10-Q 1 sep3004q.txt 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004 FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-898. AMPCO-PITTSBURGH CORPORATION Incorporated in Pennsylvania. I.R.S. Employer Identification No. 25-1117717. 600 Grant Street, Pittsburgh, Pennsylvania 15219 Telephone Number 412/456-4400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO On November 8, 2004, 9,724,997 common shares were outstanding. - 1 - AMPCO-PITTSBURGH CORPORATION INDEX Page No. Part I - Financial Information: Item 1 - Consolidated Financial Statements Consolidated Balance Sheets - September 30, 2004 and December 31, 2003 3 Consolidated Statements of Operations - Nine Months Ended September 30, 2004 and 2003 Three Months Ended September 30, 2004 and 2003 4 Condensed Consolidated Statements of Cash Flows- Nine Months Ended September 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17 Item 4 - Controls and Procedures 18 Part II - Other Information: Item 1 - Legal Proceedings 19 Item 5 - Other Information 19 Item 6 - Exhibits 19 Signatures 21 Exhibit Index 22 Exhibits Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Exhibit 32.2 - 2 - PART I - FINANCIAL INFORMATION AMPCO-PITTSBURGH CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 2004 2003 Assets Current assets: Cash and cash equivalents $ 37,428,455 $ 35,738,789 Receivables, less allowance for doubtful accounts of $869,770 in 2004 and $542,594 in 2003 37,812,098 38,801,415 Inventories 52,612,695 48,260,368 Other 8,577,324 11,549,540 Total current assets 136,430,572 134,350,112 Property, plant and equipment, at cost: Land and land improvements 4,219,527 4,219,403 Buildings 25,138,643 25,148,729 Machinery and equipment 134,075,071 130,015,316 163,433,241 159,383,448 Accumulated depreciation 94,421,341 89,885,025 Net property, plant and equipment 69,011,900 69,498,423 Prepaid pensions 24,880,916 24,104,233 Goodwill 2,694,240 2,694,240 Other noncurrent assets 3,528,830 3,500,869 $236,546,458 $234,147,877 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 14,324,649 $ 11,178,162 Accrued payrolls and employee benefits 9,261,471 7,932,751 Other 14,527,086 14,930,841 Total current liabilities 38,113,206 34,041,754 Employee benefit obligations 16,389,201 16,692,099 Deferred income taxes 20,946,281 20,555,776 Industrial Revenue Bond debt 13,311,000 13,311,000 Other noncurrent liabilities 4,713,989 5,002,033 Total liabilities 93,473,677 89,602,662 Shareholders' equity: Preference stock - no par value; authorized 3,000,000 shares: none issued - - Common stock - par value $1; authorized 20,000,000 shares; issued and outstanding 9,714,997 in 2004 and 9,653,497 in 2003 9,714,997 9,653,497 Additional paid-in capital 103,861,130 103,211,130 Retained earnings 36,821,432 39,564,359 Accumulated other comprehensive loss (7,324,778) (7,883,771) Total shareholders' equity 143,072,781 144,545,215 Total liabilities and shareholders' equity $236,546,458 $234,147,877
See Notes to Consolidated Financial Statements. - 3 - AMPCO-PITTSBURGH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended Sept. 30, Three Months Ended Sept. 30, 2004 2003 2004 2003 Net sales $151,354,311 $132,383,635 $ 50,922,137 $ 43,358,209 Operating costs and expenses: Costs of products sold (excluding depreciation) 124,299,303 103,928,965 44,130,224 34,214,123 Selling and administrative 21,051,749 20,026,474 7,195,319 6,104,016 Depreciation 4,791,466 4,740,501 1,581,508 1,540,738 Loss (gain) on disposition of assets 23,961 (16,377) 20,228 (7,523) Total operating expenses 150,166,479 128,679,563 52,927,279 41,851,354 Income (loss) from operations 1,187,832 3,704,072 (2,005,142) 1,506,855 Other income (expense): Interest expense (207,687) (252,459) (80,029) (89,136) Other - net 451,736 (264,974) 55,855 (27,504) 244,049 (517,433) (24,174) (116,640) Income (loss) from continuing operations before income taxes 1,431,881 3,186,639 (2,029,316) 1,390,215 Income tax provision (benefit) 1,261,409 1,558,000 (151,591) 489,000 Income (loss) from continuing operations 170,472 1,628,639 (1,877,725) 901,215 Discontinued operations: Loss from operations, including loss on disposal of $4,600,212 in 2003 - (5,356,228) - (5,166,425) Income tax benefit - (234,295) - (184,295) - (5,121,933) - (4,982,130) Net income (loss) $ 170,472 $ (3,493,294) $ (1,877,725) $ (4,080,915) Basic and diluted earnings per common share: Net income (loss) from continuing operations $ 0.02 $ 0.17 $ (0.19) $ 0.09 Net loss from discontinued operations $ - $ (0.53) $ - $ (0.51) Net income (loss) $ 0.02 $ (0.36) $ (0.19) $ (0.42) Cash dividends declared per share $ .30 $ .30 $ .10 $ .10 Weighted average number of common shares outstanding 9,699,654 9,633,695 9,708,964 9,636,051
See Notes to Consolidated Financial Statements. - 4 - AMPCO-PITTSBURGH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended Sept. 30, 2004 2003 Net cash flows provided by operating activities $ 7,877,047 $ 7,342,393 Cash flows from investing activities: Purchases of property, plant and equipment (5,250,618) (3,686,939) Proceeds from sale of business 500,000 14,600,000 Proceeds from grant 922,500 - Proceeds from sale of assets 38,757 818 Investing activities of discontinued operations - (212,252) Net cash flows (used in) provided by investing activities (3,789,361) 10,701,627 Cash flows from financing activities: Proceeds from the issuance of common stock 721,500 166,202 Dividends paid (2,907,249) (2,889,749) Net cash flows used in financing activities (2,185,749) (2,723,547) Effect of exchange rate changes on cash and cash equivalents (212,271) 324,966 Net increase in cash and cash equivalents 1,689,666 15,645,439 Cash and cash equivalents at beginning of period 35,738,789 27,788,798 Cash and cash equivalents at end of period $ 37,428,455 $ 43,434,237 Supplemental information: Income tax payments $ 570,419 $ 206,591 Interest payments $ 204,171 $ 256,404 Noncash investing activities - see Note 9.
See Notes to Consolidated Financial Statements. - 5 - AMPCO-PITTSBURGH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Unaudited Consolidated Financial Statements The consolidated balance sheet as of September 30, 2004, the consolidated statements of operations for the nine and three months ended September 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 have been prepared by Ampco- Pittsburgh Corporation (the Corporation) without audit. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain amounts for the preceding periods have been reclassified for comparability with the 2004 presentation. In addition, the Corporation sold the stock of its Plastics Processing Machinery segment in 2003 (see Note 9) which was accounted for as a discontinued operation. Accordingly, the results of operations for this segment for the prior periods have been reclassified and presented net of tax in the accompanying consolidated statements of operations. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in the Corporation's annual report to shareholders on Form 10-K for the year ended December 31, 2003. The results of operations for the nine and three months ended September 30, 2004 are not necessarily indicative of the operating results expected for the full year. 2. Inventories At September 30, 2004 and December 31, 2003, approximately 65% and 70%, respectively, of the inventories were valued on the LIFO method, with the remaining inventories being valued on the FIFO method. Inventories were comprised of the following: (in thousands) September 30, December 31, 2004 2003 Raw materials $13,583 $11,803 Work-in-process 26,364 23,392 Finished goods 6,539 7,894 Supplies 6,127 5,171 $52,613 $48,260 - 6 - 3. Other Current Liabilities Other current liabilities were comprised of the following: (in thousands) September 30, December 31, 2004 2003 Customer-related $ 4,830 $ 5,675 Forward exchange contracts 1,355 2,335 Accrued commissions 1,891 2,080 Other 6,451 4,841 $14,527 $14,931 Included in customer-related liabilities are costs expected to be incurred with respect to product warranties. There have been no significant changes in the liability for product warranty claims for the nine months ended September 30, 2004. 4. Comprehensive Income (Loss) The Corporation's comprehensive income (loss) for the nine and three months ended September 30, 2004 and 2003 consisted of: (in thousands) Nine Months Three Months Ended September 30, Ended September 30, 2004 2003 2004 2003 Net income (loss) $ 170 $(3,493) $(1,878) $(4,081) Foreign currency translation 140 722 (313) 172 Adjustment to minimum pension liability (138) - 120 - Unrealized holding gains (losses) on marketable securities 38 6 (23) (20) Change in fair value of derivatives 519 (230) (217) 62 Comprehensive income (loss) $ 729 $(2,995) $(2,311) $(3,867) 5. Foreign Exchange Certain of the Corporation's operations are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, forward foreign exchange contracts are purchased which are designated as fair value hedges or cash flow hedges. As of September 30, 2004, approximately $55,132,000 of anticipated foreign denominated sales have been hedged with the underlying contracts settling at various dates beginning in 2004 through September 2009. As of September 30, 2004, the fair value of contracts expected to settle within the next 12 months, which is recorded in other current liabilities, approximated $1,355,000 and the fair value of the remaining contracts, which is recorded in other noncurrent liabilities, approximated $1,904,000. The change in the fair value of the contracts designated as cash flow hedges is recorded as a component of accumulated other comprehensive loss and approximated $(1,646,000), net of taxes, as of September 30, 2004. - 7 - The change in fair value will be reclassified into earnings when the projected sales occur with approximately $(616,000), net of taxes, expected to be released to earnings within the next 12 months. During the nine months ended September 30, 2004 and 2003, approximately $(718,000) and $(551,000), respectively, net of taxes, were released into earnings and for the three months ended September 30, 2004 and 2003, approximately $(188,000) and $(193,000), respectively, net of taxes, were released. Gains (losses) on foreign exchange transactions approximated $297,000 and $(301,000) for the nine months ended September 30, 2004 and 2003 respectively, and $10,000 and $(56,000) for the three months ended September 30, 2004 and 2003, respectively. In addition, one of the Corporation's subsidiaries is subject to risk from increases in the price of a commodity 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, 2004, approximately 100% or $2,312,000 of anticipated commodity purchases over the next 12 months is hedged. The fair value of the contracts expected to settle within the next 12 months approximated $400,000 and the fair value of the remaining contracts approximated $2,000 as of September 30, 2004. The change in the fair value of the contracts is recorded as a component of accumulated other comprehensive loss and approximated $241,000, net of taxes, as of September 30, 2004. The change in the fair value will be reclassified into earnings when the projected sales occur with approximately $240,000, net of taxes, expected to be released to earnings within the next 12 months. 6. Pension and Other Postretirement Benefits No contributions were made to the U.S. pension benefit plans during the nine months ended September 30, 2004. Contributions to the foreign pension plan approximated $414,000 and net payments for other postretirement benefits approximated $669,000 for the nine months ended September 30, 2004. Net periodic pension and other postretirement benefit costs include the following components for the nine and three months ended September 30, 2004 and 2003: (in thousands) U.S. Pension Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 Service cost $ 1,530 $ 1,652 $ 493 $ 578 Interest cost 4,996 5,229 1,681 1,827 Expected return on plan assets (7,648) (8,321) (2,543) (2,911) Amortization of prior service cost 443 423 147 148 Actuarial gain (100) (3) (38) (1) Net benefit income $ (779) $(1,020) $ (260) $ (359) - 8 - (in thousands) Foreign Pension Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 Service cost $ 826 $ 590 $ 275 $ 190 Interest cost 1,381 1,000 460 321 Expected return on plan assets (1,303) (992) (434) (319) Amortization of prior service cost 578 412 192 133 Net benefit cost $ 1,482 $ 1,010 $ 493 $ 325 (in thousands) Other Postretirement Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 Service cost $ 208 $ 164 $ 89 $ 55 Interest cost 579 586 188 195 Amortization of prior service benefit (411) (412) (137) (138) Actuarial loss 111 40 32 13 Net benefit cost $ 487 $ 378 $ 172 $ 125
7. Earnings Per Share Basic earnings per share are computed by dividing income (loss) from continuing operations, loss from discontinued operations, and net income (loss) by the weighted average number of common shares outstanding for each of the periods. The weighted average number of common shares outstanding for the nine and three months ended September 30, 2004 were 9,699,654 and 9,708,964 and for the same periods of the prior year were 9,633,695 and 9,636,051, respectively. The computation of diluted earnings per share is similar to basic earnings per share except that the denominator is increased to include the dilutive effect of the net additional common shares that would have been outstanding assuming exercise of outstanding stock options, calculated using the treasury stock method. The weighted average number of common shares outstanding assuming exercise of stock options was 9,758,783 and 9,764,693 shares for the nine and three months ended September 30, 2004, respectively, and 9,692,924 and 9,687,212 for the nine and three months ended September 30, 2003, respectively. - 9 - 8. Business Segments Presented below are the net sales and income (loss) from continuing operations before income taxes for the Corporation's two business segments. (in thousands) Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 Net Sales: Forged and Cast Rolls $ 95,049 $ 78,948 $ 31,764 $ 26,560 Air and Liquid Processing 56,305 53,436 19,158 16,798 Total Reportable Segments $151,354 $132,384 $ 50,922 $ 43,358 Income (loss) from continuing operations before income taxes: Forged and Cast Rolls $ 1,571 $ 4,434 $ (1,651) $ 1,637 Air and Liquid Processing 3,819 2,917 1,382 1,054 Total Reportable Segments 5,390 7,351 (269) 2,691 Other expense, including corporate costs - net (3,958) (4,164) (1,760) (1,301) Total $ 1,432 $ 3,187 $ (2,029) $ 1,390
Income (loss) from continuing operations before income taxes for the Air and Liquid Processing segment for the nine months ended September 30, 2004 and 2003 includes approximately $783,000 and $1,442,000, respectively, and for the three months ended September 30, 2004 and 2003 includes approximately $65,000 and $328,000, respectively, for legal and case management costs associated with personal injury claims litigation and insurance recovery litigation related to asbestos-containing products and indemnity payments not expected to be recovered from insurance carriers (see Note 10). 9. Acquisitions and Divestitures The Corporation sold the stock of the New Castle Industries, Inc. group of companies constituting its small Plastics Processing Machinery segment on August 15, 2003. A loss on disposal of approximately $4,600,000 including loss on sale, curtailment and settlement of existing pension obligations and provision for environmental remediation (see Note 10) was recognized. Additionally, results of operations for the nine and three months ended September 2003 for this segment of approximately $(756,000) and $(566,000) were reclassified to discontinued operations. Net sales for this segment approximated $15,002,000 and $2,602,000 for the same periods. In connection with the sale, the Corporation provided typical representations and warranties to the buyer, which primarily expire with the statutes of limitations. Losses suffered by the buyer as a result of the Corporation's breach of representations and warranties are reimbursable by the Corporation up to approximately $2,000,000. The Corporation believes no additional amounts will become due as a result of a breach. - 10 - The Corporation continues to evaluate potential acquisitions to maximize shareholder value. 10.Litigation and Environmental Matters (claims not in thousands) The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses. In addition, claims have been asserted alleging personal injury from exposure to asbestos-containing components historically used in some products of certain of the Corporation's subsidiaries. Those subsidiaries, and in some cases, the Corporation, are defendants (among a number of defendants, typically over 50 and often over 100) in cases filed in various state and federal courts. The following reflects information about these cases: Approximate open claims as of September 30, 2004: 25,000 Gross settlement and defense costs (in 000's) for the nine months ended September 30, 2004: $2,203 Approximate claims settled or dismissed for the nine months ended September 30, 2004: 260 Of the 25,000 open claims, over 15,000 were six lawsuits filed in Mississippi in 2002. Substantially all settlement and defense costs in the above table were paid by insurers. On February 7, 2003, Utica Mutual Insurance Company ("Utica") filed a lawsuit in the Supreme Court of the State of New York, County of Oneida ("Oneida County Litigation") against the Corporation and certain of the subsidiaries named in the underlying asbestos actions (the "Policyholder Defendants") and three other insurance carriers that provided primary coverage to the Corporation (the "Insurer Defendants"). In the lawsuit, Utica disputed certain coverage obligations to the Policyholder Defendants and asserted that the Insurer Defendants also had defense and indemnity obligations to the Policyholder Defendants. As of November 24, 2003, the Policyholder Defendants and Utica had settled the Oneida County Litigation as among themselves, although the Oneida County Litigation remained pending because settlement had not been reached with all of the Insurer Defendants. Pursuant to the settlement, Utica accepted financial responsibility, subject to the limits of its policies and based on fixed defense percentages and specified indemnity allocation formulas, for a substantial majority of the costs of responding to asbestos personal injury claims arising out of exposure to alleged asbestos-containing components in products distributed by the Policyholder Defendants that are subsidiaries of the Corporation. Utica's agreed share of such defense and indemnification costs varies depending upon the alleged asbestos- containing product at issue, whether Utica's primary or umbrella policies are responsible for the claims and, for indemnification costs only, the years of the claimant's exposure to asbestos. On January 23, 2004, Utica sought the court's approval to file an amended complaint seeking additional relief against the Policyholder Defendants that is substantially identical to the relief Utica seeks - 11 - against those defendants in a separate lawsuit filed by Howden Buffalo, Inc. ("Howden") in the United States District Court for the Western District of Pennsylvania (the "Pennsylvania Litigation") that is described below. Utica also sought to add Howden as a defendant in the Oneida County Litigation. On February 23, 2004, the Policyholder Defendants filed an opposition to Utica's attempt to seek additional relief against them in the Oneida County Litigation, and filed a separate motion to dismiss them from that litigation with prejudice. Both issues are currently pending before the Court. On November 25, 2003, Howden filed the Pennsylvania Litigation against the Corporation, Utica and two of the Insurer Defendants (with Utica, the "Howden Insurer Defendants"). Howden alleges that (1) Buffalo Forge Company, a former subsidiary of the Corporation, or its predecessors (collectively or individually, "Buffalo Forge") had rights in certain policies issued by the Howden Insurer Defendants; (2) those rights were transferred in the 1993 transaction whereby the Corporation sold all of the capital stock of Buffalo Forge to Howden Group America, Inc. and Howden Group Canada, Ltd.; and (3) those rights currently reside in Howden, as successor to Buffalo Forge. In the lawsuit, Howden is seeking a judicial determination of the rights and duties of the Corporation and the Howden Insurer Defendants under those policies with respect to asbestos-related personal injury claims asserted against Howden arising from the historical operations of Buffalo Forge, as well as monetary damages from Utica as a result of its denial of Howden's rights under policies it issued that allegedly covered Buffalo Forge. The Corporation intends to defend the lawsuit vigorously, and has asserted a counterclaim against Howden. If Howden is successful in this lawsuit and obtains coverage from the Howden Insurer Defendants, however, any insurance recovery obtained by Howden under those policies could erode, in whole or in part, the applicable coverage limits, which would reduce or eliminate coverage amounts that otherwise may be available to the Corporation under those policies. As one of the Howden Insurer Defendants, Utica has filed a cross- claim against the Corporation, and a third-party complaint against two of its subsidiaries, seeking a declaratory judgment that, to the extent Utica has defense or indemnity obligations to Howden: (1) Utica is entitled to contribution, subrogation and reimbursement from the Corporation or its subsidiaries with respect to defense and indemnity payments paid on behalf of the Corporation or its subsidiaries; and (2) the Corporation and its subsidiaries have no rights under the insurance contracts issued by Utica to Buffalo Forge. The Corporation believes that Utica's cross-claim and third party claims, as well as the similar relief Utica now seeks in the Oneida County Litigation, are barred by a release provided in the settlement of the Oneida County Litigation and are otherwise without merit, and has asserted that position in both lawsuits. If Utica is successful in obtaining the declaratory relief it seeks, it could eliminate insurance coverage provided to the Corporation by Utica. The Corporation believes it has meritorious defenses to the Howden lawsuit and Utica's cross claims. In addition, based on the Corporation's claims experience to date with the underlying asbestos claims, the available insurance coverage and the identity of the subsidiaries that are named in the cases, the Corporation believes - 12 - that the pending legal proceedings will not have a material adverse effect on its consolidated financial condition or liquidity. The outcome of particular lawsuits, however, could be material to the consolidated results of operations of the period in which the costs, if any, are recognized. There can be no assurance that the Corporation or certain of its subsidiaries will not be subjected to significant additional claims in the future or that the Corporation's or its subsidiaries' ultimate liability with respect to these claims will not present significantly greater and longer lasting financial exposure than presently contemplated. The Corporation has made an accrual in its financial statements to reflect its estimated share of costs for pending asbestos claims, based on deductible and similar features of its relevant insurance policies. In addition, the Corporation incurred uninsured legal costs in connection with advice on certain matters pertaining to these asbestos cases including insurance litigation and other issues. Those costs amounted to approximately $807,000 and $79,000 for the nine and three months ended September 30, 2004, respectively, in comparison to $1,610,000 and $340,000 for the same periods of the prior year. With respect to environmental matters, the Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned and has been named a Potentially Responsible Party at two third-party landfill sites used by a division in one instance and a subsidiary in the other that were previously sold or discontinued. In addition, as a result of the sale of the Plastics Processing Machinery segment, the Corporation retained the liability to remediate certain environmental contamination at two of the sold locations and has agreed to indemnify the buyer against third-party claims arising from the discharge of certain contamination from one of these locations at a cost estimate of $2,100,000 which will be paid over several years and was provided for in the third quarter of 2003. Environmental exposures are difficult to assess and estimate for numerous reasons including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. However, in the opinion of management, the potential liability for all environmental proceedings based on information known to date has been adequately reserved. 11.Flood Damage In September 2004, the Carnegie, Pennsylvania plant of the Corporation's Union Electric Steel subsidiary was damaged by flooding as a result of the remnants of Hurricane Ivan. The plant is the larger of the two forged hardened steel roll finishing operations. As of September 30, 2004, the Corporation recorded a receivable from its insurer of approximately $1,000,000 for estimated clean up costs and recovery of fixed expenses incurred through quarter end. Property and business interruption insurance claims will be made when the full extent of lost shipments and production can be measured. The plant is expected to be in full production in early November. For the nine and three months ended September 30, 2004, uninsured costs of approximately $500,000 were recorded. - 13 - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Overview The Executive Overview of Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in Ampco- Pittsburgh Corporation's (the Corporation) annual report to shareholders on Form 10-K for the year ended December 31, 2003. The Corporation operates in two business segments - the Forged and Cast Rolls segment and the Air and Liquid Processing segment. The Corporation's businesses are cyclical and have been affected by the severe downturn in the economy including lack of capital spending by the manufacturing sector. However, during 2004, there has been an increase in the level of activity in the Forged and Cast Rolls segment which serves the global steel industry. Unfortunately, in September, the segment was negatively impacted by lost shipments and uninsured costs resulting from flood damage at a significant plant in Pennsylvania caused by the remnants of Hurricane Ivan. Disruption is expected to continue until early November. Property and business interruption insurance claims will be made when the full extent of the losses are determined. The improvement in demand from the global steel industry for forged and cast rolls, which began in the latter part of 2003, has created a strong backlog (unfilled orders on hand). The weakening of the dollar and the British pound, particularly in relation to the Euro, has improved export sales. The exception being the weaker dollar to the British pound which has adversely impacted sales from the United Kingdom to U.S. customers. Escalation in the price of steel scrap and alloys to unprecedented levels together with the high cost of natural gas has significantly reduced margins. Although raw material and energy surcharges and price increases have been implemented on new orders, margins will not begin to improve until the latter part of 2004 due to the existing high level of backlog. Because of long lead times for certain products, the Air and Liquid Processing segment was not affected by the weak economy until 2003. Similarly, any rebound in the economy will not immediately improve operating results. In particular, demand for lube oil pumps is expected to remain at low levels for the foreseeable future due to an oversupply of gas turbines in the market. The segment is also being impacted by a slow down in demand from the construction industry and the resultant reduction in margins following aggressive pricing by competitors as a reduced level of potential business is pursued. A significant increase in the level of capital spending by the manufacturing sector is necessary before earnings are likely to improve. Operations for the Nine and Three Months Ended September 30, 2004 and 2003 Net Sales. Net sales for the nine and three months ended September 30, 2004 were $151,354,000 and $50,922,000, respectively, compared to $132,384,000 and $43,358,000 for the same periods of 2003. A discussion of year-to-date and third quarter sales for the Corporation's two segments is included below. Order backlogs approximated $133,596,000 at - 14 - September 30, 2004 in comparison to $112,923,000 at December 31, 2003. The increase is attributable to improvements in backlog for each of the segments, principally the Forged and Cast Rolls segment. Costs of Products Sold. Costs of products sold, excluding depreciation, were 82.1% and 78.5% of net sales for the nine months ended September 30, 2004 and 2003, respectively, and 86.7% and 78.9% of net sales for the three months ended September 30, 2004 and 2003, respectively. The increase is due to product mix, higher raw material and natural gas costs, and uninsured costs resulting from flood damage arising from Hurricane Ivan. Selling and Administrative. Selling and administrative expenses for the nine and three months ended September 30, 2004 exceeded the comparable prior year periods. The increase is attributable to higher commission expense resulting from improved sales volumes and significant professional fees relating to the Corporation's efforts to meet the requirements of the Sarbanes-Oxley Act of 2002. Income (Loss) from Operations. Income (loss) from operations for the nine months ended September 30, 2004 and 2003 approximated $1,188,000 and $3,704,000, respectively, and for the three months ended September 30, 2004 and 2003, respectively, approximated $(2,005,000) and $1,507,000, respectively. A discussion of year-to- date and third quarter results for the Corporation's two segments is included below. Forged and Cast Rolls. Although operations for the nine and three months ended September 30, 2004 were negatively impacted by Hurricane Ivan, sales continued to improve over the comparable prior year periods. A stronger demand by the steel industry contributed to the increase, including an improvement in the level of export sales which have also been aided by more favorable foreign exchange rates. The benefit to operating income from the additional volume was more than offset by higher natural gas, steel scrap and alloy costs and uninsured flood costs resulting in a loss for the quarter. Additionally, operating results for the quarter and year-to-date were negatively impacted by losses at its U.K. facility in comparison to operating income for the prior year periods. Raw material and energy surcharges have been added to the selling price of incoming orders; however, the level of order backlog is such that it will be towards year end before some of the escalation in costs will begin to be recovered. Backlog approximated $103,756,000 as of September 30, 2004 in comparison to $79,519,000 as of September 30, 2003. The increase is reflective of the improvement in demand for both the U.S. and U.K. operations, inclusion of surcharges and closure of several foreign competitors. Air and Liquid Processing. Sales and operating income improved for the nine and three months ended September 30, 2004 in comparison to the same periods of the prior year due primarily to the air handling business which benefited from one large project and product mix. While sales and operating income for the heat exchange business were favorably impacted by a change in product mix during the quarter and a recent up-tick in the market, a higher content of OEM orders, which have lower margins, resulted in year- to-date operating income comparable to that of the prior year. Results for the pumps operation remain in line with the prior year periods. Although this segment continues to be adversely impacted by - 15 - legal and case management costs associated with personal injury claims and insurance recovery litigation related to asbestos- containing products and indemnity payments not expected to be recovered from insurance carriers, these costs decreased by approximately $659,000 and $263,000 for the nine and three months ended September 30, 2004 against the same periods of the prior year. Backlog approximated $29,840,000 as of September 30, 2004 in comparison to $26,448,000 as of September 30, 2003; the increase is attributable to additional orders for the heat exchange business, the majority of which are scheduled to ship in 2005. Other Income (Expense). Other income (expense) for the nine months ended September 30, 2004 and 2003 approximated $244,000 and $(517,000), respectively, and for the three months ended September 30, 2004 and 2003 approximated $(24,000) and $(117,000). The change is due primarily to gains on foreign exchange transactions in 2004 versus losses on foreign exchange transactions in 2003. Income Taxes. The effective tax rate for continuing operations approximated 88.1% and 48.9% for the nine months ended September 30, 2004 and 2003, respectively. The increase is due primarily to losses at the Corporation's U.K. operations for which no tax benefit has been provided. The effective tax rate for continuing operations approximated (7.5%) and 35.2% for the three months ended September 30, 2004 and 2003, respectively. The variance arises from changes in the earnings mix with respect to the Corporation's US and non-US operations. Discontinued Operations. Loss from discontinued operations includes, net of tax, results of operations for the Plastic Processing Machinery segment which was sold in August 2003, and the associated loss on disposal. This segment incurred pre-tax losses of approximately $(756,000) and $(566,000) for the nine and three months ended September 30, 2003 on sales of $15,002,000 and $2,602,000 for the respective periods. The loss on disposal includes the loss on sale, curtailment and settlement of existing pension obligations and provision for environmental remediation and approximated $4,600,000. Net Income (Loss). As a result of all of the above, the Corporation's net income (loss) for the nine months ended September 30, 2004 and 2003 equaled $170,000 and $(3,493,000), respectively, and $(1,878,000) and $(4,081,000) for the three months ended September 30, 2004 and 2003, respectively. Liquidity and Capital Resources Net cash flows provided by operating activities of $7,877,000 and $7,342,000 for the nine months ended September 30, 2004 and 2003, respectively, were comparable. Net cash flows (used in) provided by investing activities were $(3,789,000) and $10,702,000 for the nine months ended September 30, 2004 and 2003, respectively. The decrease is due primarily to proceeds from the 2003 sale of the Plastics Processing Machinery segment of which $14,600,000 was received in 2003 and $500,000 was received in 2004. Capital expenditures approximated $5,251,000 and $3,687,000, respectively, for the nine months ended September 30, 2004 and 2003, respectively. As of September 30, 2004, future capital expenditures - 16 - totaling $4,223,000 have been approved. Funds on-hand, funds generated by future operations, proceeds from U.K. government grants of which $923,000 has been received to date and available lines of credit are expected to be sufficient to finance capital expenditure requirements. Net cash flows used in financing activities were $(2,186,000) and $(2,724,000) for the nine months ended September 30, 2004 and 2003, respectively, and related to the payment of quarterly dividends at a rate of $0.10 per share offset by the proceeds from the issuance of stock under the Corporation's stock option plan. The increase in the value of the British pound against the dollar reduced cash and cash equivalents by $212,000 for the nine months ended September 30, 2004. The Corporation maintains short-term lines of credit in excess of the cash needs of its businesses. The total available at September 30, 2004 was approximately $8,000,000 (including 2,100,000 GBP in the U.K. and 400,000 Euros in Belgium). Litigation and Environmental Matters See Note 10 to the consolidated financial statements. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Corporation. Management's Discussion and Analysis and other sections of the Form 10-Q contain forward-looking statements that reflect the Corporation's current views with respect to future events and financial performance. Forward-looking statements are identified by the use of the words "believe," "expect," "anticipate," "estimate," "projects," "forecasts" and other expressions that indicate future events and trends. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations and involve risks and uncertainties. In addition, there may be events in the future that the Corporation is not able to accurately predict or control which may cause actual results to differ materially from expectations expressed or implied by forward- looking statements. The Corporation undertakes no obligation to update any forward-looking statement, whether as a result of new information, events or otherwise. These forward-looking statements shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-Q into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in the Corporation's exposure to market risk from December 31, 2003. - 17 - ITEM 4 - CONTROLS AND PROCEDURES (a) Disclosure controls and procedures. As of the end of the period covered by this Form 10-Q, the Corporation evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Disclosure controls and procedures are the controls and other procedures designed to ensure that the information required to be disclosed in reports filed with or submitted to the SEC are recorded, processed, summarized and reported in a timely manner. Robert A. Paul, Chief Executive Officer, and Marliss D. Johnson, Vice President, Controller and Treasurer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Paul and Johnson concluded that, as of the end of the period covered by this Form 10-Q, the Corporation's disclosure controls were effective. (b) Internal controls over financial reporting. Since the date of the evaluation described above, there have not been any significant changes in the Corporation's internal controls over financial reporting or in other factors that could significantly affect those controls. - 18 - PART II - OTHER INFORMATION AMPCO-PITTSBURGH CORPORATION Item 1 Legal Proceedings The information contained in Note 10 to the consolidated financial statements (Litigation and Environmental Matters) is incorporated herein by reference. Item 2-4 None Item 5 Other Information The Corporation's chief executive officer and chief financial officer have provided the certifications with respect to the Form 10-Q that are required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. These certifications have been filed as Exhibits 31.1 and 31.2 and Exhibits 32.1 and 32.2, respectively. Item 6 Exhibits 3. Articles of Incorporation and By-laws (i) Articles of Incorporation Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1983, March 31, 1984, March 31, 1985, March 31, 1987 and September 30, 1998. (ii) By-laws Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 2001. Attached hereto as Exhibit 3 is an amendment to the by-laws adopted by the Board of Directors of the Corporation as of June 1, 2004 amending Article II, Section 8 and Article III, Sections 4 and 5. 4. Instruments defining the rights of securities holders (1) Rights Agreement between Ampco-Pittsburgh Corporation and Chase Mellon Shareholder Services dated as of September 28, 1998. Incorporated by reference to the Form 8-K Current Report dated September 28, 1998. - 19 - 10. Material Contracts (1) 1988 Supplemental Executive Retirement Plan Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (2) Severance Agreements between Ampco-Pittsburgh Corporation and certain officers and employees of Ampco- Pittsburgh Corporation. Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1988; the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994; the Annual Report on Form 10-K for fiscal year ended December 31, 1994; the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997; the Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and the Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (3) 1997 Stock Option Plan, as amended. Incorporated by reference to the Proxy Statements dated March 14, 1997 and March 15, 2000. 31. Rule 13a-14(a)/15d-14(a) Certifications (1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Certification of Vice President, Controller and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32. Section 1350 Certifications (1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) Certification of Vice President, Controller and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - 20 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMPCO-PITTSBURGH CORPORATION DATE: November 8, 2004 BY: s/Robert A. Paul Robert A. Paul Chairman and Chief Executive Officer DATE: November 8, 2004 BY: s/Marliss D. Johnson Marliss D. Johnson Vice President Controller and Treasurer - 21 - AMPCO-PITTSBURGH CORPORATION EXHIBIT INDEX Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications (1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (2) Certification of Vice President, Controller and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 - Section 1350 Certifications (1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2) Certification of Vice President, Controller and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - 22 -