resulting in

27


minimal cash maintained by the Corporation’s domestic operations. Cash held by the Corporation’s foreign operations is considered to be permanently re-invested; accordingly, a provision for estimated local and withholding tax has not been made. If the Corporation were to remit any foreign earnings to it or any of its U.S. entities, the estimated tax impact would be insignificant.

Funds on hand, funds generated from future operations and availability under the Corporation’s revolving credit facility are expected to be sufficient to finance the Corporation’s operational requirements and debt service costs. The maturity date for the revolving credit facility is June 29, 2026, and, subject to the other terms and conditions of the revolving credit agreement, will become due on that date. As of September 30, 2022, remaining availability under the revolving credit facility approximated $35,622, net of standard availability reserves.

Availability under the Corporation’s equipment financing facility and the Disbursement Agreement are expected to be sufficient to finance the capital program for the FCEP segment in the timeframe currently anticipated. At September 30, 2022, availability under the equipment financing facility and Disbursement Agreement approximated $18,500. Each borrowing on the equipment financing facility will constitute a secured loan transaction (each, a “Term Loan”). Each Term Loan will convert to a Term Note on the earlier of (i) the date in which the associated equipment is placed in service or (ii) December 31, 2023. Each Term Note will have a term of 84 months in arrears fully amortizing and will commence on the date of the Term Note. Borrowings under the Disbursement Agreement will be repaid over an initial term of 20 years – through August 2042.

Litigation and Environmental Matters

See Note 15 and Note 16 to the condensed consolidated financial statements.

Critical Accounting Pronouncements

The Corporation’s critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2021, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLS AND PROCEDURES

Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission (“SEC”) rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Corporation’s management, including the principal executive officer and principal financial officer, has concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control. There has been no change in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

28


PART II – OTHER INFORMATION

AMPCO-PITTSBURGH CORPORATION

Item  1

The information contained in Note 15 to the condensed consolidated financial statements (Litigation) is incorporated herein by reference.

Item  1A

Risk Factors

There are no material changes to the Risk Factors contained in Item 1A to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

Items 2-5

None.

Item  6

Exhibits

 

 

 

 

 

 

(3.1)

 

Restated Articles of Incorporation, effective as of August 11, 2017, incorporated by reference to Quarterly Report on Form 10-Q filed on November 9, 2017.

 

 

 

(3.2)

 

Amended and Restated By-laws, effective as of December 17, 2015, incorporated by reference to Current Report on Form 8-K filed on December 23, 2015.

 

 

 

(3.3)

 

Amendment of Amended and Restated Articles of Incorporation, effective as of May 9, 2019, incorporated by reference to Quarterly Report on Form 10-Q filed on May 10, 2019.

 

(10.1)

 

Amended and Restated Master Lease Agreement between Union Electric Steel Corporation and Store Capital Acquisitions, LLC, dated August 30, 2022, incorporated by reference to Current Report on Form 8-K filed on September 2, 2022.

 

 

 

(10.2)

 

Amended and Restated Unconditional Guaranty of Payment and Performance between Ampco-Pittsburgh Corporation and Store Capital Acquisitions, LLC, dated August 30, 2022, incorporated by reference to Current Report on Form 8-K filed on September 2, 2022.

 

 

 

(10.3)

 

Master Loan and Security Agreement between Union Electric Steel Corporation and Clarus Capital Funding I, LLC, dated September 29, 2022, incorporated by reference to Current Report on Form 8-K filed on October 4, 2022.

 

 

 

(10.4)

 

Guaranty made by Ampco-Pittsburgh Corporation to Clarus Capital Funding I, LLC, and dated September 29, 2022, incorporated by reference to Current Report on Form 8-K filed on October 4, 2022.

 

 

 

(31.1)

 

Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

(31.2)

 

Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

(32.1)

 

Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

 

 

 

(32.2)

 

Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

 

 

 

(101.INS)

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

(101.SCH)

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

(101.CAL)

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

(101.DEF)

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

(101.LAB)

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

(101.PRE)

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

(104)

 

The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101.

 

29


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

AMPCO-PITTSBURGH CORPORATION

 

 

 

 

 

DATE: November 14, 2022

 

BY:

 

/s/ J. Brett McBrayer

 

 

 

 

J. Brett McBrayer

 

 

 

 

Director and Chief Executive Officer

 

 

 

 

 

DATE: November 14, 2022

 

BY:

 

/s/ Michael G. McAuley

 

 

 

 

Michael G. McAuley

 

 

 

 

Senior Vice President, Chief Financial Officer and Treasurer

 

 

 

 

30