10-Q 1 septem05q.txt FORM 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-898. AMPCO-PITTSBURGH CORPORATION Incorporated in Pennsylvania. I.R.S. Employer Identification No. 25-1117717. 600 Grant Street, Pittsburgh, Pennsylvania 15219 Telephone Number 412/456-4400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO On November 8, 2005, 9,767,497 common shares were outstanding. - 1 - AMPCO-PITTSBURGH CORPORATION INDEX Page No. Part I - Financial Information: Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - September 30, 2005 and December 31, 2004 3 Condensed Consolidated Statements of Operations - Nine and Three Months Ended September 30, 2005 and 2004 (restated) 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004 (restated) 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 20 Item 4 - Controls and Procedures 20 Part II - Other Information: Item 1 - Legal Proceedings 21 Item 6 - Exhibits 21 Signatures 22 Exhibit Index 23 Exhibits Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Exhibit 32.2 - 2 - PART I - FINANCIAL INFORMATION AMPCO-PITTSBURGH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 2005 2004 Assets Current assets: Cash and cash equivalents $ 3,455,974 $ 11,339,514 Short-term marketable securities 29,650,000 25,455,000 Receivables, less allowance for doubtful accounts of $701,370 in 2005 and $955,677 in 2004 40,544,254 37,495,920 Inventories 52,510,763 54,318,553 Other 6,204,674 8,032,423 Total current assets 132,365,665 136,641,410 Property, plant and equipment, net 66,765,244 69,432,041 Prepaid pensions 26,099,073 25,139,810 Goodwill 2,694,240 2,694,240 Other noncurrent assets 4,133,459 4,036,142 $232,057,681 $237,943,643 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 11,113,340 $ 15,446,125 Accrued payrolls and employee benefits 8,484,643 8,512,807 Industrial Revenue Bond debt 13,311,000 13,311,000 Other 15,150,593 17,226,676 Total current liabilities 48,059,576 54,496,608 Employee benefit obligations 26,813,984 28,448,316 Deferred income taxes 19,514,229 18,843,171 Other noncurrent liabilities 3,156,192 7,638,139 Total liabilities 97,543,981 109,426,234 Commitments and contingent liabilities (Note 6) Shareholders' equity: Preference stock - no par value; authorized 3,000,000 shares; none issued - - Common stock - par value $1; authorized 20,000,000 shares; issued and outstanding 9,762,497 shares in 2005 and 9,747,497 shares in 2004 9,762,497 9,747,497 Additional paid-in capital 104,367,589 104,204,311 Retained earnings 37,992,783 34,162,688 Accumulated other comprehensive loss (17,609,169) (19,597,087) Total shareholders' equity 134,513,700 128,517,409 $232,057,681 $237,943,643
See Notes to Condensed Consolidated Financial Statements. - 3 - AMPCO-PITTSBURGH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended Sept. 30, Three Months Ended Sept. 30, 2005 2004 * 2005 2004 * Net sales $177,872,725 $151,354,311 $ 56,631,688 $ 50,922,137 Operating costs and expenses: Costs of products sold (excluding depreciation) 141,460,631 124,299,303 44,614,970 44,130,224 Selling and administrative 22,109,756 21,051,749 7,465,317 7,195,319 Depreciation 5,038,070 4,791,466 1,640,952 1,581,508 (Gain) loss on disposition of assets (35,891) 23,961 (34,548) 20,228 Total operating expenses 168,572,566 150,166,479 53,686,691 52,927,279 Income (loss) from operations 9,300,159 1,187,832 2,944,997 (2,005,142) Other (expense) income: Interest expense (389,586) (207,687) (142,601) (80,029) Other - net 275,271 451,736 283,061 55,855 (114,315) 244,049 140,460 (24,174) Income (loss) before income taxes 9,185,844 1,431,881 3,085,457 (2,029,316) Income tax provision (benefit) 2,427,000 964,409 976,000 (249,591) Net income (loss) $ 6,758,844 $ 467,472 $ 2,109,457 $(1,779,725) Basic and diluted earnings per common share: Net income (loss) per common share - Basic $ 0.69 $ 0.05 $ 0.22 $ (0.18) Net income (loss) per common share - Diluted $ 0.69 $ 0.05 $ 0.21 $ (0.18) Cash dividends declared per share $ 0.30 $ 0.30 $ 0.10 $ 0.10 Weighted average number of common shares outstanding: Basic shares 9,757,978 9,699,654 9,760,120 9,708,964 Diluted shares 9,812,291 9,758,783 9,820,832 9,708,964 * Restated - Note 13. See Notes to Condensed Consolidated Financial Statements.
- 4 - AMPCO-PITTSBURGH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended Sept. 30, 2005 2004 * Net cash flows provided by operating activities $ 2,003,802 $ 7,877,047 Cash flows from investing activities: Purchases of property, plant and equipment (3,205,748) (5,250,618) Purchases of short-term marketable securities (29,200,000) (42,135,000) Proceeds from the sale of short-term marketable securities 25,005,000 35,955,000 Proceeds from sale of business - 500,000 Proceeds from U.K. governmental grants - 922,500 Proceeds from sale of assets 59,196 38,757 Net cash flows used in investing activities (7,341,552) (9,969,361) Cash flows from financing activities: Proceeds from the issuance of common stock 178,278 721,500 Dividends paid (2,927,249) (2,907,249) Net cash flows used in financing activities (2,748,971) (2,185,749) Effect of exchange rate changes on cash and cash equivalents 203,181 (212,271) Net decrease in cash and cash equivalents (7,883,540) (4,490,334) Cash and cash equivalents at beginning of period 11,339,514 15,488,789 Cash and cash equivalents at end of period $ 3,455,974 $ 10,998,455 Supplemental information: Income tax payments $ 1,459,837 $ 570,419 Interest payments $ 378,452 $ 204,171 * Restated - Note 13. See Notes to Condensed Consolidated Financial Statements.
- 5 - AMPCO-PITTSBURGH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Unaudited Condensed Consolidated Financial Statements The condensed consolidated balance sheet as of September 30, 2005, the condensed consolidated statements of operations for the nine and three months ended September 30, 2005 and 2004 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004 have been prepared by Ampco-Pittsburgh Corporation (the Corporation) without audit. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the nine and three months ended September 30, 2005 are not necessarily indicative of the operating results expected for the full year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. 2.Inventories At September 30, 2005 and December 31, 2004, approximately 66% and 64%, respectively, of the inventories were valued on the LIFO method, with the remaining inventories being valued on the FIFO method. Inventories were comprised of the following: (in thousands) September 30, December 31, 2005 2004 Raw materials $13,083 $13,984 Work-in-process 22,743 25,717 Finished goods 10,724 8,320 Supplies 5,961 6,298 $52,511 $54,319 3. Property, Plant and Equipment Property, plant and equipment were comprised of the following: (in thousands) September 30, December 31, 2005 2004 Land and land improvements $ 4,300 $ 4,292 Buildings 25,140 25,170 Machinery and equipment 136,310 135,058 165,750 164,520 Accumulated depreciation (98,985) (95,088) $ 66,765 $ 69,432 - 6 - 4.Other Current Liabilities Other current liabilities were comprised of the following: (in thousands) September 30, December 31, 2005 2004 Customer-related liabilities $ 4,652 $ 5,991 Other 10,499 11,236 $15,151 $17,227 Included in customer-related liabilities are costs expected to be incurred with respect to product warranties. Changes in the liability for product warranty claims for the nine and three months ended September 30, 2005 and 2004 consisted of: (in thousands) Nine Months Three Months Ended September 30, Ended September 30, 2005 2004 2005 2004 Balance at the beginning of the period $ 4,150 $ 3,435 $ 3,459 $ 3,153 Satisfaction of warranty claims (2,397) (1,557) (731) (305) Provision for warranty claims 1,798 1,814 665 881 Other, primarily impact from changes in foreign currency exchange rates (198) 12 (40) (25) Balance at end of the period $ 3,353 $ 3,704 $ 3,353 $ 3,704 5.Pension and Other Postretirement Benefits Contributions for the nine months ended September 30, 2005 and 2004 were as follows: (in thousands) 2005 2004 U.S. pension benefits plans $ - $ - Foreign pension benefits plan $ 415 $ 414 Other postretirement benefits (e.g. net payments) $ 824 $ 669 U.K. defined contribution plan $ 253 $ 13 Net periodic pension and other postretirement costs include the following components for the nine and three months ended September 30, 2005 and 2004: (in thousands) U.S. Pension Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 Service cost $ 1,532 $ 1,530 $ 399 $ 493 Interest cost 5,123 4,996 1,755 1,681 Expected return on plan assets (7,958) (7,648) (2,644) (2,543) Amortization of prior service cost 444 443 148 147 Actuarial gain (84) (100) (16) (38) Net benefit income $ (943) $ (779) $ (358) $ (260) - 7 - (in thousands) Foreign Pension Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 Service cost $ - $ 826 $ - $ 275 Interest cost 1,630 1,381 526 460 Expected return on plan assets (1,430) (1,303) (461) (434) Actuarial loss 276 578 89 192 Net benefit cost $ 476 $ 1,482 $ 154 $ 493 (in thousands) Other Postretirement Benefits: Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 Service cost $ 227 $ 208 $ 76 $ 89 Interest cost 578 579 193 188 Amortization of prior service benefit (411) (411) (137) (137) Actuarial loss 125 111 41 32 Net benefit cost $ 519 $ 487 $ 173 $ 172 6. Commitments and Contingent Liabilities Outstanding standby and commercial letters of credit as of September 30, 2005 approximated $18,824,000, a major portion of which serves as collateral for the Industrial Revenue Bond debt. In connection with the sale of certain subsidiaries in 2003, the Corporation provided typical warranties to the buyer (such as those relating to income taxes, intellectual property, legal proceedings, product liabilities and title to property, plant and equipment) which primarily expire with the statutes of limitations. Losses suffered by the buyer as a result of the Corporation's breach of warranties are reimbursable by the Corporation up to approximately $2,000,000. No amount has been paid to date and based on experience while owning the subsidiaries, the Corporation expects that no amounts will become due. During 2004, the Davy Roll operations received $1,498,000 (800,000 GBP) of U.K. governmental grants toward the purchase and installation of certain machinery and equipment. Under the agreement, the grants are repayable if certain conditions are not met including achieving and maintaining a targeted level of employment through March 2009. 7.Stock Option Plan On July 26, 2005, the Stock Option Committee of the Board of Directors agreed to issue to selected employees the remaining 45,000 stock options available under the 1997 Stock Option Plan, as amended. The exercise price of $13.67 was equivalent to the market price on the date of grant; accordingly, no stock-based compensation expense was recognized. The weighted-average fair value of the options, as of the date of grant using the Black-Scholes option-pricing model, was $3.08 based on the following - 8 - assumptions: dividend yield of 2.9%, expected volatility of 26.3%, risk-free interest rate of 3.9% and expected option life of 5.7 years. The following table illustrates the effect on net income (loss) and earnings per common share if the Corporation had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." There were no options granted in 2004 and previously granted options are fully vested; accordingly there would be no effect on net income (loss) or earnings per common share in 2004. (in thousands, except shares and per share amounts) Nine months ended Three months ended September 30, 2005 September 30, 2005 Net income, as reported $ 6,759 $ 2,109 Add stock-based employee compensation expense included in net income, as reported - - Less stock-based employee compensation expense determined under fair value based method, net of tax (92) (92) Net income, pro forma $ 6,667 $ 2,017 Basic Diluted Basic Diluted Earnings per common share, as reported $ 0.69 $ 0.69 $ 0.22 $ 0.21 Add stock-based employee compensation expense included in net income, as reported - - - - Less stock-based employee compensation expense determined under fair value based method, net of tax (0.01) (0.01) (0.01) - Earnings per common share, pro forma $ 0.68 $ 0.68 $ 0.21 $ 0.21 Stock option activity during 2004-2005 was as follows: Shares Under Exercise Weighted Average Options Price Exercise Price Balance at January 1, 2004 484,000 $10.44 Granted during 2004 - Exercised during 2004 (94,000) $10.30 Balance at December 31, 2004 390,000 $10.47 Granted during 2005 45,000 $13.67 Exercised through September 30, 2005 (15,000) $10.27 Balance at December 31, 2005 420,000 $10.82 - 9 - Stock options outstanding and exercisable as of September 30, 2005 were as follows: Shares Weighted Average Weighted Average Under Exercise Price Remaining Contractual Options Per Share Life in Years 157,500 10.0000 3.25 212,500 10.8125 4.55 5,000 11.1250 5.25 45,000 13.6700 10.00 420,000 4.63 8.Comprehensive Income (Loss) The Corporation's comprehensive income (loss) for the nine and three months ended September 30, 2005 and 2004 consisted of: (in thousands) Nine Months Three Months Ended September 30, Ended September 30, 2005 2004 2005 2004 Net income (loss) $ 6,759 $ 467 $ 2,109 $(1,780) Foreign currency translation adjustments (2,639) 140 (472) (313) Adjustment to minimum pension liability 1,862 (138) 342 120 Unrealized holding (losses) gains on marketable securities (96) 38 57 (23) Change in fair value of derivatives 2,861 519 451 (217) Comprehensive income (loss) $ 8,747 $ 1,026 $ 2,487 $(2,213) 9.Foreign Exchange and Futures Contracts Certain of the Corporation's operations are subject to risk from exchange rate fluctuations in connection with sales in foreign currencies. To minimize this risk, forward foreign exchange contracts are purchased which are designated as fair value or cash flow hedges. As of September 30, 2005, approximately $62,027,000 of anticipated foreign denominated sales has been hedged with the underlying contracts settling at various dates through March 2010. As of September 30, 2005, the fair value of contracts expected to settle within the next 12 months, which is recorded in other current liabilities, approximated $630,000 and the fair value of the remaining contracts, which is recorded in other noncurrent liabilities, approximated $1,114,000. The change in the fair value of the contracts designated as cash flow hedges is recorded as a component of accumulated other comprehensive income (loss) and approximated $(970,000), net of income taxes, as of September 30, 2005. The change in fair value will be reclassified into earnings when the projected sales occur with approximately $(560,000) expected to be released to pre-tax earnings within the next 12 months. During the nine months ended September 30, 2005 and 2004, approximately $(692,000) and $(1,197,000), respectively, were released to - 10 - pre-tax earnings, and during the three months ended September 30, 2005 and 2004, approximately $(135,000) and $(314,000), respectively, were released to pre-tax earnings. (Losses) gains on foreign exchange transactions approximated $(89,000) and $297,000 for the nine months ended September 30, 2005 and 2004, respectively, and $127,000 and $10,000 for the three months ended September 30, 2005 and 2004, respectively. In addition, one of the Corporation's subsidiaries is subject to risk from increases in the price of a commodity (copper) used in the production of inventory. To minimize this risk, futures contracts are entered into which are designated as cash flow hedges. At September 30, 2005, approximately 98% or $2,690,000 of anticipated commodity purchases over the next 12 months are hedged. The fair value of the contracts expected to be settled within the next 12 months approximated $690,000 and the fair value of the remaining contracts approximated $17,000 as of September 30, 2005. The change in the fair value of the contracts designated as cash flow hedges is recorded as a component of accumulated other comprehensive income (loss) and approximated $446,000, net of income taxes, as of September 30, 2005. The change in the fair value will be reclassified into earnings when the projected sales occur with approximately $690,000, expected to be released to pre-tax earnings within the next 12 months. During the nine months ended September 30, 2005 and 2004, approximately $485,000 and $664,000, respectively, were released to pre-tax earnings and during the three months ended September 30, 2005 and 2004, approximately $131,000 and $240,000, respectively, were released to pre-tax earnings. 10.Business Segments Presented below are the net sales and income (loss) before income taxes for the Corporation's two business segments. (in thousands) Nine Months Ended Three Months Ended September 30, September 30, 2005 2004 2005 2004 Net sales: Forged and Cast Rolls $121,435 $ 95,049 $ 38,152 $ 31,764 Air and Liquid Processing 56,438 56,305 18,480 19,158 Total Reportable Segments $177,873 $151,354 $ 56,632 $ 50,922 Income (loss) before income taxes: Forged and Cast Rolls $ 10,654 $ 1,571 $ 3,711 $ (1,651) Air and Liquid Processing 2,617 3,819 728 1,382 Total Reportable Segments 13,271 5,390 4,439 (269) Other expense, including corporate costs - net (4,085) (3,958) (1,354) (1,760) Total $ 9,186 $ 1,432 $ 3,085 $ (2,029) Income (loss) before income taxes for the Forged and Cast Rolls segment for the nine months ended September 30, 2005 includes $2,320,000 of proceeds from the settlement of its business interruption insurance claim (see Note 12). - 11 - Income (loss) before income taxes for the Air and Liquid Processing segment for the nine and three months ended September 30, 2005 and 2004 includes the majority of the legal and case management costs associated with personal injury claims and insurance recovery litigation related to asbestos-containing product and indemnity payments not expected to be recovered from insurance carriers (see Note 11). 11. Litigation and Environmental Matters The Corporation and its subsidiaries are involved in various claims and lawsuits incidental to their businesses. In addition, claims have been asserted alleging personal injury from exposure to asbestos- containing components historically used in some products of certain of the Corporation's subsidiaries. Those subsidiaries, and in some cases, the Corporation, are defendants (among a number of defendants, typically over 50 and often over 100) in cases filed in various state and federal courts. The following table reflects information about these cases for the nine months ended September 30, 2005: Approximate open claims at end of period: 17,000 Approximate gross settlement and defense costs: $7,559,000 Approximate claims settled or dismissed during the period: 10,000 Substantially all settlement and defense costs in the above table were paid by insurers. The asbestos-related claims, along with certain asbestos-related claims against another corporation insured under policies covering the Corporation and its subsidiaries, have given rise to insurance- coverage litigation in New York state court and in Pennsylvania federal court. As described below, the insurance coverage disputes at issue in those litigations have been resolved with respect to nearly all parties by a comprehensive coverage arrangement. The only party as to which a coverage arrangement has not yet been entered is one insurer that issued two known policies to one of the Corporation's subsidiaries. On February 7, 2003, Utica Mutual Insurance Company ("Utica") filed a lawsuit in the Supreme Court of the State of New York, County of Oneida ("Oneida County Litigation") against the Corporation and certain of the subsidiaries named in the underlying asbestos actions (the "Policyholder Defendants") and three other insurance carriers that provided primary coverage to the Corporation (the "Insurer Defendants"). In the lawsuit, Utica disputed certain coverage obligations to the Policyholder Defendants and asserted that the Insurer Defendants also had defense and indemnity obligations to the Policyholder Defendants. As of November 24, 2003, the Policyholder Defendants and Utica had reached an agreement that settled the Oneida County Litigation as among themselves(the "Utica Settlement"), although the Oneida County Litigation remained pending because settlement had not been reached with all of the Insurer Defendants. Pursuant to the Utica Settlement, Utica accepted financial responsibility, subject to the limits of its policies and based on fixed defense percentages and specified indemnity allocation formulas, for a substantial majority of the asbestos personal injury claims arising out of - 12 - exposure to alleged asbestos-containing components in products distributed by the Policyholder Defendants that are subsidiaries of the Corporation. Utica's agreed share of such defense and indemnification costs varies depending upon the alleged asbestos- containing product at issue, whether Utica's primary or umbrella policies are responsible for the claims and, for indemnification costs only, the years of the claimant's exposure to asbestos. The Policyholder Defendants subsequently reached similar arrangements with four other of their historical insurers. On January 23, 2004, Utica sought the court's approval to file an amended complaint seeking additional relief against the Policyholder Defendants that is substantially identical to the relief Utica seeks against those defendants in a separate lawsuit filed by Howden Buffalo, Inc. ("Howden") in the United States District Court for the Western District of Pennsylvania (the "Pennsylvania Litigation") that is described below. Utica also sought to add Howden as a defendant in the Oneida County Litigation. On November 25, 2003, Howden filed the Pennsylvania Litigation against the Corporation, Utica and two of the Insurer Defendants, and Howden subsequently amended its complaint to include three other insurers, two of which had issued policies to the Company (collectively, the "Howden Insurer Defendants"). Howden alleged that (1) Buffalo Forge Company, a former subsidiary of the Corporation, or its predecessors (collectively or individually, "Buffalo Forge") had rights in certain policies issued by the Howden Insurer Defendants to the Corporation or its subsidiaries; (2) those rights were transferred in the 1993 transaction whereby the Corporation sold all of the capital stock of Buffalo Forge to Howden Group America, Inc. and Howden Group Canada, Ltd.; and (3) those rights reside in Howden, as successor to Buffalo Forge. In the lawsuit, Howden sought a judicial determination of the rights and duties of the Corporation and the Howden Insurer Defendants with respect to asbestos-related personal injury claims asserted against Howden arising from the historical operations of Buffalo Forge, as well as monetary damages from Utica as a result of its denial of Howden's rights under policies it issued that allegedly covered Buffalo Forge. As one of the Howden Insurer Defendants, Utica filed a cross-claim against the Corporation, and a third-party complaint against two of its subsidiaries, seeking a declaratory judgment that, to the extent Utica has defense or indemnity obligations to Howden: (1) Utica is entitled to contribution, subrogation and reimbursement from the Corporation or its subsidiaries with respect to defense and indemnity payments paid on behalf of the Corporation or its subsidiaries; and (2)the Corporation and its subsidiaries have no rights under the insurance contracts issued by Utica to Buffalo Forge. In September 2005, the Corporation and its subsidiaries, Howden, and all insurer parties to the Oneida County Litigation and Pennsylvania Litigation (except for one insurer that issued only two policies to one of the Corporation's subsidiaries) entered into a comprehensive coverage-in-place arrangement ("Coverage Arrangement")resolving as among themselves the disputed asbestos insurance coverage issues arising out of the historical products manufactured or distributed by Buffalo Forge Company and its former subsidiaries (the "Products"). The Coverage Arrangement reaffirmed the Utica Settlement and coverage arrangements previously made by the - 13 - Corporation and its subsidiaries with four other insurers. The Coverage Arrangement also includes an agreement pursuant to which all parties acknowledge that both the Corporation and its subsidiaries and Howden are entitled to coverage under policies covering the Products. The non-settling insurer and the Corporation and its subsidiaries did not assert claims against each other in either litigation, and are currently in negotiations. Based on the Corporation's claims experience to date with the underlying asbestos claims, the available insurance coverage and the identity of the subsidiaries that are named in the cases, the Corporation believes that the pending legal proceedings will not have a material adverse effect on its consolidated financial condition or liquidity. The outcome of particular lawsuits, however, could be material to the consolidated results of operations of the period in which the costs, if any, are recognized. There can be no assurance that the Corporation or certain of its subsidiaries will not be subjected to significant additional claims in the future or that the Corporation's or its subsidiaries' ultimate liability with respect to these claims will not present significantly greater and longer lasting financial exposure than presently contemplated. The Corporation has made an accrual in its financial statements to reflect its estimated share of costs for pending asbestos claims, based on deductible and similar features of its relevant insurance policies. In addition, the Corporation incurred uninsured legal costs in connection with advice on certain matters pertaining to these asbestos cases including insurance litigation, case management and other issues. Those costs amounted to approximately $762,000 and $332,000 for the nine and three months ended September 30, 2005, respectively, in comparison to $807,000 and $79,000 for the same periods of the prior year. With respect to environmental matters, the Corporation is currently performing certain remedial actions in connection with the sale of real estate previously owned and has been named a Potentially Responsible Party at four third-party landfill sites. In addition, as a result of the sale of certain subsidiaries, the Corporation retained the liability to remediate certain environmental contamination at two of the sold locations and has agreed to indemnify the buyer against third-party claims arising from the discharge of certain contamination from one of these locations, the cost for which was accrued at the time of sale. Environmental exposures are difficult to assess and estimate for numerous reasons including lack of reliable data, the multiplicity of possible solutions, the years of remedial and monitoring activity required, and identification of new sites. However, in the opinion of management, the potential liability for all environmental proceedings of approximately $2,200,000 accrued at September 30, 2005 is considered adequate based on information known to date. 12. Flood Damage In September 2004, the Carnegie, Pennsylvania plant of the Corporation's Union Electric Steel subsidiary was damaged by flooding as a result of the remnants of Hurricane Ivan. The Corporation received $5,740,000 toward its claim of which $3,000,000 was received in 2004. Of the $2,740,000 received in 2005, $2,320,000 represents settlement of its business interruption insurance claim which was recorded as a reduction of costs of products sold (excluding depreciation) in the accompanying condensed consolidated - 14 - statements of operations. The remaining $3,420,000 represents reimbursement of clean-up costs, repairs to machinery and recovery of certain fixed expenses. 13. Restatement Subsequent to the issuance of the Corporation's condensed consolidated financial statements for the nine and three months ended September 30, 2004, the Corporation determined that deferred tax liabilities were not required to be provided for interest receivable from its U.K. subsidiary on intercompany debt owed to the Corporation. Additionally, subsequent to the issuance of the Corporation's consolidated financial statements for the year ended December 31, 2004, the Corporation concluded, based on supplemental guidance issued, that auction-rate securities did not meet the definition of cash equivalents and should therefore be classified as short-term marketable securities. Accordingly, the accompanying condensed consolidated financial statements for the nine and three months ended September 30, 2004 have been restated from the amounts previously reported. The effect of reversing the deferred tax liabilities on the condensed consolidated statements of operations for the nine and three months ended September 30, 2004 were as follows: (in thousands, except per share amounts) Nine Months Ended Three Months Ended Previously As Previously As Reported Restated Reported Restated Income tax provision (benefit) $ 1,261 $ 964 $ (152) $ (250) Net income (loss) 170 467 (1,878) (1,780) Net income (loss) per common share: Basic 0.02 0.05 (0.19) (0.18) Diluted 0.02 0.05 (0.19) (0.18) The effect of correcting the classification of its investments in auction-rate securities from cash and cash equivalents to short-term marketable securities on the accompanying condensed consolidated statement of cash flows for the nine months ended September 30, 2004 was as follows: (in thousands) Previously As Reported Restated Purchases of short-term marketable securities $ - $(42,135) Proceeds from the sale of short-term marketable securities - 35,955 Net cash flows used in investing activities (3,789) (9,969) Net increase (decrease) in cash and cash equivalents 1,690 (4,490) Cash and cash equivalents at beginning of period 35,739 15,489 Cash and cash equivalents at end of period 37,428 10,998 The difference in cash and cash equivalents at the end of period of $26,430,000 represents the Corporation's investment in short-term marketable securities at September 30, 2004. - 15 - 14. Recently Issued Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs" which confirms that accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current period charges and that allocation of fixed production overheads to inventories be based on normal capacity of the production facilities. The provisions of SFAS No. 151 will become effective for the Corporation on January 1, 2006 and are not expected to have a significant effect on its financial condition or results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets" which amends previously issued guidance by eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges which do not have commercial substance. The provisions of SFAS No. 153 became effective for the Corporation on July 1, 2005. Until the Corporation enters into such transactions, the standard will not impact the Corporation's financial condition or results of operations. In December 2004, the FASB issued SFAS No. 123(R), "Shared-Based Payment" which requires companies to recognize compensation cost for stock options and other stock-based awards based on their fair value. Companies will no longer be permitted to follow the intrinsic value accounting method. The provisions of SFAS No. 123(R) become effective for the Corporation on January 1, 2006. The Corporation does not have any remaining options available for grant and granted options are fully vested; accordingly, the standard will not impact the Corporation's financial condition or results of operations unless the Corporation issues share-based payments in future years. In March 2005, the FASB issued an interpretation of SFAS No. 143, "Accounting for Conditional Asset Retirement Obligations" which clarifies the term conditional asset retirement obligation. The interpretation did not impact the Corporation's financial condition or results of operations. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3" which provides guidance for the accounting and reporting of a change in accounting principle. It also applies to changes required by a newly-issued accounting pronouncement if that pronouncement does not provide such guidance. Previously, most changes in accounting principles were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. SFAS No. 154 requires retrospective application to prior periods and becomes effective for the Corporation on January 1, 2006. Until the Corporation makes any such changes, the standard will not impact the Corporation's financial condition or results of operations. - 16 - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Overview The Corporation currently operates in two business segments - the Forged and Cast Rolls segment and the Air and Liquid Processing segment. After several years of weak sales and earnings, the Forged and Cast Rolls segment is benefiting from a strong global steel industry and the weaker dollar which is improving export business, particularly to the Asian and Indian markets. Despite the continuing high level of raw material and unprecedented energy costs, the Forged and Cast Rolls segment continues to improve its income from operations. Backlog of orders is at an all- time high and is reflective of the demand for rolling mill rolls from steel producers throughout the world. Additional machinery brought on- line late in 2004 at Davy Roll is contributing to operational improvements and has added needed capacity. The Air and Liquid Processing segment continues to experience weak sales and earnings resulting from a decline in the level of capital spending by the industrial sector and a slow down in construction spending. In particular, demand for lube oil pumps while expected to remain steady is significantly below peak levels of several years ago due to reduced demand for gas turbines. The segment is also being impacted by higher material costs, the slow down in the construction industry particularly related to air handling systems for the pharmaceutical, institutional and health care markets, and the resulting decline in margins following aggressive pricing by competitors as a reduced level of potential business is pursued. Product offerings have been expanded but no significant improvement in demand for air handling equipment is expected until capital spending for new construction improves. The following MD&A gives effect to the restatement discussed in Note 13 to the condensed consolidated financial statements for the nine and three months ended September 30, 2004. Operations for the Nine and Three Months Ended September 30, 2005 and 2004 Net Sales. Net sales for the nine and three months ended September 30, 2005 were $177,873,000 and $56,632,000, respectively, compared to $151,354,000 and $50,922,000,for the same periods of 2004. A discussion of sales for the Corporation's two segments is included below. Order backlogs approximated $289,246,000 at September 30, 2005 against $164,981,000 at December 31, 2004. Although the backlog has improved for both of the segments, the increase is principally attributable to the Forged and Cast Rolls segment. Approximately $222,232,000 of the September 30, 2005 backlog is scheduled for shipment after December 31, 2005. Costs of Products Sold. Costs of products sold, excluding depreciation, were 79.5% and 82.1% of net sales for the nine months ended September 30, 2005 and 2004, respectively, and 78.8% and 86.7% of net sales for the three months ended September 30, 2005 and 2004, respectively. The improvement is due primarily to receipt of $2,320,000 from the settlement of the Corporation's business interruption insurance claim which is recorded as a reduction of costs of products sold for the nine months ended September 30, 2005, and raw material surcharges assessed in 2004 which are progressively flowing through to earnings in 2005. - 17 - Selling and Administrative. Selling and administrative expenses for the nine and three months ended September 30, 2005 approximated 12.4% and 13.2% of net sales, respectively, and 13.9% and 14.1% of net sales for the comparable prior year periods. The decrease is due to higher sales which dilute the effect of certain selling and administrative costs which are fixed in nature. Income (Loss) from Operations. Income (loss) from operations for the nine and three months ended September 30, 2005 approximated $9,300,000 and $2,945,000, respectively, against $1,188,000 and $(2,005,000) for the comparable prior year periods. A discussion of year-to-date and third quarter results for the Corporation's two segments is included below. Forged and Cast Rolls. Sales and operating income for the nine and three months ended September 30, 2005 improved over the flood-impaired periods of the prior year as a result of greater demand from steel producers throughout the world and better margins as surcharges and price increases for raw material and energy began to flow through to earnings. Additionally, during the second quarter, the segment finalized its 2004 flood-related business interruption insurance claim recording income of $2,320,000. Backlog approximated $256,152,000 as of September 30, 2005 in comparison to $138,729,000 as of December 31, 2004. The increase is reflective of global demand for products for both the U.S. and U.K. operations. Approximately $209,960,000 of the September 30, 2005 backlog is scheduled for shipment after 2005. Air and Liquid Processing. Sales for the nine and three months ended September 30, 2005 were comparable to the same periods of the prior year. Operating income declined due principally to the weak performance of the air handling business which has been impacted by a decline in construction activity and depressed pricing on available projects. However, activity for this operation has begun to show signs of improvement although margins continue to be depressed. Results for the pumps operation remain in line with the prior period. Earnings for the heat exchange coil business have improved due to an increase in sales, particularly to electric-utility customers. Backlog approximated $33,094,000 as of September 30, 2005 in comparison to $26,252,000 as of December 31, 2004; the increase is attributable to improvement in orders for air handling units and receipt of long lead-time pump orders for U.S. Navy ships. Approximately $12,272,000 of the September 30, 2005 backlog is scheduled for shipment after 2005. Other (Expense) Income. Other (expense) income for the nine months ended September 30, 2005 and 2004 approximated $(114,000) and $244,000, respectively. The change is due primarily to losses on foreign exchange transactions in 2005 versus gains on foreign exchange transactions in 2004. Other (expense) income approximated $140,000 and $(24,000) for the three months ended September 30, 2005 and 2004, respectively. The improvement is attributable primarily to higher gains on foreign exchange transactions in 2005. Income Taxes. The effective tax rate approximated 26.4% and 67.4% for the nine months ended September 30, 2005 and 2004, respectively, and 31.6% and (12.3%) for the three months ended September 30, 2005 and 2004, respectively. The decrease is attributable principally to profitability of the U.K. operations in 2005 for which no tax liability arises due to utilization of net operating loss carryforwards and beneficial permanent deductions in comparison to losses by the U.K. operations in the prior year for which no tax benefit was recognized since it was more likely than not the resulting asset would not be realized. - 18 - Net Income (Loss). As a result of the above, the Corporation's net income (loss) for the nine months ended September 30, 2005 and 2004 equaled $6,759,000 and $467,000, respectively, and $2,109,000 and $(1,780,000), respectively, for the three months ended September 30, 2005 and 2004. Liquidity and Capital Resources Net cash flows provided by operating activities approximated $2,004,000 and $7,877,000 for the nine months ended September 30, 2005 and 2004, respectively. The decrease is attributable primarily to an increase in accounts receivable arising from higher sales for the third quarter of 2005 versus third quarter of 2004 and a reduction in accounts payable due primarily to timing of payments. Net cash flows used in investing activities were $(7,342,000) and $(9,969,000) for the nine months ended September 30, 2005 and 2004, respectively. The change is attributable to a reduction in net purchases of short-term marketable securities and lower capital expenditures. Capital expenditures approximated $3,206,000 for the nine months ended September 30, 2005 and $5,251,000 for the nine months ended September 30, 2004 of which approximately $923,000 of U.K. governmental grants were received during the same period reducing the net cost of the expenditures. Additionally, the remaining sales proceeds of $500,000 from the 2003 sale of the Plastic Processing Machinery segment were received in 2004. As of September 30, 2005, future capital expenditures totaling $3,696,000 have been approved. Funds on-hand and funds generated by future operations are expected to be sufficient to finance capital expenditure requirements. Net cash flows used in financing activities were $(2,749,000) and $(2,186,000) for the nine months ended September 30, 2005 and 2004, respectively. Dividends were paid at a rate of $0.30 per share for each of the nine month periods. Issuance of stock under the Corporation's stock option plan provided cash of $178,000 and $722,000 for the respective nine month periods. The change in the value of local currencies against the dollar, principally the British pound, impacted cash and cash equivalents by $203,000 and $(212,000) for the nine months ended September 30, 2005 and 2004. The Corporation maintains short-term lines of credit and an overdraft facility in excess of the cash needs of its businesses. The total available at September 30, 2005 was approximately $8,200,000 (including 2,100,000 GBP in the U.K. and 400,000 Euros in Belgium). Litigation and Environmental Matters See Note 11 to the condensed consolidated financial statements. Critical Accounting Pronouncements The Corporation's critical accounting policies, as summarized in its Form 10-K/A for the year ended December 31, 2004, remain unchanged. Recently Issued Accounting Pronouncements See Note 14 to the condensed consolidated financial statements. - 19 - Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Corporation. Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-Q contain forward-looking statements that reflect the Corporation's current views with respect to future events and financial performance. Forward-looking statements are identified by the use of the words "believe," "expect," "anticipate," "estimate," "projects," "forecasts" and other expressions that indicate future events and trends. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations and involve risks and uncertainties. In addition, there may be events in the future that the Corporation is not able to accurately predict or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. The Corporation undertakes no obligation to update any forward-looking statement, whether as a result of new information, events or otherwise. These forward-looking statements shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-Q into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes in the Corporation's exposure to market risk from December 31, 2004. ITEM 4 - CONTROLS AND PROCEDURES (a) Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of the management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission ("SEC") rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in reports that it files under the Exchange Act are recorded, processed, summarized and reported within the required time periods. Based on that evaluation, the Corporation's management, including the principal executive officer and principal financial officer, have concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2005. (c) Changes in internal control over financial reporting. During the quarter ended September 30, 2005, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. - 20 - PART II - OTHER INFORMATION AMPCO-PITTSBURGH CORPORATION Item 1 Legal Proceedings The information contained in Note 11 to the condensed consolidated financial statements (Litigation and Environmental Matters) is incorporated herein by reference. Items 2-5 None Item 6 Exhibits (3) Articles of Incorporation and By-laws (a) Articles of Incorporation Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1983, March 31, 1984, March 31, 1985, March 31, 1987 and September 30, 1998. (b) By-laws Incorporated by reference to the Quarterly Reports on Form 10-Q for the quarters ended September 30, 1994, March 31, 1996, June 30, 2001 and June 30, 2004. (4) Instruments defining the rights of securities holders (a) Rights Agreement between Ampco-Pittsburgh Corporation and Chase Mellon Shareholder Services dated as of September 28, 1998. Incorporated by reference to the Form 8-K Current Report dated September 28, 1998. (31.1) Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1) Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2) Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - 21 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMPCO-PITTSBURGH CORPORATION DATE: November 8, 2005 BY: __________________________ Robert A. Paul Chairman and Chief Executive Officer DATE: November 8, 2005 BY: ___________________________ Marliss D. Johnson Vice President Controller and Treasurer - 22 - AMPCO-PITTSBURGH CORPORATION EXHIBIT INDEX Exhibit (31.1) Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit (32.1) Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2) Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - 23 -