<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998.
Commission File Number 1-898
AMPCO-PITTSBURGH CORPORATION I.R.S. Employer Identification
600 Grant Street, Suite 4600, No. 25-1117717
Pittsburgh, PA 15219 State of Incorporation: Pennsylvania
412/456-4400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------------
Common stock, $1 par value New York Stock Exchange
Philadelphia Stock Exchange
Series A Preference Stock New York Stock Exchange
Purchase Rights Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 period 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 9, 1999, 9,577,621 common shares were outstanding. The aggregate
market value of the voting stock of Ampco-Pittsburgh Corporation held by non-
affiliates (based upon the closing price of these shares on the New York Stock
Exchange) was approximately $71 million.
DOCUMENTS INCORPORATED BY REFERENCE: Parts I, II and IV of this report
incorporate by reference certain information from the Annual Report to
Shareholders for the year ended December 31, 1998.
<PAGE>
PART I
ITEM 1 - BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Ampco-Pittsburgh Corporation (the "Corporation") was incorporated in
Pennsylvania in 1929. In 1998, the Corporation reclassified the way it reports
its businesses into three segments:
Forged Steel Rolls Segment
- --------------------------
Union Electric Steel Corporation produces forged hardened steel rolls and
is headquartered in Carnegie, Pennsylvania.
Air and Liquid Processing Segment
- ---------------------------------
Aerofin Corporation produces finned tube heat exchange coils and is
headquartered in Lynchburg, Virginia. Buffalo Air Handling Company is
headquartered in Amherst, Virginia and manufactures large standard and custom
air handling systems. Buffalo Pumps, Inc. manufactures centrifugal pumps and is
headquartered in North Tonawanda, New York.
Plastics Processing Machinery Segment
- -------------------------------------
New Castle Industries, Inc. and its subsidiaries primarily produce feed
screws, barrels and chill rolls and are headquartered in New Castle,
Pennsylvania. F. R. Gross Company, located in Stow, Ohio, manufactures heat
transfer rolls.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The sales and operating profit of the Corporation's three segments and the
identifiable assets attributable to each segment for the three years ended
December 31, 1998 are set forth in Note 14 (Business Segments) on pps. 17 and 18
of the Annual Report
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to Shareholders for the year ended December 31, 1998 which is incorporated
herein by reference.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Forged Steel Rolls segment manufactures forged hardened steel rolls for
producers of steel, aluminum and other metals. The operations comprising the
Air and Liquid Processing segment produce heat exchange coils, air handling
systems and pumps for the construction, power generation, refrigeration,
chemical processing and marine defense industries and a variety of other
industrial and commercial customers. The Plastics Processing Machinery segment
produces components including feed screws, barrels, heat transfer rolls and
chill rolls for use by original equipment machinery manufacturers and processors
principally serving the plastics industry. In all three segments, the products
are dependent on engineering, principally custom designed and are sold to
sophisticated commercial and industrial users in the United States and foreign
countries.
No one customer's purchases in any segment were material to the
Corporation. Contracts that may be subject to renegotiation or termination are
not material to the Corporation. The Corporation's businesses are not seasonal
but are subject to the cyclical nature of the industries and markets served.
For additional information on the products produced and financial
information about each segment, see pp. 3 through 7 and Note 14 on pps. 17 and
18 of the Annual Report to Shareholder for the year ended December 31, 1998
which are incorporated herein by reference.
Raw Materials
- -------------
Raw materials used in all segments are generally available from many
sources and the Corporation is not dependent upon any single supplier for any
raw material. Certain of
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the raw materials used by the Corporation have historically been subject to
variations in price. The Corporation generally does not purchase or arrange for
the purchase of a major portion of raw materials significantly in advance of the
time it requires them.
Patents
- -------
While the Corporation holds some patents, trademarks and licenses, in the
opinion of management they are not material to any segment of the Corporation's
business other than in protecting the goodwill associated with the names under
which products are sold.
Working Capital
- ---------------
Each segment of the Corporation's business maintains levels of inventory,
which generally reflect normal requirements and are believed to reflect the
practices of its industries. Production in all segments is generally to custom
order and requires inventory levels of raw materials or semi-finished products
with only a limited level of finished products. The Corporation extends credit
terms consistent with practices of the industries served.
Backlog
- -------
The backlog of orders at December 31, 1998 was approximately $100,000,000
compared to a backlog of $115,200,000 at year end 1997. Most of those orders
are expected to be filled in 1999.
Competition
- -----------
The Corporation faces considerable competition from a large number of
companies in each segment. The Corporation believes, however, that it is a
significant factor in each of the principal markets which it serves.
Competition in all segments is based on quality, service, price and delivery.
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Forged Steel Rolls Segment
--------------------------
Union Electric Steel Corporation is considered the largest producer of
forged hardened steel rolls in the United States, which are sold to steel and
aluminum companies throughout the world. In addition to several domestic
competitors, several major European and Japanese manufacturers also compete in
both the domestic and foreign markets.
Air and Liquid Processing Segment
---------------------------------
Buffalo Pumps, Inc. produces a line of centrifugal pumps serving
refrigeration, power generation and marine defense industries and competes with
many other producers. Aerofin Corporation produces heat exchange coils used by
the commercial and industrial construction, process and utility industries.
Buffalo Air Handling Company produces standard and custom air handling systems
used in commercial and industrial buildings. Aerofin and Buffalo Air Handling
have several major competitors in each of their markets.
Plastics Processing Machinery Segment
-------------------------------------
New Castle Industries and its subsidiaries primarily produce feed screws,
barrels, and chill rolls for use principally in the plastics processing industry
and compete with a number of small regional companies. F. R. Gross Co.
produces heat transfer rolls for the plastics, paper, packaging, printing and
converting industries and also competes with a number of small regional
companies.
Research and Development
- ------------------------
As part of an overall strategy to develop new markets and maintain
leadership in each of the industry niches served, each of the Corporation's
businesses in all three segments incur expenditures for research and
development. The activities that are undertaken are designed to develop new
products, improve existing products and
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processes, enhance product quality, adapt products to specific customer
requirements and reduce costs. In the aggregate, these expenditures generally
do not exceed $1,000,000 per year.
Environmental Protection Compliance Costs
- -----------------------------------------
Expenditures for environmental control matters were not material to any
segment in 1998 and such expenditures are not expected to be material in 1999.
Employees
- ---------
In December, 1998, the Corporation had 1,332 active employees, of whom 437
were sales, executive, administrative, engineering and clerical personnel.
Approximately 66% of the production and craft hourly employees are members of
various unions.
Year 2000
- ---------
See Management's Discussion and Analysis of Financial Condition and Results
of Operations on pps. 19 through 23 of the Annual Report to Shareholders for the
year ended December 31, 1998 which is incorporated herein by reference.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Corporation's only foreign operation is a plant located in Belgium
(Union Electric Steel N.V.) that manufactures forged hardened steel rolls
principally for the European markets. For financial information relating to
foreign and domestic operations see Note 14 (Business Segments) on pps. 17 and
18 of the accompanying Annual Report which is incorporated herein by reference.
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ITEM 2 - PROPERTIES
The location and general character of the principal locations in each of
the three segments, all of which are owned unless otherwise noted, are as
follows:
<TABLE>
<CAPTION>
Company and Principal Approximate Type of
Location Use Square Footage Construction
- ------------ -------------- --------------- ------------
<S> <C> <C> <C>
Forged Steel Rolls Segment
- --------------------------
Union Electric Steel Corp.
Route 18 Manufacturing 186,000 on Metal and
Burgettstown, PA 15021 facilities 55 acres steel
726 Bell Street Manufacturing 153,000 on Metal and
Carnegie, PA 15106 facilities and 5 acres steel
offices
U.S. Highway 30 Manufacturing 88,000 on Metal and
Valparaiso, IN 46383 facilities 20 acres steel
1712 Greengarden Road Manufacturing 40,000* Metal and
Erie, PA 16501 facilities steel
Industrie Park Manufacturing 66,000 on Concrete,
B-3980 Tessenderlo facilities and 15 acres metal and
Belgium offices steel
Air and Liquid Processing Segment
- ---------------------------------
Aerofin Corporation Manufacturing 146,000 on Brick,
4621 Murray Place facilities and 15.3 acres concrete
Lynchburg, VA 24506 offices and steel
Buffalo Air Handling Manufacturing 89,000 on Metal and
Company facilities and 19.5 acres steel
Zane Snead Drive offices
Amherst, VA 24531
Buffalo Pumps, Inc. Manufacturing 94,000 on Metal, brick
874 Oliver Street facilities and 7 acres and cement
N. Tonawanda, NY 14120 offices block
</TABLE>
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<TABLE>
<CAPTION>
Company and Principal Approximate Type of
Location Use Square Footage Construction
- ------------ -------------- --------------- ---------------
<S> <C> <C> <C>
Plastics Processing Machinery Segment
- -------------------------------------
Atlantic Grinding &
Welding, Inc.
Manufacturing 19,000 on Metal and
9 Ricker Avenue facilities and 2.6 acres Steel
Londonderry, NH 03053 offices
1950 Old Dunbar Road Manufacturing 20,000* Metal and
West Columbia, SC 29172 facilities steel
Bimex Industries, Inc. Manufacturing 33,500 on Metal and
319 Universal Street facilities and 7.8 acres steel
Wales, WI 53183 offices
F. R. Gross Co., Inc. Manufacturing 25,300 on Masonry,
1397 Commerce Drive facilities and 4.2 acres metal and steel
Stow, OH 44224 offices
New Castle Industries, Inc.
Manufacturing 81,600 on Metal and
1399 Countyline Road facilities and 18.5 acres steel
New Castle, PA 16102 offices
925 Industrial Street Manufacturing 31,000 Masonry
New Castle, PA 16102 facilities 5.3 acres with steel
truss roof
</TABLE>
- --------------
* Facility is leased.
(1) The Corporation holds real estate for sale in Plymouth, MI.
(2) The Corporate office space is leased as are several small domestic sales
offices. All of the owned facilities are adequate and suitable for their
respective purposes. There were no facilities idled during 1998.
(3) The Corporation estimates that all of its facilities were operated within
75% to 95% of their normal capacity during 1998. Normal capacity is defined
as capacity under approximately normal conditions with allowances made for
unavoidable interruptions, such as lost time for repairs, maintenance,
breakdowns, set-up, failure, supply delays, labor shortages and absences,
Sundays, holidays, vacation, inventory taking, etc. The number of work
shifts are also taken into consideration.
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ITEM 3 - LEGAL PROCEEDINGS
The Corporation has been involved in various claims and lawsuits incidental
to its business. In the opinion of management, the Corporation has meritorious
defenses in those cases and believes that, in the aggregate, any liability will
not have a material effect on the financial position of the Corporation.
A lawsuit was commenced in May, 1991 against the Corporation and its
subsidiary, Vulcan, Inc. ("Vulcan"), arising out of the filing of a petition
under Chapter 11 of the United States Bankruptcy Code in October, 1990 by
Valley-Vulcan Mold Company (the "Partnership"), a 50/50 partnership formed in
September, 1987 between Vulcan and Valley Mould Corporation, a subsidiary of
Microdot, Inc. Microdot and Valley are unrelated to the Corporation and were
also defendants in the lawsuit. The Partnership acquired the ingot mold
businesses of each of the partners. On June 10, 1993, Microdot also filed a
Petition under Chapter 11 of the United States Bankruptcy Code. In October,
1994, Microdot's Chapter 11 case was converted to a Chapter 7 liquidation.
In the lawsuit, Official Unsecured Creditors' Committee of Valley-Vulcan
--------------------------------------------------------
Mold Company v. Microdot, Inc., Valley Mould Corporation, Ampco-Pittsburgh
- --------------------------------------------------------------------------
Corporation and Vulcan, Inc., the plaintiff, allegedly on behalf of the debtor
- ----------------------------
Partnership, filed a proceeding in the United States Bankruptcy Court for the
Northern District of Ohio against Microdot, Valley, Vulcan and the Corporation,
seeking to set aside the Corporation's liens on the Partnership's assets, to
hold all defendants liable for the debts of the Partnership, and return of all
money received by any of the defendants from the Partnership and out of the
proceeds of a loan to the Partnership by a third-party lender, alleged to be at
least $9.35 million. The Corporation's liens secure a guaranty that it was
required to give with respect
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to a Vulcan obligation that was assumed by the Partnership, and a $500,000 loan
made to the Partnership.
The trial of this lawsuit was held the week of October 4, 1993. In April,
1994 the Court issued a judgment in favor of the Corporation. Under the Court's
decision, all claims against the Corporation were denied. All claims against
Vulcan were also denied except for its liability as a general partner. Vulcan's
only asset is its interest in the partnership, which has no value, and
accordingly the judgment will not have any adverse effect on the Corporation.
In May, 1994, plaintiff appealed to the United States District Court, Northern
District of Ohio, Eastern Division. In 1998, upon stipulation of the parties,
the Court ordered this appeal transferred to the Bankruptcy Appellate Panel for
the Sixth Circuit ("BAP"). The BAP has not yet rendered its decision.
The Corporation is involved in various environmental proceedings which all
involve discontinued operations. In some of those proceedings, the Corporation
has been designated as a Potentially Responsible Party ("PRP"). However, the
Corporation believes that in most instances it is either a de minimis
----------
participant based on information known to date and the estimated quantities of
waste at these sites and/or that it is entitled to indemnity from the successors
of the operations alleged to be involved. Based on the current estimate of
cleanup costs and proposed allocation of that cost among the various PRP groups,
for all environmental matters considered in the aggregate, the liability to the
Corporation would not be material.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter.
10
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information called for by this item is set forth on pps. 23 and 24 of
the Annual Report to Shareholders for the year ended December 31, 1998 which is
incorporated herein by reference.
Description of Common Stock - The Company is authorized to issue 20,000,000
shares of Common Stock, par value $1.00 per share, and 3,000,000 shares of
Preference Stock, without par value. None of the Preference Stock has been
issued but the Board of Directors of the Company may, without further approval
of shareholders of the Company, issue the Preference Stock in one or more series
with such rights, voting powers, preferences, qualifications, limitations,
restrictions, and special or related rights as the Board of Directors may
determine. Subject to the foregoing, holders of Common Stock are entitled to
receive such dividends (in cash, stock or otherwise) as may be determined by the
Board of Directors and may be legally available for that purpose and, in the
event of liquidation, to share ratably in assets available for distribution.
Subject to the voting rights, if any, of holders of Preference Stock hereafter
issued by the Company, each holder of Common Stock is entitled to one vote for
each share held of record on all matters voted on by shareholders and there are
cumulative voting rights in electing directors. At the Annual Meeting of
Shareholders, held on April 26, 1984, the Shareholders approved amendments to
the Company's Articles of Incorporation that (1) included in the Articles the
provision already in the Company's By-laws creating a classified board of three
classes, (2) permit directors to be removed by shareholder vote without cause,
but only if shareholders entitled to cast at least 75% of the votes which all
shareholders would be entitled to cast in
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an annual election of directors shall vote for such removal (subject to
provisions to protect cumulative voting rights) and (3) increased the
shareholder vote required, from a majority vote to 75% of the votes which all
shareholders would be entitled to cast in an annual election of directors, to
amend or repeal or to adopt any provision inconsistent with the Articles or the
By-laws (whether adopted by the Board of Directors or the shareholders), unless
such amendment has been approved by at least a two-thirds vote of the whole
Board of Directors.
The holders of Common Stock have no subscription, redemption, conversion
or preemptive rights. All outstanding shares of Common Stock are fully paid and
nonassessable.
The Common Stock is listed on the New York and Philadelphia Stock
Exchanges. The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services.
The Company furnishes its shareholders quarterly unaudited reports for the
first three fiscal quarters and annual reports containing audited financial
statements for each fiscal year.
ITEM 6 - SELECTED FINANCIAL DATA
The information called for by this item is set forth on p. 24 of the
Annual Report to Shareholders for the year ended December 31, 1998 which is
incorporated herein by reference.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information called for by this item is set forth on pps. 19 through 23
of the Annual Report to Shareholders for the year ended December 31, 1998 which
are incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information called for by this item is set forth in Note 9 (Financial
Instruments) on p. 15 of the Annual Report to Shareholders for the year ended
December 31, 1998 which is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth on pps. 8 through 18
of the Annual Report to Shareholders for the year ended December 31, 1998 which
are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 25, 1999, the Board of Directors, upon recommendation of the
Audit Committee, approved the dismissal of the Corporation's independent
accountants, PricewaterhouseCoopers LLP ("PwC"), and selected Deloitte & Touche
LLP ("D&T") as the independent accountants for the year 1999.
For each of the two most recent fiscal years: (a) the reports of PwC on the
Corporation's financial statements did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles; (b) there were no disagreements with PwC
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which
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disagreements, if not resolved to the satisfaction of PwC would have caused PwC
to make reference to the matter in connection with its report; (c) there were no
"reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K; and (d)
neither the Corporation nor anyone else on its behalf consulted D&T regarding
any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
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PART III
ITEM 10 - DIRECTORS and EXECUTIVE OFFICERS
(a) IDENTIFICATION OF DIRECTORS
Name, Age, Tenure as a Director, Position with the Corporation (1), Principal
Occupation, Business Experience Past Five Years, and Other Directorships in
Public Companies
- -----------------------------------------------------------------------------
Louis Berkman (age 90, Director since 1960; current term expires in 1999). He
has been Chairman of the Board of the Corporation since September 20, 1994. He
is also Chairman of the Executive Committee of the Corporation and has been for
more than five years. He is also President and a director of The Louis Berkman
Company (steel products, fabricated metal products, building and industrial
supplies). (N)(2)(4)
Leonard M. Carroll (age 56, Director since 1996; current term expires in 2001).
He has been Managing Director of Seneca Capital Management, Inc. (a private
investment company) since June, 1996. For more than five years before 1996, he
was President and Chief Operating Officer and a director of Integra Financial
Corporation (a bank holding company). (2)(3)(4)(5)
William D. Eberle (age 75, Director since 1982; current term expires in 2000).
He is a private investor and consultant and is Chairman of Manchester
Associates, Ltd. and Showscan Entertainment, Inc. He is also a director of
Mitchell Energy & Development Co., America Service Group, Sirrom Capital
Corporation and Konover Property Trust. (3)(4)(5)
Robert A. Paul (age 61, Director since 1970; current term expires in 2000). He
has been President and Chief Executive Officer of the Corporation since
September 20, 1994. For more than five years before 1994, he was President and
Chief Operating Officer of the Corporation. He is also an officer and director
of The Louis Berkman Company and director of National City Corporation. (2)
Laurence E. Paul (age 34, Director since 1998; current term expires in 2001).
He has been
Senior Vice President of Donaldson, Lufkin & Jenrette (Investment Banker) since
1997. From 1995 to 1997 he was a Vice President and from 1994 to 1995 he was an
associate of that firm.
Carl H. Pforzheimer, III (age 62, Director since 1982; current term expires in
1999). For more than five years he has been Managing Partner of Carl H.
Pforzheimer & Co. (member of the New York and American Stock Exchanges). He is
also a director of U. S. Trust Corporation. (N)(3)(4)(5)
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(a) IDENTIFICATION OF DIRECTORS (cont')
Name, Age, Tenure as a Director, Position with the Corporation (1), Principal
Occupation, Business Experience Past Five Years, and Other Directorships in
Public Companies
- ------------------------------------------------------------------------------
Ernest G. Siddons (age 65, Director since 1981; current term expires in 2001).
He has been Executive Vice President and Chief Operating Officer of the
Corporation since September 20, 1994. For more than five years before 1994, he
was Senior Vice President Finance and Treasurer of the Corporation. From
September, 1996 to December, 1997 he was President of Union Electric Steel
Corporation, a subsidiary of the Corporation. (2)
- ----------------
(N) Nominee for election at the April 27, 1999 Annual Meeting of Shareholders.
(1) Officers serve at the discretion of the Board of Directors.
(2) Member of Executive Committee.
(3) Member of Audit Committee.
(4) Member of Salary Committee.
(5) Member of Stock Option Committee.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
In addition to Louis Berkman, Robert A. Paul and Ernest G. Siddons (see
"Identification of Directors" above) the following are also Executive Officers
of the Corporation:
Name, Age, Position with the Corporation (1), Business Experience Past Five
- ---------------------------------------------------------------------------
Years
- -----
Rose Hoover (age 43). She has been Secretary of the Corporation for more than
five years and Manager of Real Property and Environmental Control since January,
1995.
Terrence W. Kenny (age 39). He has been Group Vice President of the Corporation
since February 1999 and was Vice President Corporate Development & Planning from
April 1998 to February 1999. For five years prior to 1998, he was Vice
President and Treasurer of Buffalo Pumps, Inc.
Robert J. Reilly (age 42). Vice President Finance and Treasurer of the
Corporation since January, 1997. He was Treasurer of the Corporation since
September, 1994 and Controller of the Corporation since January, 1994.
Robert F. Schultz (age 51). He has been Vice President Industrial Relations and
Senior Counsel of the Corporation for more than five years.
- ---------------
(1) Officers serve at the discretion of the Board of Directors and none of the
listed individuals serve as a director of a public company.
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(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None.
(d) FAMILY RELATIONSHIPS
Louis Berkman is the father-in-law of Robert A. Paul, and grandfather of
Laurence E. Paul (son of Robert A. Paul). There are no other family
relationships among the Directors and Officers.
(e) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers to file forms with the Securities
and Exchange Commission and the New York Stock Exchange to report their initial
ownership of the Corporation's Common Stock and any subsequent changes in that
ownership. The Corporation is required to disclose herein, any failure to file
such reports by the required dates.
Terrence W. Kenny was elected as an officer of the Corporation by the Board
of Directors in February, 1998. His initial filing on Form 3 under Section 16
of the Securities Exchange Act was not filed on a timely basis. Although Mr.
Kenny owned no shares of the Corporation's Common Stock, a Form 3 should have
been filed reporting his election.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information as to the total
remuneration received for the past three years by the four most highly
compensated executive officers of the Corporation, including the Chief Executive
Officer (the "Named Executive Officers"):
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SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (g) (i)
Name and Securities All Other
Principal Salary Bonus Underlying Compensation
Position Year ($) ($) Options ($)
- -------- ------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Louis Berkman 1998 330,500 66,000 60,000
Chairman of the Board 1997 308,750 94,500
and Executive Committee 1996 290,000 67,000
Robert A. Paul 1998 330,500 66,000 60,000
President and Chief 1997 308,750 94,500
Executive Officer 1996 290,000 67,000
Ernest G. Siddons 1998 296,250 59,000 50,000 450,000(1)
Executive Vice President 1997 276,875 84,750 7,172(1)
and Chief Operating 1996 260,000 60,000 5,520(1)
Officer
Robert F. Schultz 1998 138,250 14,500 20,000
Vice President 1997 134,500 18,500
Industrial Relations 1996 130,875 16,500
and Senior Counsel
</TABLE>
- -----------------
(1) The 1996 and 1997 amounts in column (i) represent the value of the term
portion of a split dollar life insurance policy. In 1998, the Salary
Committee approved the payment to Mr. Siddons of an amount equal to the cash
value of that policy. Mr. Siddons has relinquished all rights to the Policy
and the split dollar provisions have been terminated.
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OPTION GRANTS IN 1998
The following table shows all options to purchase the Corporation's Common
Stock granted to each of the Named Executive Officers in 1998.
Option Grants in Last Fiscal Year
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
% of Total
Securities Options
Underlying Granted to Exercise Grant Date
Options Employees or Base Expiration Present
Name Granted (1) in Fiscal Year Price ($/Sh) Date (2) Value (3)
- ------------------- ----------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Louis Berkman 60,000 22% $10 12/15/08 $152,400
Chairman of
the Board
Robert A. Paul 60,000 22% $10 12/15/08 $152,400
Chairman of the
Board and Chief
Executive Officer
Ernest G. Siddons 50,000 18% $10 12/15/08 $127,000
Executive Vice
President and
Chief Operating
Officer
Robert F. Schultz 20,000 7% $10 12/15/08 $ 50,800
Vice President
Industrial Relations
and Senior Counsel
</TABLE>
- ----------------
(1) Option grants for Named Executive Officer who received grants in 1998 are
not exercisable prior to May 1, 1999, at which time they become exercisable
in full.
(2) The expiration date will occur on the sooner of the date noted and (i) 30
days following termination of employment without cause and (ii) the date of
termination of employment by the Corporation for cause or by the Named
Executive Officer for any reason other than retirement.
(3) In accordance with Securities and Exchange Commission rules, the estimated
grant date present values were determined using the Black-Scholes model.
The use of this model is not an endorsement of the model's accuracy in
valuing options. The material assumptions and adjustments incorporated in
the model include: an option life of 5 years, dividend yield of 4%,
volatility of 34.17%, and a risk free rate of return of 4.76%. The
ultimate value of the options in this table will depend on the actual
performance of the Corporation's stock and the timing of exercises.
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(b) COMPENSATION PURSUANT TO PLANS
The Corporation has a tax qualified retirement plan (the "Plan") applicable
to the Executive Officers and other employees, to which the Corporation makes
annual contributions, as required, in amounts determined by the Plan's
actuaries. The Plan does not have an offset for Social Security and is fully
paid for by the Corporation. Under the Plan, employees become fully vested
after five years of participation and normal retirement age under the Plan is
age 65 but actuarially reduced benefits may be available for early retirement at
age 55. The benefit formula is 1.1% of the highest consecutive five year
average earnings in the final ten years, times years of service. Federal law
requires that 5% owners start receiving a pension no later than April 1
following the calendar year in which the age 70-1/2 is reached. Louis Berkman
is currently receiving $5,147 a month pursuant to the Plan. As an active
employee, Mr. Berkman continues to receive credit for additional service
rendered after age 70-1/2.
The Corporation adopted a Supplemental Executive Retirement Plan (SERP) in
1988 (amended and restated in 1996) for all officers listed in the compensation
table, except Louis Berkman, and certain key employees, covering retirement
after completion of ten years of service and attainment of age 55. The combined
retirement benefit at age 65 provided by the Plan and the SERP is 50% of the
highest consecutive five year average earnings in the final ten years of
service. The participants are eligible for reduced benefits for early
retirement at age 55. A benefit equal to 50% of the benefit otherwise payable
at age 65 is paid to the surviving spouse of any participant, who has had at
least five years of service, commencing on the later of the month following the
participant's death or the month the participant would have reached age 55. In
addition, there is an offset for
20
<PAGE>
pensions from other companies. Certain provisions, applicable if there is a
change of control, are discussed below under Termination of Employment and
Change of Control Arrangement.
The following shows the estimated annual pension that would be payable,
without offset, under the Plan and the SERP to the individuals named in the
compensation table assuming continued employment to retirement at age 65, but no
change in the level of compensation shown in such table:
Louis Berkman (1)
Robert A. Paul $198,250
Ernest G. Siddons $176,500 (2)
Robert F. Schultz $ 76,375
- ----------------
(1) Mr. Berkman is currently receiving a pension pursuant to the Plan as
described above.
(2) Assumes employment until end of year.
(c) COMPENSATION OF DIRECTORS
In 1998, each Director who was not employed by the Corporation received an
annual retainer of $6,000 (payable quarterly), $1,000 for each Board meeting
attended and $500 for each Committee meeting attended. Attendance can be either
in person or by telephonic connection. Directors do not receive a fee for
either Board or Committee meetings if they do not attend.
(d) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
The Chairman, President, and Executive Vice President have two year
contracts (which automatically renew for one year periods unless the Corporation
chooses not to extend) providing for compensation equal to five times their
annual compensation (with a provision to gross up to cover the cost of any
federal excise tax on the benefits) in the
21
<PAGE>
event their employment is terminated (including a voluntary departure for good
cause) and the right to equivalent office space and secretarial help for a
period of one year after a change in control. The remaining officer named in the
compensation table and a certain key employee have two year contracts providing
for three times their annual compensation in the event their employment is
terminated after a change in control (including a voluntary departure for good
cause). In addition, each of the Vice President Finance, Group Vice President
and Corporate Secretary have two year contracts providing for two times their
annual compensation in the event their employment is terminated after a change
in control (including a voluntary departure for good cause). All of the
contracts provide for the continuation of employee benefits, for three years for
the three senior executives and two years for the others, and the right to
purchase the leased car used by the covered individual at the Corporation's then
book value. The same provisions concerning change in control that apply to the
contracts apply to the SERP and vest the right to that pension arrangement. A
change of control triggers the right to a lump sum payment equal to the present
value of the vested benefit under the SERP if applicable.
(e) SALARY COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
A Salary Committee is appointed each year by the Board of Directors.
Committee members abstain from voting on matters which involve their own
compensation arrangements. The Salary Committee for the year 1998 was comprised
of four Directors: William D. Eberle, who is Chairman of the Committee, Louis
Berkman, Leonard M. Carroll and Carl H. Pforzheimer, III.
Louis Berkman is Chairman of the Board of Directors and the Executive
Committee. He is also the President and a Director of The Louis Berkman Company.
The Corporation's
22
<PAGE>
President and Chief Executive Officer is also an officer and director of The
Louis Berkman Company.
The Louis Berkman Company had certain transactions with the Corporation
which are more fully described under Item 13 "Certain Relationships and Related
Transactions."
(f) SALARY COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Salary Committee approves salaries for executive officers within a
range from $150,000 up to $200,000 and increases in the salary of any executive
officer, which would result in such officer earning a salary within such range.
Salaries of $200,000 per year and above must be approved by the Board of
Directors after a recommendation by the Salary Committee. Salaries for
executive officers below the level of $150,000 are set by the Chairman,
President and Executive Vice President of the Corporation.
The compensation of the Chief Executive Officer of the Corporation, as well
as the other applicable executive officers, is based on an analysis conducted by
the Salary Committee. The Committee does not specifically link remuneration
solely to quantitative measures of performance because of the cyclical nature of
the industries and markets served by the Corporation. In setting compensation,
the Committee also considers various qualitative factors, including competitive
compensation arrangements of other companies within relevant industries,
individual contributions, leadership ability and an executive officer's overall
performance. In this way, it is believed that the Corporation will attract and
retain quality management, thereby benefitting the long-term interest of
shareholders.
In 1998, the Salary Committee reviewed and approved salary increases and
had previously approved an incentive program for 1998 covering Louis Berkman,
Robert A. Paul and Ernest G. Siddons ("participants"). Incentive payments were
to be determined, based exclusively on the Corporation's 1998 income from
operations performance as
23
<PAGE>
compared to the Corporation's business plan. These payments were to be limited
to 30% of base salary of participants. In 1998, the participants earned
incentives of $66,000, $66,000 and $59,000 respectively.
This report of the Salary Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this 10-K report
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent that the Corporation specifically
incorporates this report and the information contained herein by reference, and
shall not otherwise be deemed filed under such Acts.
Louis Berkman
Leonard M. Carroll
William D. Eberle
Carl H. Pforzheimer, III
24
<PAGE>
(g) STOCK PERFORMANCE GRAPH
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG AMPCO, S&P 500 INDEX AND STEEL (INTEGRATED) INDEX
Ampco S&P 500 Steel (integrated)
12/31/93 $100.00 $100.00 $100.00
12/31/94 $140.35 $101.60 $104.74
12/31/95 $154.44 $139.71 $100.03
12/31/96 $174.71 $172.18 $103.96
12/31/97 $291.99 $229.65 $110.11
12/31/98 $166.10 $294.87 $104.22
Assumes $100 invested at the close of trading on the last trading day
preceding January 1, 1994 in Ampco-Pittsburgh Corporation common stock,
Standard & Poors 500 and Steel (integrated)
*Cumulative total return assumes reinvestment of dividends.
In the above graph, the Corporation has used Value Line's Steel
(Integrated) Index for its peer comparison. The diversity of products produced
by subsidiaries of the Corporation made it difficult to match to any one
product-based peer group. The Steel Industry was chosen because it is impacted
by some of the same end markets that the Corporation ultimately serves, such as
the automotive, appliance and construction industries. Historical stock price
performance shown on the above graph is not necessarily indicative of future
price performance.
25
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 9, 1999, Louis Berkman owned directly 213,888 shares of the
Common Stock of the Corporation and had the right to acquire 60,000 shares
pursuant to a stock option. As of the same date, The Louis Berkman Company,
P. O. Box 576, Steubenville, OH 43952 owned beneficially and of record
2,166,089 shares of the Common Stock of the Corporation. Louis Berkman, an
officer and director of The Louis Berkman Company, owns directly 61.94% of its
common stock. Robert A. Paul, an officer and director of The Louis Berkman
Company, disclaims beneficial ownership of the 19.88% of its common stock owned
by his wife. Louis Berkman and Robert A. Paul are trustees of The Louis and
Sandra Berkman Foundation and disclaim beneficial ownership of the 1,266 shares
of the Corporation's Common Stock held by such Foundation.
In March 1998, Gabelli Funds, Inc. and affiliates, Corporate Center, Rye,
NY 10580, filed an amendment to its Schedule 13D reporting they owned 1,893,500
shares or 19.77%. In February, 1999, Dimensional Fund Advisors Inc., 1299 Ocean
Avenue, Santa Monica, CA 90401 filed a 13G disclosing that as of December 31,
1998 it had sole voting and dispositive power of 778,700 shares or 8.13% (all of
which shares are held in portfolios of various investment vehicles).
26
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 9, 1999 information concerning
the beneficial ownership of the Corporation's Common Stock by the Directors and
Named Executive Officers and all Directors and Executive Officers of the
Corporation as a group:
<TABLE>
<CAPTION>
Name of Amount and nature of Percent
beneficial owner beneficial ownership of class
---------------- -------------------- --------
<S> <C> <C>
Louis Berkman 2,441,243(1)(2) 25.3
Robert A. Paul 117,922(2)(3) 1.2
Ernest G. Siddons 51,833(4) .5
Robert F. Schultz 20,200(5) .2
Carl H. Pforzheimer, III 2,733(6) *
Leonard M. Carroll 1,000 *
Laurence E. Paul 1,000 *
William D. Eberle 200 *
Directors and Executive
Officers as a group
(11 persons) 2,664,865(7) 27.2
</TABLE>
- ----------------
*less than .1%
(1) Includes 213,888 shares owned directly, 60,000 shares which he has the
right to acquire within sixty days pursuant to a stock option, 2,166,089
shares owned by The Louis Berkman Company, and 1,266 shares held by The
Louis and Sandra Berkman Foundation of which Louis Berkman and Robert A.
Paul are trustees, in which shares Mr. Berkman disclaims beneficial
ownership.
(2) The Louis Berkman Company owns beneficially and of record 2,166,089 shares
of the Corporation's Common Stock. Louis Berkman is an officer and
director of The Louis Berkman Company and owns directly 61.94% of its
common shares. Robert A. Paul, an officer and director of The Louis
Berkman Company, disclaims beneficial ownership of the 19.88% of its common
stock owned by his wife. The number of shares shown in the table for
Robert A. Paul does not include any shares held by The Louis Berkman
Company.
27
<PAGE>
(3) Includes 42,889 shares owned directly, 60,000 shares which he has the right
to acquire within sixty days pursuant to a stock option, and the following
shares in which he disclaims beneficial ownership: 13,767 shares owned by
his wife and 1,266 shares held by The Louis and Sandra Berkman Foundation
of which Robert A. Paul and Louis Berkman are Trustees.
(4) Includes 1,833 shares owned jointly with his wife and 50,000 shares which
he has the right to acquire within sixty days pursuant to a stock option.
(5) Includes 200 shares owned jointly with his wife and 20,000 shares which he
has the right to acquire within sixty days pursuant to a stock option.
(6) Includes 1,000 shares owned directly, 800 shares held by a trust of which
he is a trustee and principal beneficiary, and the following shares in
which he disclaims beneficial ownership: 133 shares held by his daughter
and 800 shares held by a trust of which he is a trustee.
(7) Includes 220,000 shares which certain officers have the right to acquire
within sixty days pursuant to stock options and excludes double counting of
shares deemed to be beneficially owned by more than one Director.
Unless otherwise indicated the individuals named have sole investment and
voting power.
(c) CHANGES IN CONTROL
The Corporation knows of no arrangements which may at a subsequent date
result in a change in control of the Corporation.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998 the Corporation bought industrial supplies from The Louis Berkman
Company in transactions in the ordinary course of business amounting to
approximately $1,666,000. Additionally, The Louis Berkman Company paid the
Corporation $165,000 for certain administrative services. Louis Berkman and
Robert A. Paul are officers and
28
<PAGE>
directors, and Louis Berkman is a shareholder, in that company. These
transactions and services were at prices generally available from outside
sources. Transactions between the parties will take place in 1999.
29
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, appearing on pps. 8 through 18 and p. 24 of the
accompanying Annual Report are incorporated by reference in this Form 10-K
Annual Report.
2. Financial Statement Schedules - None
3. Exhibits
Exhibit No.
(3) Articles of Incorporation and By-laws
a. Articles of Incorporation
Incorporated by reference to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1983; the Quarterly Report on Form
10-Q for the quarter ended March 31, 1984; the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1985; the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1987; and the
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
b. By-laws
Incorporated by reference to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 and the
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
(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.
30
<PAGE>
3. Exhibits (cont')
- --------------------
b. Revolving Credit Agreement dated as of September 30, 1998
Incorporated by reference to the Quarterly Report on Form
10-Q for quarter ended September 30, 1998.
(10) Material Contracts
a. 1988 Supplemental Executive Retirement Plan
Incorporated by reference to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
b. 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; and the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
c. Severance Agreement between Ampco-Pittsburgh Corporation and
Terrence W. Kenny.
d. 1997 Stock Option Plan
Incorporated by reference to the Proxy Statement dated March 14,
1997.
(13) Annual Report to Shareholders for the fiscal year ended December
31, 1998
(21) Significant Subsidiaries
(27) Financial Data Schedule
31
<PAGE>
(b) Reports on Form 8-K
-------------------
A report on Form 8-K, dated September 28, 1998, was filed in the fourth
quarter of 1998, reporting under Item 5 (Other Events) the dividend
distribution of one Right for each outstanding share of Common Stock.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
March 16, 1999
By /s/ Louis Berkman
---------------------------------------------
Director, Chairman of the Board -
Louis Berkman
By /s/ Robert A. Paul
---------------------------------------------
Director, President and Chief Executive
Officer - Robert A. Paul
By /s/ Ernest G. Siddons
---------------------------------------------
Director, Executive Vice President
and Chief Operating Officer -
Ernest G. Siddons
By /s/ Robert J. Reilly
---------------------------------------------
Vice President Finance and Treasurer
(Principal Financial Officer) -
Robert J. Reilly
33
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in their capacities as Directors, as of the date indicated.
March 16, 1999
By /s/ Leonard M. Carroll
------------------------------------------
Leonard M. Carroll
By /s/ William D. Eberle
------------------------------------------
William D. Eberle
By /s/ Laurence E. Paul
------------------------------------------
Laurence E. Paul
By /s/ Carl H. Pforzheimer, III
------------------------------------------
Carl H. Pforzheimer, III
34
<PAGE>
Exhibit 10.C
ampco pittsburgh
600 Grant St., Suite 4600
Pittsburgh, Pennsylvania 15219
(412) 456-4400
Fax (412) 456-4404
February 25, 1999
Mr. Terrence Kenny
c/o Ampco-Pittsburgh Corporation
600 Grant St., Suite 4600
Pittsburgh, Pennsylvania 15219
Dear Terry:
Ampco-Pittsburgh Corporation (the "Corporation") recognizes that your
contribution to the success of the Corporation has been substantial and desires
to assure the Corporation of your continued employment. In this connection, the
Board of Directors of the Corporation (the "Board") recognizes that, as is the
case with other publicly held corporations, the possibility of a change in
control may exist and that such possibility, and the uncertainty that it may
raise among the Company's management, may result in the departure or distraction
of management personnel to the detriment of the Corporation and its
stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Corporation's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation agrees that you shall receive the severance benefits set forth in
this letter
<PAGE>
Mr. Terrence Kenny 2
agreement ("Agreement") in the event your employment with the Corporation is
terminated subsequent to a "Change in Control" (as defined in Section 2 hereof)
under the circumstances described below.
1. Term of Agreement. This Agreement will commence on the date
-----------------
hereof and shall continue in effect for twenty-four (24) months from the date
hereof; provided, however, that commencing on February 25, 2001 and on each
-------- -------
anniversary thereafter, the term of this Agreement shall automatically be
extended for one additional year unless, not later than thirty (30) days prior
to such date, the Corporation shall have given notice that it does not wish to
extend this Agreement; provided, further, however, that if a Change in Control
-------- ------- -------
shall have occurred during the original or extended term of this Agreement, this
Agreement cannot be cancelled.
2. Change in Control.
-----------------
(a) No benefits shall be payable hereunder unless there shall have
been a Change in Control as set forth below. For purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred if:
(i) any "Person" (as defined in Sections 13(d) and 14(d) of the
Exchange Act) other than the persons or the group of persons in control of
the Corporation on the date hereof is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the corporation representing fifty percent (50%) or
<PAGE>
Mr. Terrence Kenny 3
more of the combined voting power of the Corporation's then outstanding
securities;
(ii) within any period of two consecutive years (not including
any period prior to the execution of this Agreement) there shall cease to
be a majority of the Board comprised as follows: individuals who at the
beginning of such period constitute the Board and any new director(s) whose
election was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved;
(iii) the shareholders of the Corporation approve a merger of, or
consolidation involving, the Corporation in which (A) the Corporation's
Common Stock, par value $1.00 per share (such stock, or any other
securities of the Corporation into which such stock shall have been
converted through a reincorporation, recapitalization or similar
transaction, hereinafter called "Common Stock of the Corporation"), is
converted into shares or securities of another corporation, or into cash or
other property, or (B) the Common Stock of the Corporation is not converted
as described in Clause (A), but in which more than forty percent (40%) of
the Common Stock of the surviving corporation in the merger is owned by
shareholders other than those who owned such amount prior to the merger; or
any other transaction after which the Corporation's Common Stock is no
longer to be publicly traded; in
<PAGE>
Mr. Terrence Kenny 4
each case, other than a transaction solely for the purpose of
reincorporating the Corporation in another jurisdiction or recapitalizing
the Common Stock of the Corporation; or
(iv) the shareholders of the Corporation approve a plan of
complete liquidation of the Corporation, or an agreement for the sale or
disposition by the Corporation of all or substantially all the
Corporation's assets, either of which is followed by a distribution of all
or substantially all of the proceeds to the shareholders.
3. Agreement of Employee. You agree that in the event of a
---------------------
Potential Change in Control of the Corporation, you will not terminate
employment with the Corporation for any reason until the occurrence of a Change
in Control of the Corporation.
For purposes of this Agreement, a "Potential Change in Control of the
Corporation" shall be deemed to have occurred if (i) the Corporation enters into
an agreement, the consummation of which would result in the occurrence of a
Change in Control, (ii) any person (including the Corporation) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control, or (iii) the Board adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control of the Corporation has occurred.
4. Termination Following a Change in Control of the Corporation.
-------------------------------------------- ---------------
<PAGE>
Mr. Terrence Kenny 5
(a) If any of the events described in Section 2 hereof constituting a
Change in Control shall have occurred, you shall be entitled to the benefits
provided in Section 5(d) upon the termination of your employment within twenty-
four (24) months after the Change in Control has occurred, unless such
termination is (i) because of your death or Disability, (ii) by the Corporation
for Cause, or (iii) by you other than for Good Reason.
(b) For purposes of this Agreement, "Disability" shall mean that if,
as a result of your incapacity due to physical or mental illness, you shall have
been absent from the full-time performance of your duties with the Corporation
for six (6) consecutive months, and within thirty (30) days after written notice
of termination shall have been given to you, you shall not have returned to the
full-time performance of your duties.
(c) For purposes of this Agreement, termination by the Corporation of
your employment for "Cause" shall mean termination upon:
(i) the willful and continued failure by you to substantially
perform duties consistent with your position with the Corporation (other
than any such failure resulting from incapacity due to physical or mental
illness or termination by you for Good Reason), after a demand for
substantial performance is delivered to you by the Board, together with a
copy of the resolution of the Board that specifically identifies the manner
in which the Board believes that you have not substantially performed your
duties, which resolution
<PAGE>
Mr. Terrence Kenny 6
must be passed by at least two-thirds (2/3) of the entire Board at a
meeting called for the purpose and after an opportunity for you and your
counsel to be heard by the Board, and you have failed to resume substantial
performance of your duties on a continuous basis within fourteen (14) days
of receiving such demand,
(ii) the willful engaging by you in conduct that is demonstrably
and materially injurious to the Corporation, monetarily or otherwise, as
set forth in a resolution of the Board, which resolution must be passed by
at least two-thirds (2/3) of the entire Board at a meeting called for the
purpose and after an opportunity for you and your counsel to be heard by
the Board, or
(iii) your conviction of a felony, or conviction of a
misdemeanor involving assets of the Corporation.
For purposes of this Section 4(c), no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you not in good faith
and without reasonable belief that your action or omission was in the best
interest of the Corporation.
(d) For purposes of this Agreement, "Good Reason" shall mean, without
your express written consent, the occurrence after a Change in Control of any
one or more of the following:
<PAGE>
Mr. Terrence Kenny 7
(i) the assignment to you of duties inconsistent with your
duties, responsibilities and status immediately before the Change in
Control or a reduction or alteration in the nature or status of your
responsibilities from those in effect immediately before the Change in
Control;
(ii) a reduction by the Corporation in your base salary as in
effect immediately before the Change in Control, a failure to increase such
base salary at the same intervals as prevailed before the Change in Control
in an amount at least equal to the same percentage increase as the last
increase prior to the Change in Control, or a reduction in bonus after the
Change in Control over the last bonus paid before the Change in Control
unless there are equivalent reductions in bonuses for all executives of the
Corporation;
(iii) the requirement that you be based at a location in excess
of twenty-five (25) miles from the location where you are currently based;
(iv) the failure by the Corporation to continue in effect any of
the Corporation's employee benefit plans, policies, practices or
arrangements in which you participate or under which you are entitled to
benefits, or the failure by the Corporation to continue your participation
therein or benefits thereunder on substantially the same basis, both in
terms of the amount of benefits provided and the level of your
participation relative to other participants, as existed immediately prior
to the Change in Control; or
<PAGE>
Mr. Terrence Kenny 8
(v) the failure of the Corporation to obtain a satisfactory
agreement from any successor to the Corporation to assume and agree to
perform this Agreement, as contemplated in Section 6.
(e) "Good Reason" may be established notwithstanding your possible
incapacity due to physical or mental illness, provided that Disability has not
been established pursuant to Section 4(b). Your continued employment following
the Change in Control shall not constitute a waiver of any rights hereunder,
including, but not limited to, rights with respect to any circumstance
constituting Good Reason or rights under Section 6.
5. Compensation Upon Termination or During Incapacity. Following a
--------------------------------------------------
Change in Control, upon termination of your employment or during a period of
incapacity but before termination for Disability, you shall be entitled to the
following benefits:
(a) During any period prior to termination for Disability in which you
fail to perform your full-time duties with the Corporation as a result of
incapacity due to physical or mental illness, you shall continue to receive your
Base Salary at the rate in effect at the commencement of any such period.
Following termination for Disability, your benefits shall be determined in
accordance with the Corporation's retirement, insurance and other applicable
programs and plans then in effect.
<PAGE>
Mr. Terrence Kenny 9
(b) If your employment shall be terminated by the Corporation for
Cause or by you other than for Good Reason, the Corporation shall pay to you
your full Base Salary through the date of termination of your employment at the
rate then in effect, plus all other amounts to which you are entitled under any
compensation or benefit plans of the Corporation at the time such amounts are
due, and the Corporation shall have no further obligations to you under this
Agreement.
(c) If your employment terminates by reason of your death, your
benefits shall be determined in accordance with the Corporation's retirement,
survivor's benefits, insurance and other applicable programs and plans then in
effect.
(d) If your employment by the corporation shall be terminated within
twenty-four (24) months after the Change in Control, unless such termination is
(i) by the Corporation for Cause, (ii) because of your death or Disability, or
(iii) by you other than for Good Reason, you shall be entitled to the following
benefits (the "Severance Payments"):
(A) the Corporation shall pay to you your full Base Salary
through the date of termination of your employment at the rate then in
effect;
(B) the Corporation shall pay to you, as severance benefits,
a lump sum severance payment equal to (i) the sum of two times your
annual base salary either at the time of the Change in Control
<PAGE>
Mr. Terrance Kenny
or at termination, whichever is higher, and (ii) two times your bonus
paid for the prior year;
(C) in lieu of shares of Common Stock of the Corporation
("Shares") issuable upon exercise of outstanding options ("Options"),
if any, granted to you under the Corporation's Incentive Stock Option
Plan, or under any additional, substitute or successor option program
or plan as may be in effect from time to time (which Options shall be
cancelled upon the making of the payment referred to below), you shall
receive an amount in cash equal to the product of (i) the higher of
the closing price per Share as reported on the New York Stock Exchange
on the date of termination of your employment or the highest price per
Share actually paid in connection with any Change in Control, over the
exercise price per Share of each Option held by you, times (ii) the
number of Shares covered by each such Option;
(D) for a twenty-four (24) month period after such
termination, the Corporation will arrange to provide you at the
Corporation's expense with benefits under the Corporation's health,
dental, disability, life insurance, and other similar plans, or
benefits substantially similar to the benefits you were receiving
under such plans immediately prior to the termination of your
employment; and
<PAGE>
Mr. Terrence Kenny 11
(E) the opportunity to purchase the leased company car,
which has been assigned to you, at its then book value under the
Corporation's leasing arrangements.
(e) Notwithstanding the foregoing provisions of this Section 5, in the
event you are determined by the Board to be a "disqualified individual" (within
the meaning of Section 280G(c) of the Internal Revenue Code of 1986, as amended
(the "Code")) with respect to the Company, the amount of the payments hereunder,
which are determined to be "parachute payments" (within the meaning of Section
280G(b) of the Code), shall be reduced to the extent necessary so that the total
of (i) such payments and (ii) any other payment or the value of any benefit
received or to be received by you in connection with a Change in Control remains
deductible by the Company for federal income tax purposes. If any payments
payable hereunder or under any other agreement with the Corporation are required
to be reduced pursuant to the preceding sentence, such reduction shall be made
to such payments in the order elected by you.
(f) The payments provided for in Section 5(d) shall be made not later
than the fifth day following your termination pursuant to the provisions of
Section 5(d); provided, however, that if the amounts of such payments cannot be
-------- -------
finally determined on or before such day, the Corporation shall pay to you on
such day an estimate as determined in good faith by the Corporation of the
minimum amount of such payments and shall pay the remainder of such payments
(together with interest at
<PAGE>
Mr. Terrence Kenny 12
the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than the thirtieth day after
the date of such termination. If the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Corporation to you payable on the fifth day after
demand by the Corporation (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(g) The Corporation shall also pay to you all legal fees and expenses
incurred by you as a result of such termination of your employment (including
all such fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided by
this Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided hereunder).
(h) You shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Agreement be reduced by any
compensation earned by you as the result of employment by another employer after
the date of termination of your employment, or otherwise.
6. Successors; Binding Agreement.
-----------------------------
(a) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
<PAGE>
Mr. Terrence Kenny 13
substantially all of the business and/or assets of the Corporation or of any
division or subsidiary thereof employing you to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform if no such succession had taken place.
Failure of the Corporation to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to compensation from the Corporation in the same amount and on
the same terms as you would be entitled hereunder if you terminated your
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed to be the date of termination of your employment.
(b) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees.
7. Notice. For the purpose of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, or to any
changed address, notice of which either of us shall have given to the other.
8. Miscellaneous. No provision of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed
<PAGE>
Mr. Terrence Kenny 14
to in writing and signed by you and such officer as may be specifically
designated by the Board. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania.
9. Validity. The invalidity or unenforceability of any provision of
--------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Effective Date. This Agreement shall become effective as of the
--------------
date signed by you.
* * *
<PAGE>
Mr. Terrence Kenny 15
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Corporation the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
AMPCO-PITTSBURGH CORPORATION
By:_________________________________
Accepted and Agreed to
this ____ day of February, 1999.
_________________________________
<PAGE>
ampco pittsburgh
1998 Annual Report
<PAGE>
Ampco-Pittsburgh Corporation
(DOLLARS IN MILLIONS EXCEPT PER SHARE)
Net Sales Operating Income
[Graph Showing Net Sales] [Graph Showing Operating Income]
1996 ......... 162.4 1996 ......... 18.1
1997 ......... 173.9 1997 ......... 22.0
1998 ......... 187.9 1998 ......... 23.2
Operating Segments:
[ ] Forged Steel Rolls
[ ] Air and Liquid Processing [ ] Plastics Processing Machinery
Basic Earnings Per Share Shareholders' Equity
[Graph Showing Basic Earnings Per Share] [Graph Showing Shareholders' Equity]
1996 ......... 1.29 1996 ......... 119.7
1997 ......... 1.73 1997 ......... 129.4
1998 ......... 1.64 1998 ......... 142.3
================================================================================
Financial Highlights
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
1998 1997 1996
Net Sales $187,853 $173,906 $162,403
Operating Income 23,202 21,961 18,068
Investment Gains
net of tax -- 2,268 337
Net Income 15,667 16,540 12,390
Basic Earnings Per Share 1.64 1.73 1.29
Dividends Per Share .370 .270 .235
Shareholders' Equity $142,299 $129,416 $119,667
<PAGE>
[ ] To Our Shareholders
We are pleased to report a year of solid performance. Sales and operating
income again increased and the financial position of the Corporation continued
to strengthen.
It will recalled that we entered 1998 with high levels of backlog, but with
weakness beginning to show in some markets impacted by the Asian economic
situation and the strength of the dollar. These factors were reflected in strong
first six months earnings and a fall off to lower levels in the second half.
Sales in 1998 of $187,853,000 increased by 8% compared to $173,906,000 in
1997. Overall operating margins were similar in both years with operating income
in 1998 increasing by 5.7% to the second highest level in the company's history
at $23,202,000 compared with $21,961,000 in 1997. Higher sales and earnings from
the Plastics Processing Machinery segment, in which two small acquisitions were
made in mid-1997, were responsible for most of the improvement. The Corporation
had net income of $15,667,000 in 1998, or $1.64 per share, compared to
$16,540,000 in 1997, or $1.73 per share. Included in the results for 1997 were
gains from sales of investments which contributed $2,268,000, or $.24 per share.
The Corporation's financial strength grew as cash holdings increased by
$11,412,000 to end the year at $33,108,000. The only borrowings are long-term
industrial revenue bonds totaling $12,586,000. Shareholder's equity totaled
$142,299,000 at year end. The regular quarterly dividend was increased from $.09
to $.10 per share effective with the January 1999 payment. This represents the
fourth straight year in which the dividend payout was increased.
Throughout the year, the Corporation continued to invest heavily in capital
expenditures to expand capacity, maximize manufacturing efficiencies and improve
our competitive position. In the three years ended December 1998, the
Corporation spent more than $36,000,000 on plant, machinery and equipment, and
has committed to an additional $12,000,000 of expenditures during 1999. Research
and development has also been an important area of management focus,
particularly in the forged hardened steel roll business, in order to maintain
leadership in technology and expand product offerings.
The Corporation enters 1999 with reduced backlog levels. This, together
with an uncertain global financial situation, causes management to believe that
it will be difficult to duplicate the results of the last two years. Your
Corporation, however, is extremely healthy and looks forward to a quite
successful year. We continue to seek out investment opportunities but will only
consummate a transaction which adds value to our existing niche businesses or
offers the opportunity to enter a new niche business as a significant player.
The Corporation has adopted new disclosure requirements by grouping
operating businesses into three reportable segments: Forged Steel Rolls, Air and
Liquid Processing, and Plastics Processing Machinery. The next several pages of
this Annual Report, including the financial section, contain discussions of the
businesses in each segment and supply financial and operating highlights of the
segments. This format provides shareholders with additional insight into our
markets and some of the steps we are taking to maintain leadership in each of
our industry niches.
Our shareholders, customers, suppliers and employees are always important
to our efforts and we appreciate and thank them for their interest and support.
/s/ Louis Berkman
Louis Berkman
Chairman of the Board
/s/ Robert A. Paul
Robert A. Paul
President and
Chief Executive Officer
/s/ Ernest G. Siddons
Ernest G. Siddons
Executive Vice President and
Chief Operating Officer
March 1, 1999
<PAGE>
[Photo showing 65" diameter 50 ton capacity CNC lathe.]
This heavy duty 65" diameter;
50 ton capacity CNC lathe
finish-machines large back-up
and work rolls for use by
customers in their production
of steel, aluminum and other
metals. It was commissioned in
1998 at the Union Electric Steel
plant in Carnegie, Pennsylvania,
and is part of the significant
investment in capital
expenditures currently ongoing
throughout the Corporation.
<PAGE>
[ ] Forged Steel Rolls
Union Electric Steel
Union Electric Steel is the world's largest manufacturer of forged hardened
steel rolls. Following a record prior year, the Company, benefitting from a
strong opening backlog and the capital expenditures of recent years, improved
earnings modestly on a sales increase of 3% in 1998.
[Photo showing 5-stand tandem cold rolling mill]
This 5-stand tandem cold
rolling mill located at
U.S. Steel's Irvin Works
near Pittsburgh,
Pennsylvania reduces
1/4-inch hot band steel
into high quality thin
gauge sheet used in such
products as household
appliances. Union
Electric Steel supplies
ultra deep hardened
work rolls and back-up
rolls to this and similar
mills throughout
the world.
Despite lower margins in the second six months of 1998, earnings for the last
two years have been exceptional. This results in part from orders received prior
to the start of 1997 for new mill construction, as well as for the then high
production levels of the steel industry worldwide. During 1998, however, backlog
levels and orders declined. Contributing factors were a reduction in exports
resulting from lower economic activity, particularly in Asia, the strengthened
value of the dollar and the resultant slowdown of domestic steel production as
low priced imported steel flooded the U.S. market. Accordingly, we begin 1999 in
a more difficult environment due to the lower and less profitable backlog,
continued weakness in certain global markets and a domestic and European
customer base facing severe competitive pressures. These factors, coupled with
foreign roll manufacturers becoming more active in the U.S., have created added
pressure on pricing and margins.
Steel mill requirements and roll technology are changing at a dynamic rate. To
address these changes as well as expand capacity, the Corporation has spent $25
million on capital expenditures over the last three years and is committed to an
additional $8 million in 1999. The latter is primarily for the enhancement of
heat treatment capabilities. These expenditures, coupled with a continuing
commitment to research and development, are aimed at keeping Union Electric
Steel as the technology leader in roll performance throughout the world. In
addition, they will provide growth opportunity by allowing continued penetration
into hot mill roll applications formerly serviced only by cast roll producers.
(Dollars in millions)
[Graph Showing Sales for 1996, 1997 and 1998]
Sales
1996...........80.6
1997...........85.2
1998...........87.8
[Graph Showing Earnings for 1996, 1997 and 1998]
Earnings
1996...........10.0
1997...........14.9
1998...........15.3
[Graph Showing Backlog for 1996, 1997 and 1998]
Backlog
1996...........84.2
1997...........79.6
1998...........60.8
[Graph Showing Capital Expenditures for 1996, 1997 and 1998]
Capital Expenditures
1996...........6.4
1997...........12.1
1998...........6.5
<PAGE>
Plastics Processing Machinery
The Plastics Processing Machinery segement consists of New Castle Industries --
feed screws, barrels and chill rolls, and F. R. Gross -- heat transfer rolls.
Sales and earnings for this segement have grown due to the acquisitions of F. R.
Gross an the small Atlantic Grinding feed screw business in mid-1997, as well as
internal growth attained at New Castle Industries.
[Photo showing thin plate extrusion line]
This thin gauge plastic extrusion line, equipped with a stack of three chrome
chill rolls from New Castle Industires, is being used by a customer in
Wisconsin to extrude polypropylene sheet for the packaging of disposable
contact lenses.
New Castle Industries
New Castle performed better overall in 1998 as sales of its component products
to plastic processors and machine builders improved, particularly in the first
half of the year. By mid-year, however, weakness in the plastics industry
affected order levels which began to show improvement only late in the year. The
acquisition in August 1997 of Atlantic Grinding expanded New Castle's marketing
and service reach to New England and the southeastern states. Considerable efort
was spent during the year to integrate manufacturing capabilities which, along
with an expanded sales force, are expected to provide opportunities to grow the
customer base. Significant investments are planned in CNC equipment to improve
manufacturing productivity and efficiency. New Castle has begun to implement an
integrated systems software package which is expected to improve information
flow between its five facilities as well as improve plant scheduling and
throughput.
F. R. Gross
Gross, a manufacturer of high performance heat transfer rolls for the plastics,
paper, printing and converting industries, had a good year. Contributing factors
were a strong opening backlog along with an expanded manufacturing capacity from
CNC equipment additions. However order intake fell off during the year.
Accordingly, the backlog at year end is at low level. Sales staff has been
increased to provide expanded coverage. In addition, Gross will continue to
develop ancillary product offerings and services.
(Dollars in millions)
[Graph Showing Sales for 1996, 1997 and 1998]
Sales
1996...........20.7
1997...........28.8
1998...........37.8
[Graph Showing Earnings for 1996, 1997 and 1998]
Earnings
1996...........1.6
1997...........1.8
1998...........3.6
[Graph Showing Backlog for 1996, 1997 and 1998]
Backlog
1996...........5.7
1997...........12.1
1998...........9.2
[Graph Showing Capital Expenditures for 1996, 1997 and 1998]
Capital Expenditures
1996...........0.3
1997...........0.8
1998...........2.4
<PAGE>
Air and Liquid Processing
The Air and Liquid Processing segment consists of Aerofin -- heat exchange
coils, Buffalo Air Handling -- air handling systems, and Buffalo Pumps --
centrifugal pumps. Sales for this segment improved 4% in 1998 following a slight
decline in 1997's sales. Despite the improvement in sales, earnings were lower
compared to the prior year due to weakness in Aerofin's heat exchange coil
business.
[Photo of New Jersey Performing Arts Center]
Eighteen Buffalo Air Handling units equipped with Aerofin coils provide quiet
air conditioning for the 250,000 square foot New Jersey Performing Arts Center,
which contains a 514-seat theater, a 3,000 square foot rehearsal area and a
multi-use hall containing 2,750 seats.
Aerofin
The heat exchange coil business was a disappointment in 1998 following two very
strong years. Sales to both the general industrial and nuclear utility markets
were soft throughout most of the year. In particular, export business was
impacted by financial problems in the Pacific Rim as several anticipated
projects were delayed or cancelled. However, Aerofin's backlog entering 1999 has
strengthened and is appreciably higher than at last year end. A building
expansion was completed in December and a state-of-the-art machinery line to
produce plate fin coils will be installed by the end of the first quarter. This
product line addition will provide Aerofin with increased sales opportunities in
the heating, air conditioning and industrial markets.
Buffalo Air Handling
Sales and earnings improved for this manufacturer of large standard and custom
air handling systems as activity in pharmaceutical and hospital construction
markets strengthened. Several large orders at the end of the year gave Buffalo
Air Handling a substantial increase in backlog and provides an opportunity for
further improvement in 1999. The Company's reputation of building a reliable,
heavy duty, air tight unit, along with the ability to use specialty metals and
perform extensive factory testing, is meeting with increased success in the
markets served. The addition of CNC right angle shear equipment in the coming
year will improve manufacturing efficiency and quality. An upgraded computerized
design system is also being implemented.
<PAGE>
[Photo of Buffalo Pumps at a Florida Power Plant]
Seven lube oil pumps from Buffalo Pumps provide continuous lubrication to the
main turbine bearings of this combined-cycle power generation system, which
supplies electricity to thousands of households and businesses in Florida.
Buffalo Pumps
Buffalo Pumps had a good year in 1998. Shipments of commercial pumps improved
by more than 10% for the year with strong activity from original equipment
manufacturers of gas turbines and refrigeration units. The order intake from
and the outlook for the power generation industry continues to be strong.
However, as expected, the reduction in defense spending is impacting the Navy
pump business and orders are slowing. The Company has been successful in
minimizing its dependency on Navy business which now contributes less than 25%
of sales. Buffalo Pumps is continuing to invest in research and development,
adding a new vacuum test system in 1999, to accelerate product refinements to
allow penetration of new commercial markets. The program of upgrading
manufacturing capabilities to improve productivity and quality is also
continuing with the addition of two CNC machines during the first quarter.
[Graph Showing Sales for 1996, 1997 and 1998]
Sales
1996...........61.1
1997...........59.9
1998...........62.2
[Graph Showing Earnings for 1996, 1997 and 1998]
Earnings
1996...........6.5
1997...........5.2
1998...........4.3
[Graph Showing Backlog for 1996, 1997 and 1998]
Backlog
1996...........22.4
1997...........23.5
1998...........30.0
[Graph Showing Capital Expenditures for 1996, 1997 and 1998]
Capital Expenditures
1996...........2.3
1997...........2.2
1998...........3.1
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 33,107,815 $ 21,695,512
Receivables, less allowance for doubtful
accounts of $691,090 in 1998 and
$629,677 in 1997.............................. 35,017,919 35,024,843
Inventories.................................... 35,492,440 35,452,494
Other.......................................... 4,076,339 4,530,430
------------ ------------
Total current assets......................... 107,694,513 96,703,279
Property, plant and equipment, at cost:
Land and land improvements..................... 4,790,793 4,825,973
Buildings...................................... 26,419,747 25,424,177
Machinery and equipment........................ 119,498,465 108,999,527
------------ ------------
150,709,005 139,249,677
Accumulated depreciation....................... (73,932,512) (66,714,835)
------------ ------------
Net property, plant and equipment............ 76,776,493 72,534,842
Unexpended industrial revenue bond proceeds...... 503,898 2,218,317
Prepaid pension.................................. 13,885,544 13,679,592
Other noncurrent assets.......................... 12,950,682 11,709,131
------------ ------------
$211,811,130 $196,845,161
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................... $ 9,247,179 $ 8,638,073
Accrued payrolls and employee benefits......... 7,820,048 7,747,474
Other.......................................... 9,355,391 7,373,110
------------ ------------
Total current liabilities.................... 26,422,618 23,758,657
Employee benefit obligations..................... 16,509,026 16,755,483
Industrial revenue bond debt..................... 12,586,000 12,586,000
Deferred income taxes............................ 11,707,742 11,329,110
Other noncurrent liabilities..................... 2,287,132 3,000,124
------------ ------------
Total liabilities............................ 69,512,518 67,429,374
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
9,577,621 shares.............................. 9,577,621 9,577,621
Additional paid-in capital..................... 102,555,980 102,555,980
Retained earnings.............................. 28,724,905 16,602,063
Accumulated other comprehensive income......... 1,440,106 680,123
------------ ------------
Total shareholders' equity................... 142,298,612 129,415,787
------------ ------------
$211,811,130 $196,845,161
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
For The Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales............................... $187,853,060 $173,906,315 $162,402,805
------------ ------------ ------------
Operating costs and expenses:
Cost of products sold (excluding
depreciation)........................ 129,410,176 120,075,719 113,933,520
Selling and administrative............ 27,717,806 25,197,129 24,248,794
Depreciation.......................... 7,522,605 6,672,483 6,152,433
------------ ------------ ------------
164,650,587 151,945,331 144,334,747
------------ ------------ ------------
Income from operations.................. 23,202,473 21,960,984 18,068,058
Other income (expense):
Gain on sale of investments........... -- 3,489,228 518,589
Other income--net..................... 419,089 454,773 183,841
------------ ------------ ------------
Income before income taxes.............. 23,621,562 25,904,985 18,770,488
Income taxes............................ 7,955,000 9,365,000 6,380,000
------------ ------------ ------------
Net income.............................. $ 15,666,562 $ 16,539,985 $ 12,390,488
============ ============ ============
Basic and diluted earnings per share.... $ 1.64 $ 1.73 $ 1.29
============ ============ ============
Weighted average number of common
shares outstanding..................... 9,577,621 9,577,621 9,577,621
============ ============ ============
</TABLE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------- Accumulated
Additional Other
Stated Paid-in Retained Comprehensive
Capital Capital Earnings Income (Loss) Total
------- ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance December 31,
1995................... $9,577,621 $102,555,980 $(7,491,711) $7,493,159 $112,135,049
------------
Comprehensive income:
Net income 1996....... 12,390,488 12,390,488
Other comprehensive
(loss)............... (2,607,773) (2,607,773)
------------
Comprehensive
income............. 9,782,715
Cash dividends ($.235
per share)............. (2,250,741) (2,250,741)
---------- ------------ ----------- ---------- ------------
Balance December 31,
1996................... 9,577,621 102,555,980 2,648,036 4,885,386 119,667,023
------------
Comprehensive income:
Net income 1997....... 16,539,985 16,539,985
Other comprehensive
(loss)............... (4,205,263) (4,205,263)
------------
Comprehensive
income............. 12,334,722
Cash dividends ($.27 per
share)................. (2,585,958) (2,585,958)
---------- ------------ ----------- ---------- ------------
Balance December 31,
1997................... 9,577,621 102,555,980 16,602,063 680,123 129,415,787
------------
Comprehensive income:
Net income 1998....... 15,666,562 15,666,562
Other comprehensive
income............... 759,983 759,983
------------
Comprehensive
income............. 16,426,545
Cash dividends ($.37 per
share)................. (3,543,720) (3,543,720)
---------- ------------ ----------- ---------- ------------
Balance December 31,
1998................... $9,577,621 $102,555,980 $28,724,905 $1,440,106 $142,298,612
========== ============ =========== ========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 15,666,562 $ 16,539,985 $ 12,390,488
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation..................... 7,522,605 6,672,483 6,152,433
Gain on sale of investments...... -- (3,489,228) (518,589)
Deferred income taxes............ 1,034,000 3,565,000 3,787,000
Other--net....................... 552,874 289,206 649,415
Changes in assets/liabilities,
net of effects from
business acquisitions:
Receivables.................... 617,901 (1,771,708) (4,096,165)
Inventories.................... 275,366 (2,190,829) (13,434)
Other assets................... (393,334) (71,752) 1,258,330
Accounts payable............... 397,416 (1,018,684) 607,939
Accrued payrolls and employee
benefits...................... 120,481 (212,999) 159,337
Other liabilities.............. (107,497) (4,158,879) (2,533,659)
------------ ------------ ------------
Net cash flows from operating
activities........................ 25,686,374 14,152,595 17,843,095
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and
equipment......................... (12,099,403) (15,164,640) (9,011,249)
Proceeds from sales of property,
plant and equipment............... 419,638 79,020 109,283
Use of unexpended industrial
revenue bond proceeds............. 1,714,419 7,548,621 (9,766,938)
Business acquisitions.............. (899,463) (11,966,579) --
Proceeds from sales of investments. -- 4,907,484 1,101,939
------------ ------------ ------------
Net cash flows from investing
activities........................ (10,864,809) (14,596,094) (17,566,965)
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid..................... (3,447,944) (3,256,684) (1,436,643)
Proceeds from industrial revenue
bonds............................. -- 7,116,000 11,236,000
Repayment of industrial revenue
bonds............................. -- (7,116,000) --
------------ ------------ ------------
Net cash flows from financing
activities........................ (3,447,944) (3,256,684) 9,799,357
------------ ------------ ------------
Effect of exchange rate changes on
cash................................ 38,682 (114,536) (118,519)
------------ ------------ ------------
Net increase (decrease) in cash...... 11,412,303 (3,814,719) 9,956,968
Cash and cash equivalents at
beginning of year................... 21,695,512 25,510,231 15,553,263
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 33,107,815 $ 21,695,512 $ 25,510,231
============ ============ ============
Supplemental information:
Income tax payments................ $ 6,282,784 $ 7,649,541 $ 3,298,598
Interest payments.................. 701,840 523,555 287,887
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
Notes to Consolidated Financial Statements
Description of Business
Ampco-Pittsburgh Corporation (the Corporation) is in three business segments
that manufacture and sell principally custom engineered equipment. The Forged
Steel Rolls segment consists of Union Electric Steel and its Belgium affiliate
which sell forged hardened steel rolls to steel and aluminum producers. The Air
and Liquid Processing segment consists of Aerofin--heat exchange coils, Buffalo
Air Handling--air handling systems, and Buffalo Pumps--centrifugal pumps, all
of which sell to a variety of commercial and industrial users. The Plastics
Processing Machinery segment consists of New Castle Industries--feed screws,
barrels and chill rolls and F. R. Gross--heat transfer rolls, both of which
sell principally to the plastics processing and machinery industry.
Note 1--Accounting Policies:
The Corporation's accounting policies conform to generally accepted accounting
principles. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. A summary
of the significant accounting policies followed by the Corporation is presented
below. Certain amounts for preceding periods have been reclassified for
comparability with the 1998 presentation.
Consolidation
All subsidiaries are wholly owned and are included in the consolidated
financial statements. Intercompany accounts and transactions are eliminated.
Cash and Cash Equivalents
Securities with purchased original maturities of three months or less are
considered to be cash equivalents. The Corporation maintains cash and cash
equivalents at various financial institutions which may exceed federally
insured amounts.
Inventories
Inventories are valued at cost, which is lower than market. Cost of domestic
raw materials, work-in-process and finished goods inventories is determined by
the last-in, first-out (LIFO) method. Cost of domestic supplies and foreign
inventories is determined by the first-in, first-out method.
Investments
Investments are considered "available for sale" and, accordingly, are reported
at market value with the unrealized gains and losses, net of tax, reported as a
separate component of other comprehensive income. Realized gains and losses on
sales of investments and declines in value judged to be other than temporary
are included in net income.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost with depreciation computed
on the straight-line method over the following estimated useful lives: land
improvements--15 to 20 years, buildings--25 to 45 years and machinery and
equipment--5 to 20 years. Expenditures that extend economic useful lives are
capitalized. Routine maintenance is charged to operating results. Gains or
losses are recognized on retirements or disposals.
Comprehensive Income
In 1998, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its components
(see Note 11) in the financial statements; however, it does not impact the
measurement of the Corporation's net income.
Foreign Currency Translation
Assets and liabilities of the Corporation's foreign operations are translated
at the current year-end exchange rate and the statements of income are
translated at the average exchange rate for the year. Gains or losses resulting
from translating foreign currency financial statements are accumulated as a
separate component of other comprehensive income until the entity is sold or
substantially liquidated.
Income Taxes
Income taxes are recognized during the year in which transactions enter into
the determination of financial statement income. Deferred tax assets and
liabilities are recognized for the future tax consequences of temporary
differences between the book carrying amounts and the tax basis of assets and
liabilities.
Stock-Based Compensation
The Corporation accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value method,
compensation expense is recognized only to the extent the market price of the
common stock exceeds the exercise price of the stock option at the date of
the grant.
11
<PAGE>
Note 1--Accounting Policies (continued):
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. The computation of
diluted earnings per share is similar to basic earnings per share except that
the denominator is increased to include 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 the stock options was 9,577,990
common shares for 1998. There were no potentially dilutive securities
outstanding for 1997 and 1996.
Note 2--Acquisitions:
In July, 1997, the Corporation acquired F. R. Gross Company for $9,400,000 in
cash and in August, 1997, acquired Atlantic Grinding & Welding, Inc. for
$2,600,000 in cash. The acquisition prices paid included debt assumed and
retired. Both acquisitions were accounted for as purchase transactions. The
excess of the purchase price over the estimated fair value of the tangible net
assets acquired amounted to approximately $4,500,000 for F. R. Gross, which has
been accounted for as goodwill and is being amortized over thirty years using
the straight-line method.
The Asset Purchase Agreements for F. R. Gross and Atlantic Grinding & Welding
provide for additional payments to the former owners contingent on future
earnings. Additional payments, which amounted to $899,000 in 1998, are
accounted for as goodwill and amortized over the remaining life of the
original goodwill.
Note 3--Inventories:
<TABLE>
<S> <C> <C>
(in thousands)
1998 1997
---- ----
Raw materials................................................... $ 6,425 $ 6,214
Work-in-process................................................. 21,985 23,905
Finished goods.................................................. 5,100 3,440
Supplies........................................................ 1,982 1,893
------- -------
$35,492 $35,452
======= =======
</TABLE>
The carrying amount of inventories valued on the LIFO method approximates
current cost at December 31, 1998 and 1997. Approximately 80% of the inventory
was valued using the LIFO method in 1998 and 87% in 1997.
Note 4--Borrowing Arrangements:
The Corporation maintains a revolving credit agreement (RCA), subject to annual
renewal, which provides for a bank commitment of up to $7,500,000 expiring in
September 1999. In addition, the Corporation maintains short-term lines of
credit of approximately $7,000,000. There were no bank borrowings outstanding
at either December 31, 1998 or 1997, with only minimal line of credit
borrowings during each of the years.
The Corporation's RCA requires, among other things, the maintenance of certain
financial covenants including minimum net worth and ratios of interest coverage
and debt to equity. The Corporation is in compliance with the applicable bank
covenants as of December 31, 1998.
In 1996, a subsidiary of the Corporation issued two series of tax-exempt
Industrial Revenue Bonds totalling $11,236,000. Due to anticipated capital
expenditures exceeding limitations prescribed for tax-exempt financings, one of
the series for $7,116,000 was refinanced in 1997 with a taxable issue. The
presently unexpended proceeds of the remaining tax-exempt series are presented
as a noncurrent asset on the balance sheet. As required by the Trust Indenture
Agreement, these funds have been invested in liquid, highly rated securities,
and are carried at cost which approximates market. Principal on the tax-exempt
and taxable bonds mature in 2020 and 2027, respectively. Interest on the tax-
exempt bonds, including a 1987 tax-exempt issue for $1,350,000 which is due in
2002, are at floating rates which averaged 3.7% during the year. Interest on
the taxable bonds averaged 5.6%.
Note 5--Operating Leases:
The Corporation leases office space and certain production machinery and
computer equipment. Operating lease payments were $1,915,000 in 1998,
$1,800,000 in 1997 and $1,745,000 in 1996. Operating lease payments for
subsequent years are as follows:
<TABLE>
<S> <C> <C> <C>
1999 $1,332,000 2002 $731,000
2000 1,205,000 2003 552,000
2001 804,000 Thereafter 698,000
</TABLE>
Note 6--Pension and Other Postretirement Benefits:
Pension Plans
The Corporation has noncontributory defined benefit pension plans covering
substantially all of its employees. Generally, the benefits are based on years
of service multiplied by either a fixed amount or a percentage of compensation.
For its pension plans covered by the Employee Retirement Income Security Act of
1974 (ERISA), the Corporation's policy is to fund at least the minimum
actuarially computed annual contribution required under ERISA.
12
<PAGE>
Note 6--Pension and Other Postretirement Benefits (continued):
The Corporation maintains a nonqualified defined benefit plan to provide
supplemental retirement benefits for selected executives in addition to
benefits provided under the Corporate sponsored pension plans. The Corporation
contributed $1,000,000 in both 1998 and 1997 to a grantor tax trust known as a
"Rabbi" trust. The assets of the trust are subject to claims of the
Corporation's creditors, but otherwise must be used only for purposes of
providing benefits under the plan. The fair market value of the trust at
December 31, 1998 and 1997, which is included in other noncurrent assets, is
$2,058,000 and $1,000,000, respectively. For financial reporting purposes, the
plan is treated as a non-funded pension plan. The accumulated benefit
obligation for the plan at December 31, 1998 and 1997 was $3,517,000 and
$2,969,000, respectively.
Other Postretirement Benefits
The Corporation provides postretirement health care benefits principally to the
bargaining groups of one subsidiary (the Plan). The Plan covers participants
and their spouses and/or dependents who retire under the existing pension plan
on other than a deferred vested basis and at the time of retirement have also
rendered 15 or more years of continuous service irrespective of age. Other
health care benefits are provided to retirees under plans no longer being
offered by the Corporation. Retiree life insurance is provided to substantially
all retirees. Postretirement benefits with respect to health care are subject
to certain Medicare offsets.
During 1994, the Corporation amended its primary postretirement health benefit
plans to provide for a cost-sharing method for current and future retirees. The
amendments, along with changes in inflation, discount rate and mortality
assumptions used in calculating the accumulated postretirement benefit
obligation, resulted in an unrecognized gain of $4,976,000 which is being
amortized on a straight-line basis over the average remaining employee service
period as a reduction in postretirement benefit expense beginning in 1995.
The Corporation also provides health care and life insurance benefits to former
employees of discontinued operations. This obligation had been estimated and
provided for at the time of disposal.
The Corporation's postretirement health care and life insurance plans are
unfunded.
The following provides a reconciliation of benefit obligations, plan assets,
and funded status of the plans.
<TABLE>
<CAPTION>
(in thousands)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit
obligation:
Benefit obligation at
January 1.............. $ 82,346 $ 75,091 $ 9,184 $ 9,120
Service cost............ 1,413 1,206 100 90
Interest cost........... 5,914 5,711 624 697
Plan amendments......... 120 -- -- --
Actuarial (gain) loss... 5,536 4,495 (243) 37
Participant
contributions.......... -- -- 91 92
Benefits paid from plan
assets................. (4,417) (4,033) -- --
Benefits paid by
Corporation............ (124) (124) (857) (852)
-------- -------- ------- -------
Benefit obligation at
December 31............ $ 90,788 $ 82,346 $ 8,899 $ 9,184
======== ======== ======= =======
Change in plan assets:
Fair value of plan
assets at January 1.... $113,037 $ 91,850 $ -- $ --
Actual return on plan
assets................. 22,921 25,220 -- --
Corporate contribution.. 124 124 766 760
Participant
contributions.......... -- -- 91 92
Gross benefits paid..... (4,541) (4,157) (857) (852)
-------- -------- ------- -------
Fair value of plan
assets at December 31.. $131,541 $113,037 $ -- $ --
======== ======== ======= =======
</TABLE>
13
<PAGE>
Note 6--Pension and Other Postretirement Benefits (continued):
<TABLE>
<CAPTION>
(in thousands)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status of the plans:............ $ 40,753 $ 30,691 $ (8,899) $ (9,184)
Unrecognized actuarial (gain) loss..... (31,572) (21,194) 138 386
Unamortized prior service cost
(benefit)............................. 1,156 1,177 (4,843) (5,458)
Unrecognized net transition obligation. 32 37 -- --
Accrued benefit cost................... 3,517 2,969 13,604 14,256
-------- -------- -------- --------
Prepaid benefit cost................... $ 13,886 $ 13,680 $ -- $ --
======== ======== ======== ========
Assumptions as of December 31:
Discount rate.......................... 6.75% 7.25% 6.75% 7.25%
Expected long-term rate of return on
plan assets........................... 8.50% 8.50% -- --
Rate of increases in compensation...... 3.00% 3.00% -- --
</TABLE>
Net periodic pension and other postretirement benefit costs include the
following components:
<TABLE>
<CAPTION>
(in thousands)
Other
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost................... $ 1,413 $ 1,206 $ 1,143 $ 100 $ 90 $ 84
Interest cost.................. 5,914 5,711 5,215 624 697 651
Expected return on plan assets. (7,333) (6,427) (6,073) -- -- --
Amortization of prior service
cost.......................... 140 132 122 (615) (615) (615)
Actuarial loss................. 118 76 224 4 26 22
------- ------- ------- ----- ----- -----
Benefit cost................... $ 252 $ 698 $ 631 $ 113 $ 198 $ 142
======= ======= ======= ===== ===== =====
</TABLE>
The assumed health care cost trend rate at December 31, 1998 was 5.5%,
gradually decreasing to 4.5% in 2001 and thereafter. The assumed health care
cost trend rate at December 31, 1997 was 6.5% gradually decreasing to 5.0% in
2001 and thereafter.
A one percentage point increase or decrease in the assumed health care cost
trend rate would change the postretirement benefit obligation and the annual
benefit expense by approximately $760,000 and $76,000, respectively.
Note 7--Authorized and Issued Shares:
In September 1998, a new Shareholder Rights Plan was adopted which became
effective upon the expiration of the Corporation's former Shareholder Rights
Plan in November 1998. Each outstanding share of common stock carries one
Preference Share Purchase Right (a Right). The Rights are designed to assure
that all shareholders receive equal treatment in the event of a potential
acquisition of the Corporation or a change in control. Under certain
circumstances, each Right entitles the shareholder to buy 1/100 of a share of
Series A Preference Stock at a $45.00 exercise price. The Rights are
exercisable only if a party acquires, or commences a tender offer to acquire,
beneficial ownership of 20% or more of the Corporation's common stock without
the approval of the independent directors on the Corporation's Board.
After the Rights become exercisable, if anyone acquires 30% or more of the
Corporation's stock or assets, merges into the Corporation or engages in
certain other transactions, each Right may be used to purchase shares of the
Corporation's common stock (or, under certain conditions, the acquirer's common
stock) worth twice the exercise price. The Corporation may redeem the Rights,
which expire in November 2008, for one cent per Right under certain
circumstances. At December 31, 1998, there are 3,000,000 shares of unissued
preference stock, of which 150,000 shares have been designated as Series A
Preference Stock for issuance in connection with these Rights.
14
<PAGE>
Note 8--Stock Option Plan:
In 1997, the shareholders approved a stock option plan authorizing the issuance
of options to purchase up to 300,000 shares of the Corporation's common stock
to selected employees. Under the terms of the plan, options may be either
incentive or non-qualified. Options granted under the plan are subject to terms
and conditions, including exercise price and timing of exercise, as may be
determined by the Stock Option Committee of the Board of Directors.
In December 1998, options for 277,500 shares of common stock were granted at an
exercise price of $10 per share which was the market price on the date of
grant. The options vested at date of grant, become fully exercisable after May
1, 1999 and have a ten year life.
The Corporation accounts for its stock-based compensation using the intrinsic
value method prescribed by APB No. 25; accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
of the option at the grant date consistent with SFAS No. 123, the Corporation's
net income and earnings per share for 1998 would have been $15,208,000 and
$1.59, respectively.
The fair value of the option, estimated on the date of grant using the Black-
Scholes option-pricing model, was $2.54 based on the following assumptions:
dividend yield of 4.0%, expected volatility of 34.2%, risk-free interest rate
of 4.8% and an expected option life of 5 years.
Note 9--Financial Instruments:
Forward Foreign Exchange Contracts
The Corporation's Belgian operation is subject to risk from exchange rate
fluctuations in connection with its regular purchases in U.S. dollars of semi-
finished and finished roll products from its U.S. affiliate. In order to
minimize this risk, forward foreign exchange contracts are purchased as hedges
of these anticipated purchase transactions. At December 31, 1998, the Belgian
operation had monthly forward exchange contracts through 2000 to purchase an
aggregate of $8,900,000 of U.S. dollars, representing approximately 32% of
anticipated requirements. Gains and losses on forward exchange contracts which
hedge exposures on anticipated foreign currency commitments are deferred and
recognized as adjustments to the bases of the inventory acquired. The deferred
unrealized loss on forward exchange contracts at December 31, 1998
was $110,000.
Fair Value of Financial Instruments
The estimated fair value of forward foreign exchange contracts, based on quoted
market prices of comparable contracts, approximates their notional principal
amount plus (minus) the unrealized deferred gain (loss).
The fair value of other financial instruments classified as current assets or
current liabilities approximates their carrying values due to the short-term
maturities of these instruments. The fair value of the floating rate industrial
revenue bond debt approximates its carrying value.
Note 10--Income Taxes:
The provision or (benefit) for taxes on income consists of the following:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................ $6,545 $4,451 $2,014
State.................................................. 268 720 600
Foreign................................................ 108 629 (21)
------ ------ ------
6,921 5,800 2,593
------ ------ ------
Deferred:
Federal................................................ 830 3,611 3,854
State.................................................. 119 124 72
Foreign................................................ 85 (170) (139)
------ ------ ------
1,034 3,565 3,787
------ ------ ------
$7,955 $9,365 $6,380
====== ====== ======
</TABLE>
Deferred tax assets and liabilities comprise the following:
<TABLE>
<CAPTION>
(in thousands)
Assets 1998 1997
- ------ ---- ----
<S> <C> <C>
Employment-related liabilities.......................... $ 6,005 $ 5,840
Capital loss carryforward............................... -- 11,923
Other................................................... 4,396 4,301
-------- --------
Gross deferred tax assets............................... 10,401 22,064
Valuation allowance..................................... -- (11,923)
-------- --------
10,401 10,141
-------- --------
Liabilities
- -----------
Depreciation............................................ (12,446) (11,831)
Prepaid pension......................................... (5,528) (5,472)
Foreign deferred tax.................................... (1,175) (1,090)
-------- --------
Gross deferred tax liabilities.......................... (19,149) (18,393)
-------- --------
Net deferred tax liability.............................. $ (8,748) $ (8,252)
======== ========
</TABLE>
The Corporation's unused capital loss carryforward expired in 1998. The
Corporation had recorded a valuation allowance with respect to the future tax
benefit of the capital loss carryforward due to the uncertainty of its ultimate
realization.
15
<PAGE>
Note 10--Income Taxes (continued):
The difference between the U.S. federal income tax statutory rate and the
Corporation's effective income tax rate is as follows:
<TABLE>
<CAPTION>
(Percent)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed at statutory rate........................... 35.0 35.0 35.0
Foreign income taxes................................. 0.1 0.4 (0.1)
State income taxes................................... 1.1 1.8 2.1
Valuation reserve.................................... (0.6) 0.6 (1.0)
Other--net........................................... (1.9) (1.6) (2.0)
---- ---- ----
33.7 36.2 34.0
==== ==== ====
</TABLE>
Note 11--Other Comprehensive Income:
Other comprehensive income includes changes in net assets from nonowner sources
including, foreign currency translation adjustments, changes in minimum pension
liability and unrealized holding gains on securities. The following table
reflects the accumulated balances of other comprehensive income:
<TABLE>
<CAPTION>
(in thousands)
Foreign Unrealized Accumulated
Currency Minimum Holding Other
Translation Pension Gains on Comprehensive
Adjustments Liability Securities Income
----------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996....... $ 3,497 $(260) $ 4,256 $ 7,493
Change during year............... (938) 65 (1,735) (2,608)
------- ----- ------- -------
Balance at December 31, 1996..... 2,559 (195) 2,521 4,885
Change during year............... (1,483) (201) (2,521) (4,205)
------- ----- ------- -------
Balance at December 31, 1997..... 1,076 (396) -- 680
Change during year............... 881 (222) 101 760
------- ----- ------- -------
Balance at December 31, 1998..... $ 1,957 $(618) $ 101 $ 1,440
======= ===== ======= =======
</TABLE>
The change in Unrealized Holding Gains on Securities during 1997 includes
reclassification adjustments for $1,145,000 net of tax gains realized in income
from the sale of the securities. The tax expense (benefit) associated with
changes in the Minimum Pension Liability were $(119,000), $(108,000) and
$35,000 for 1998, 1997 and 1996, respectively. The tax expense (benefit)
associated with changes in the Unrealized Holding Gains on Securities were
$54,000, $(1,357,000) and $(936,000) for 1998, 1997 and 1996, respectively.
Note 12--Litigation:
The Corporation's subsidiary, Vulcan Inc. (Vulcan), is a 50% general partner in
Valley-Vulcan Mold Company (Valley), a partnership, which filed under Chapter
11 of the U.S. Bankruptcy Code in 1990. Valley, in connection with its
formation, assumed certain obligations of each of the partners, including
Vulcan's obligation to pay an industrial revenue bond. A portion of the latter
obligation, however, had been paid by the Corporation pursuant to a guaranty
given at the time of Valley's formation, which guaranty was secured by all of
Valley's assets. In 1991, the unsecured creditors committee brought an
adversary proceeding against the Corporation and Vulcan, as well as others,
seeking to set aside the Corporation's liens, to hold the Corporation and
Vulcan liable for debts of Valley, and for return of certain funds received in
connection with Valley's formation. In April 1994, the Bankruptcy Court issued
a favorable judgment denying all claims against the Corporation. In addition,
the Court permitted the Corporation to recover $2,200,000 from the estate of
Valley in connection with the Corporation's lien for the industrial revenue
bond guaranty. No reserve had been established for the outcome of this
litigation based on the Corporation's belief that it had meritorious
defenses. The plaintiff in the case, the unsecured creditors committee of
Valley, has filed a notice of
16
<PAGE>
Note 12--Litigation (continued):
appeal from the Court's decision. The Corporation has posted a bank letter of
credit for the $2,200,000 received from the estate pending the outcome of the
appeal.
In addition to the litigation noted above, the Corporation is from time to time
subject to routine litigation incidental to its business. The Corporation
believes that the results of the above noted litigation and other pending legal
proceedings will not have a material adverse effect on the Corporation's
financial condition, results of operations or liquidity.
Note 13--Environmental Matters:
There are various environmental proceedings which involve discontinued
operations. In some of those proceedings, the Corporation has been designated
as a potentially responsible party. The reserves for discontinued operations
include an accrual for costs of likely remedial actions.
Environmental exposures are difficult to assess and estimate for numerous
reasons including the lack of reliable data, the number of potentially
responsible parties and their financial capabilities, the multiplicity of
possible solutions, the years of remedial and monitoring activity required, and
the identification of new sites. While it is not possible to quantify with
certainty the environmental exposure, in the opinion of management, the
potential liability for all environmental proceedings, based on information
known to date and the estimated quantities of waste at these sites, will not
have a material adverse effect on the financial condition, results of
operations or liquidity of the Corporation.
Note 14--Business Segments:
In 1998, the Corporation adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" which changed its previous practice of
reporting under one business segment, engineered equipment. The Corporation's
six separate business units have now been aggregated into three reportable
segments, based on products offered, markets served and other comparable
criteria, which will be affected by similar economic conditions.
The Forged Steel Rolls segment consists of Union Electric Steel and it's
Belgium affiliate which manufacture forged hardened steel rolls sold to
customers in the steel and aluminum industries. Union Electric's rolls are used
in the production of strip and sheet products for the automotive, appliance,
aircraft, packaging and construction markets. The Air and Liquid Processing
segment consists of Aerofin--heat exchange coils, Buffalo Air Handling--air
handling systems, and Buffalo Pumps--centrifugal pumps, all of which sell to a
variety of commercial and industrial users. The Plastics Processing Machinery
segment consists of New Castle Industries--feed screws, barrels and chill rolls
and F. R. Gross--heat transfer rolls, both of which sell principally to the
plastics processing and machinery industry.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The
Corporation evaluates the performance of its operating segments based on income
from operations after allocating corporate expenses based on a sales, property
and payroll formula.
Summarized financial information concerning the Corporation's reportable
segments is shown in the following tables. Corporate assets included under
Identifiable Assets represent cash and cash equivalents, deferred tax assets,
prepaid pension and other items not allocated to reportable segments.
<TABLE>
<CAPTION>
Net Sales Earnings before Taxes
1998 1997 1996 1998 1997 1996
(in thousands) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Forged Steel Rolls.......... $ 87,781 $ 85,215 $ 80,550 $15,264 $14,914 $10,023
Air and Liquid Processing... 62,240 59,936 61,162 4,321 5,198 6,484
Plastics Processing
Machinery.................. 37,832 28,755 20,691 3,618 1,849 1,561
-------- -------- -------- ------- ------- -------
Total Reportable Segments... 187,853 173,906 162,403 23,203 21,961 18,068
Investment gains and other.. -- -- -- 419 3,944 702
-------- -------- -------- ------- ------- -------
Total....................... $187,853 $173,906 $162,403 $23,622 $25,905 $18,770
======== ======== ======== ======= ======= =======
</TABLE>
17
<PAGE>
Note 14--Business Segments (continued):
<TABLE>
<CAPTION>
Capital Expenditures Depreciation Expense Identifiable Assets
(in thousands) 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Forged Steel Rolls...... $ 6,525 $12,066 $6,406 $4,957 $4,579 $4,285 $ 88,988 $ 88,929 $ 88,539
Air and Liquid
Processing............. 3,103 2,241 2,259 1,282 1,206 1,250 39,728 37,089 35,839
Plastics Processing
Machinery.............. 2,441 809 331 1,236 829 561 28,225 27,397 11,142
Corporate............... 30 49 15 48 58 56 54,870 43,430 52,650
------- ------- ------ ------ ------ ------ -------- -------- --------
Total................... $12,099 $15,165 $9,011 $7,523 $6,672 $6,152 $211,811 $196,845 $188,170
======= ======= ====== ====== ====== ====== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Net Sales Identifiable Assets
(in thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Geographic Areas:
United States............ $138,451 $119,830 $107,997 $192,837 $181,323 $173,061
Foreign.................. 49,402 54,076 54,406 18,974 15,522 15,109
-------- -------- -------- -------- -------- --------
Total..................... $187,853 $173,906 $162,403 $211,811 $196,845 $188,170
======== ======== ======== ======== ======== ========
</TABLE>
Net sales are attributed to countries based on location of customer.
- --------------------------------------------------------------------------------
Quarterly Information--Unaudited
<TABLE>
<CAPTION>
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- -------- ------- ----
<S> <C> <C> <C> <C> <C>
1998
- ----
Net sales............... $48,598 $46,773 $46,080 $46,402 $187,853
Gross profit(1)......... 15,800 15,017 13,587 14,039 58,443
Income from operations.. 7,074 6,257 4,781 5,090 23,202
Net income.............. 4,656 4,226 3,273 3,512 15,667
Basic and diluted
earnings per share..... .49 .44 .34 .37 1.64
1997
- ----
Net sales............... $40,834 $43,091 $41,628 $48,353 $173,906
Gross profit(1)......... 12,973 13,403 12,795 14,660 53,831
Income from operations.. 5,382 5,808 4,770 6,001 21,961
Net income (2).......... 3,795 4,332 4,550 3,863 16,540
Basic and diluted
earnings per share..... .40 .45 .48 .40 1.73
</TABLE>
Notes
1. Gross profit as used herein does not include a charge for depreciation.
2. Included in net income for 1997 are gains on sales of investments, net of
deferred taxes, of $140, $469 and $1,659 in the first, second and third
quarters, respectively.
18
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
1998 Compared to 1997
Operations
Net Sales. Net sales of $187,853,000 in 1998 increased by $13,947,000 or 8%
compared with sales of $173,906,000 in 1997. Approximately one-half of the
increase is attributable to the full year impact of the mid-1997 acquisitions
of F. R. Gross and Atlantic Grinding and Welding while overall sales at other
operations were higher by 4%. The order backlog at December 31, 1998 of
$100,000,000 declined by 13% compared to $115,200,000 at December 31, 1997. The
reduction in the backlog is due primarily to a decrease in forged hardened
steel roll orders.
Forged Steel Rolls. In 1998, sales for the Forged Steel Rolls segment were
$87,781,000 compared to $85,215,000 in 1997, an increase of 3%. Sales in 1998
benefitted from a high opening backlog of $79,600,000 and stronger sales to
domestic steel customers, in part attributable to non-recurring new mill
construction. However, sales outside of the U.S., accounting for approximately
44% of current year shipments, were lower in 1998 due to economic weakness in
certain markets, particularly Asia, and the negative impact of the strengthened
value of the dollar. These factors, along with a slowing of European and
domestic orders related to an increase in low priced imported steel into the
U.S., resulted in a decline in the backlog of 24% which totaled $60,800,000 at
December 31, 1998. Margins in the backlog are lower compared to a year ago, due
to reduced demand and increased competitive activity of foreign roll
manufacturers.
Air and Liquid Processing. Sales for the Air and Liquid Processing segment were
$62,240,000 in 1998, a 3.8% improvement over 1997 sales of $59,936,000. Sales
for both air handling systems and centrifugal pumps improved, however, sales of
heat exchange coils were lower in 1998. Air handling system sales benefitted
from good demand from pharmaceutical and hospital construction markets. Pump
sales to commercial customers improved on stronger activity from original
equipment manufacturers of gas turbines and refrigeration units. Pump sales to
the Navy were flat as reductions in defense spending resulted in slowing of
orders for this product line. Sales of heat exchange coils were impacted by
lower demand in both the general industrial and nuclear utility markets. In
addition, several anticipated projects from customers in the Pacific Rim were
canceled or delayed due to economic weakness in that region. Order activity for
both heat exchange coils and air handling systems improved during the second
half and the backlog for this segment at December 31,1998 was $30,000,000
compared to $23,500,000 at December 31, 1997.
Plastics Processing Machinery. Plastics Processing Machinery segment sales were
$37,832,000 in 1998, an increase of $9,077,000 or 31.6% compared to sales of
$28,755,000 in 1997. Approximately three-fourths of the increase is
attributable to the full year impact of the mid-1997 acquisitions of F.R. Gross
and Atlantic Grinding and Welding. Excluding the impact of these acquisitions,
sales at New Castle Industries increased by 8.6% in 1998 due to strong demand,
particularly in the first half of the year, from plastic processors and machine
builders. The backlog for this segment declined to $9,200,000 at December
31,1998 compared with $12,100,000 at the beginning of the year due to reduced
bookings of heat transfer rolls at F. R. Gross.
Cost of Products Sold. The cost of products sold, excluding depreciation, in
relationship to net sales was 68.9% in 1998 compared to 69.0% in 1997.
Selling and Administrative Expense. Selling and administrative expenses totaled
$27,718,000 (14.8% of net sales) and $25,197,000 (14.5% of net sales) in 1998
and 1997, respectively.
Depreciation Expense. Depreciation expense of $7,523,000 in 1998 was increased
compared to $6,672,000 in 1997 due principally to increased capital spending as
well as the inclusion of the acquired businesses for the entire year.
Income From Operations. Income from operations of $23,202,000 in 1998 increased
by $1,241,000 or 5.7% compared to $21,961,000 in 1997. Increased earnings from
the Plastics Processing Machinery segment were the principal source of the
improvement.
Forged Steel Rolls. Earnings for the Forged Steel Rolls segment improved
modestly to $15,264,000 in 1998 compared to $14,914,000 in 1997. The
historically high earnings in both years resulted in part from orders received
prior to the start of 1997 for new mill construction, as well as for the then
high production levels of the steel industry worldwide.
Air and Liquid Processing. Earnings for the Air and Liquid Processing segment
declined in 1998 to $4,321,000 compared to $5,198,000 in 1997 despite a 3.8%
overall sales improvement. This decrease is due to reduced earnings from the
Aerofin heat exchange
19
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
coil business as sales fell 12% in 1998. Improved results and margins were
achieved at both the air handling systems and centrifugal pump operations which
experienced stronger demand in 1998.
Plastics Processing Machinery. The Plastics Processing Machinery segment
doubled its earnings in 1998 to $3,618,000 compared with $1,849,000 in 1997.
This improvement was principally achieved at F. R. Gross which benefitted from
a strong opening backlog.
Other Income (Expense). Gains on sales of investments of $3,489,000 were
realized in 1997.
Income Tax Expense. Income tax expense in 1998 totaled $7,955,000 based on a
33.7% effective tax rate as compared to the $9,365,000 expense in 1997, based
on a 36.2% effective tax rate. The lower 1998 tax rate is attributable to
modest utilization in 1998 of capital loss carryforwards, which had been not
been anticipated, as well as lower state and foreign taxes.
Net Income. As a result of all of the above, the Corporation had net income of
$15,667,000 in 1998 compared to $16,540,000 in 1997.
Liquidity and Capital Resources
Net cash flows from operating activities were positive for 1998 at $25,686,000
and compare with positive cash flows of $14,153,000 for 1997. The difference in
cash flow between the two years resulted from a $1,241,000 increase in income
from operations in 1998 and the negative impact on 1997 cash flow of
significant requirements for working capital.
Net cash outflows from investing activities were $10,865,000 in 1998 and
compare with cash outflows of $14,596,000 in 1997. Capital expenditures for
1998 totaled $12,099,000 compared to $15,165,000 in 1997. Proceeds from
previously issued Industrial Revenue Bonds provided reimbursement of
expenditures for plant and equipment at Union Electric Steel totaling
$1,714,000 in 1998 and $7,549,000 in 1997. As of December 31, 1998, future
capital expenditures totaling $12,350,000 have been approved. Funds generated
internally are expected to be sufficient to finance capital expenditure
requirements.
The net cash outflow from investing activities in 1997 included $11,967,000 for
the purchases of F. R. Gross and Atlantic Grinding and Welding. Payments of
$899,000 were made in 1998 in connection with the post-acquisition contingent
earnings arrangement as provided in the F. R. Gross Assets Purchase Agreement.
This amount has been accounted for as goodwill. In addition, the Corporation
disposed of stock and other non-operating investment interests in 1997,
receiving proceeds of $4,907,000.
Cash outflows with respect to financing activities in 1998 reflect an increase
in the quarterly dividend rate to $.09 per share compared to $.06 per share in
1997. The common stock quarterly dividend rate was further increased to $.10
per share starting with the payment made in January 1999. Included in 1997 is
an additional prior year-end dividend of $958,000 or $.10 per share. Cash flows
from financing activities in 1997 include the issuance of taxable Industrial
Revenue Bonds, the proceeds of which were used to refinance a tax-exempt issue
of the same amount.
As a result of all of the above, cash and cash equivalents increased by
$11,412,000 in 1998 and ended the year at $33,108,000.
The Corporation maintains short-term lines of credit and a revolving credit
agreement in excess of the cash needs of its businesses. The total available at
December 31, 1998 was $14,500,000.
With respect to environmental concerns, the Corporation has been named a
potentially responsible party at certain third party sites. The Corporation has
accrued its share of the estimated cost of remedial actions it would likely be
required to contribute. While it is not possible to quantify with certainty the
potential cost of actions regarding environmental matters, particularly any
future remediation and other compliance efforts, in the opinion of management,
compliance with the present environmental protection laws and the potential
liability for all environmental proceedings will not have a material adverse
effect on the financial condition, results of operations or liquidity of the
Corporation (also see Notes to Consolidated Financial Statements--Note 13).
The nature and scope of the Corporation's business brings it into regular
contact with a variety of persons, businesses and government agencies in the
ordinary course of business. Consequently, the Corporation and its subsidiaries
from time to time are named in various legal actions. The Corporation does not
anticipate that its financial condition, results of operations or liquidity
will be materially affected by the costs of known, pending or threatened
litigation (also see Notes to Consolidated Financial Statements--Note 12).
Impact of Year 2000
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to
20
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
define the applicable year. If the Corporation's computer programs or other
equipment with date-sensitive functions are not Year 2000 compliant, they may
recognize a date using "00" as the Year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities.
Generally, each of the Corporation's subsidiaries maintains its own data
processing equipment and software. In order to ensure that their operations
will not be adversely impacted by Year 2000 software failures, project teams
have been formed at each subsidiary to address Year 2000 risks. The project
teams have coordinated the identification of and will coordinate the
implementation of changes to computer hardware and software applications to
ensure availability and integrity of the Corporation's information systems and
the reliability of its operational systems and manufacturing processes.
Each subsidiary has reviewed its information and operational systems and
manufacturing processes to identify those products, services or systems that
are not Year 2000 compliant. As a result of these reviews, it has been
determined that it will be necessary to modify or replace certain information
and operational systems so they will be Year 2000 compliant. These
modifications and replacements are being, and will continue to be, made in
conjunction with the Corporation's overall systems initiatives. It is difficult
to break out the total cost of Year 2000 compliance; however, the combined cost
of such compliance, system upgrades (principally software), and setting up a
stand-alone system at a subsidiary currently integrated into an unrelated
business subsidiary system, is less than $1,000,000. The majority of this cost
is for system upgrade and replacement software, which has been acquired and
capitalized as of December 31, 1998, and is either in operation or in the
process of being implemented. The modifications being handled in-house to
internally developed systems are progressing on schedule. The Corporation
estimates its Year 2000 efforts are sixty percent complete and the entire
project will be completed by mid-1999. Based on available information, the
Corporation does not believe any material exposure to significant business
interruption exists as a result of Year 2000 compliance issues. Accordingly,
the Corporation has not adopted any formal contingency plan in the event its
Year 2000 project is not completed in a timely manner. If the Corporation's
progress deviates from the anticipated timeline, contingency plans will be
developed as deemed necessary at that time.
The Corporation also faces some risk to the extent that customers or suppliers
of products, services and systems purchased by the Corporation do not comply
with Year 2000 requirements. The Corporation has initiated efforts to evaluate
the status of significant suppliers and customers to determine the extent to
which the Corporation is vulnerable to these third parties' failure to
remediate their own Year 2000 issues. However, the Corporation believes the
breadth of its customer base and availability of alternative suppliers will
mitigate the risks associated with third party issues.
The descriptions herein of the elements of the Corporation's Year 2000 effort
are forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Of necessity, this effort is based on estimates and there
can be no assurance that actual results will not materially differ from
expectations.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 addresses costs
incurred in connection with the implementation of internal-use software, and
specifies the circumstances under which such costs should be capitalized or
expensed. The Corporation will be required to adopt SOP 98-1 in the first
quarter of 1999. Adoption of SOP 98-1 will not have a material impact on the
financial position, results of operations or cash flows of the Corporation.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
pronouncement requires all derivative instruments to be reported at fair value
on the balance sheet; depending on the nature of the derivative instrument,
changes in fair value will be recognized either in net income or as an element
of other comprehensive income. SFAS No. 133 is first effective for the
Corporation for the year ending December 31, 2000. The Corporation does not
engage in significant activity with respect to derivative instruments or
hedging activities and management does not anticipate adoption of SFAS No. 133
will have a material impact on the financial position, results of operations or
cash flows of the Corporation.
21
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
1997 compared to 1996
Operations
Net Sales. Net sales of $173,906,000 in 1997 were increased by $11,503,000 or
7.1% compared with sales of $162,403,000 in 1996. Approximately one-half of
this increase is attributed to the 1997 acquisitions of F. R. Gross and
Atlantic Grinding & Welding while overall sales at other operations were higher
by 3.5%. Most of the Corporation's operations experienced higher shipment
levels due primarily to improved economic activity in domestic markets along
with slower growth in markets outside of the U.S. The order backlog at December
31, 1997 of $115,200,000 compares with $112,300,000 at December 31, 1996. The
acquired businesses contributed $5,000,000 to the backlog while the remaining
operations declined slightly. This decline is in part due to a slowing of
forged steel roll orders from customers in Asia and the Pacific Rim, partially
offset by strong bookings for domestic mills and the plastics processing and
machinery industry.
Forged Steel Rolls. In 1997, sales for the Forged Steel Rolls segment were
$85,215,000 compared to $80,550,000 in 1996, an increase of 5.8%. Sales in 1997
benefitted from a record opening backlog of $84,200,000 and an increase in
shipments of 10.6% to domestic customers. Sales to foreign customers increased
at a modest 1.7% compared to the prior year. As noted above, slowing orders
from foreign customers resulted in a decline of the backlog which stood at
$79,600,000 at December 31, 1997.
Air and Liquid Processing. Sales for the Air and Liquid Processing segment were
$59,936,000 in 1997 which represented a slight decline of 2% compared to 1996's
sales of $61,162,000. Softness in the industrial coil market resulted in
decreased sales of heat exchange coils by 8.0% in 1997 following a record year
in 1996. This decline was partially offset by an increase in sales of air
handling systems. The backlog at year end for this segment had improved
slightly to $23,500,000 compared to $22,400,000 a year ago.
Plastics Processing Machinery. Plastics Processing Machinery segment sales were
$28,755,000 in 1997, an increase of $8,064,000 or 39.0% compared to sales of
$20,691,000 in 1996. Approximately three-fourths of the increase is
attributable to the mid-1997 acquisitions of F.R. Gross and Atlantic Grinding
and Welding. Excluding the impact of these acquisitions, sales at New Castle
Industries increased by 10.4% in 1997 due to improved demand from plastic
processors and machine builders following a slowdown in 1996. The backlog for
this segment increased to $12,100,000 at December 31,1997 compared with
$5,700,000 at the beginning of the year due principally to the acquired
companies.
Cost of Products Sold. The cost of products sold, excluding depreciation, in
relationship to net sales was 69.0% in 1997 compared to 70.2% in 1996. A more
profitable sales mix together with increased margins, principally in forged
steel rolls, resulted in an improved ratio of cost of products sold to sales in
1997.
Selling and Administrative Expense. Selling and administrative expenses
increased by $948,000 in 1997 due to the impact of the businesses acquired
during the year. The relationship of selling and administrative expenses to net
sales declined to 14.5% in 1997 compared to 14.9% in 1996.
Depreciation Expense. Depreciation expense of $6,672,000 in 1997 compares with
$6,152,000 in 1996. The increase is attributable to high capital expenditure
levels in both years and the impact of the acquisitions.
Income From Operations. Income from operations of $21,961,000 in 1997 increased
by $3,893,000 or 21.5% compared to $18,068,000 in 1996. Increased earnings from
the Forged Steel Rolls segment were the principal source of the improvement.
Forged Steel Rolls. Earnings for the Forged Steel Rolls segment improved by
$4,891,000 to $14,914,000 in 1997, compared to $10,023,000 in 1996. An
improvement in margins was realized as shipment levels increased due to strong
demand, principally from domestic steel customers.
Air and Liquid Processing. Earnings for the Air and Liquid Processing segment
declined in 1997 to $5,198,000 compared to $6,484,000 in 1996. Earnings were
decreased at the heat exchange coil operation due to the previously noted
shipment decline to industrial customers following a record year in 1996.
Results were also lower for air handling systems as margins were impacted by
severe competitive pressures within this industry.
Plastics Processing Machinery. The Plastics Processing Machinery segment
increased its earnings in 1997 to $1,849,000 compared with $1,561,000 in 1997.
Both improved earnings at New Castle Industries due to higher sales volume and
modest earnings from the mid-1997 acquisitions of F. R. Gross and Atlantic
Grinding and Welding were contributing factors.
22
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Other Income (Expense). Gains on sales of investments of $3,489,000 were
realized in 1997 compared with $519,000 in 1996. Other income--net was $455,000
in 1997 as compared to $184,000 in 1996. The previous year included losses on
disposals of equipment and lower foreign exchange transaction gains.
Income Tax Expense. Income tax expense in 1997 totaled $9,365,000 based on a
36.2% effective tax rate as compared to the $6,380,000 expense in 1996, based
on a 34.0% effective tax rate. The lower 1996 tax rate is attributable to
revisions to the valuation reserve concerning use of tax loss carryforwards as
well as lower foreign taxes.
Net Income. As a result of all of the above, the Corporation had net income of
$16,540,000 in 1997 compared to $12,390,000 in 1996.
Statement of Cash Flow
Net cash flows from operating activities were positive for 1997 at $14,153,000
and compare with positive cash flows of $17,843,000 for 1996. While income from
operations increased by $3,893,000 in 1997, operating cash flows declined
primarily due to an increase in working capital requirements and a full year of
federal income tax payments following utilization of tax loss carryforwards in
mid-1996.
Net cash outflows from investing activities were $14,596,000 in 1997 and
compare with cash outflows of $17,567,000 in 1996. Capital expenditures for
1997 totaled $15,165,000 compared to $9,011,000 in 1996. The major expenditure
in 1997 was for plant and equipment at Union Electric Steel. Unexpended
industrial revenue bond proceeds of $9,767,000 were available to fund a portion
of this capital program and $7,549,000 of these proceeds were drawn down during
1997. The remaining proceeds of $2,218,000 will be available to finance a
portion of Union Electric Steel's capital program, which along with other
approved appropriations carried forward into 1998 total $7,000,000. Funds
generated internally are expected to be sufficient to finance the balance of
the capital expenditures.
The net cash outflow from investing activities in 1997 includes $11,967,000 for
the purchases of F. R. Gross and Atlantic Grinding & Welding. The Corporation
disposed of stock and other investment interests, including its stock holdings
in Northwestern Steel and Wire Company, receiving proceeds of $4,907,000 in
1997 and $1,102,000 in 1996.
Cash outflows with respect to financing activities in 1997 reflect an increase
in the quarterly dividend rate to $.06 per share compared to $.025 per share in
1996, and an additional prior year-end dividend of $960,000 in 1997 or $.10 per
share, as compared to $.05 per share paid in 1996. The regular quarterly
dividend rate was increased from $.06 per share to $.09 per share effective
with the January 31, 1998 payment. Cash flows from financing activities in 1997
include the issuance of taxable Industrial Revenue Bonds, the proceeds of which
were used to refinance a tax-exempt issue of the same amount. Cash flows in
1996 include receipt of $11,236,000 from the issuance of tax-exempt Industrial
Revenue Bonds.
As a result of all of the above, cash and cash equivalents decreased by
$3,815,000 in 1997 and ended the year at $21,696,000.
- --------------------------------------------------------------------------------
Common Stock Information
The shares of common stock of Ampco-Pittsburgh Corporation are traded on the
New York Stock Exchange and on the Philadelphia Stock Exchange (symbol AP).
Cash dividends have been paid on common shares in every year since 1965.
<TABLE>
<CAPTION>
1998 1997
----------------------------------- ------------------------------------
Dividends Dividends
Quarter High Low Declared High Low Declared
- ------- ---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
First $19 5/8 $14 1/2 $.09 $13 7/8 $11 1/8 $.06
Second 18 5/8 14 5/8 .09 15 1/8 11 1/2 .06
Third 16 1/4 13 3/8 .09 19 5/16 14 5/8 .06
Fourth 14 1/2 9 7/8 .10 20 5/8 17 1/2 .09
Year 19 5/8 9 7/8 .37 20 5/8 11 1/8 .27
</TABLE>
23
<PAGE>
Five-Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales............... $187,853,060 $173,906,315 $162,402,805 $143,785,139 $113,836,181
Income from operations.. 23,202,473 21,960,984 18,068,058 14,176,001 8,359,705
Income from continuing
operations............. 15,666,562 16,539,985 12,390,488 9,050,286 6,322,477
Discontinued operations. -- -- -- -- 1,728,251
Net income.............. 15,666,562 16,539,985 12,390,488 9,050,286 8,050,728
Total assets............ 211,811,130 196,845,161 188,170,344 171,423,690 151,912,087
Shareholders' equity.... 142,298,612 129,415,787 119,667,023 112,135,049 102,970,884
Basic and diluted
earnings per share:
Income from continuing
operations............. 1.64 1.73 1.29 .94 .66
Discontinued
operations............. -- -- -- -- .18
Net income............. 1.64 1.73 1.29 .94 .84
Cash dividends
declared............... .37 .27 .235 .15 .10
Shareholders' equity... 14.86 13.51 12.49 11.71 10.75
Market price at year
end.................... $10.875 $19.5625 $12.00 $10.75 $9.875
Weighted average shares
outstanding and at year
end.................... 9,577,621 9,577,621 9,577,621 9,577,621 9,577,621
Number of shareholders.. 1,226 1,312 1,418 1,532 1,654
Number of employees..... 1,350 1,340 1,225 1,204 955
</TABLE>
Report of Independent Accountants
PricewaterhouseCoopers LLP [New Logo To Come]
To the Board of Directors
and Shareholders of
Ampco-Pittsburgh Corporation
In our opinion, the consolidated financial statements appearing on pages 8
through 18 herein present fairly, in all material respects, the financial
position of Ampco-Pittsburgh Corporation and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
[New Signature Cut To Come]
600 Grant Street
Pittsburgh, Pennsylvania
January 27, 1999
24
<PAGE>
Directors & Officers
Louis Berkman (1)(3)
Director
Chairman of the Board
President, The Louis Berkman Company
Robert A. Paul (1)
Director
President and Chief Executive Officer
Ernst G. Siddons (1)
Director
Executive Vice President and
Chief Operating Officer
Leonard M. Carroll (1)(2)(3)(4)
Director
Managing Director, Seneca Capital
Management, Inc.
William D. Eberie (2)(3)(4)
Director
Private Investor
Laurence E. Paul
Director
Senior Vice President
Donaldson, Lufkin & Jenrette
Carl H. Pforzheimer, III (2)(3)(4)
Director
Managing Partner, Carl H. Pforzheimer & Co.
Terrence W. Kenny
Group Vice President
Robert J. Reilly
Vice President Finance and
Treasurer
Robert F. Schultz
Vice President Industrial Relations and
Senior Counsel
Rose Hoover
Corporate Secretary
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Salary Committee
(4) Member of the Stock Option Committee
Operating Companies
Forged Steel Rolls
------------------
Union Electric Steel Corporation
Carnegie, Pennsylvania
Robert G. Carothers, President
Plastics Processing Machinery
-----------------------------
New Castle Industries, Inc.
New Castle, Pennsylvania
James D. Frankland, President
F. R. Gross Company
Stow, Ohio
David C. Bastow, President
Air and Liquid Processing
-------------------------
Aerofin Corporation
Lynchburg, Virginia
David L. Corell, President
Buffalo Air Handling Company
Amherst, Virginia
William R. Phelps, President
Buffalo Pumps, Inc.
North Tonawanda, New York
Charles R. Kistner, President
Annual Meeting
The Annual Meeting of the
Shareholders will be held at:
The USX Tower
33rd Floor Conference Room
Pittsburgh, Pennsylvania
Thursday, April 27, 1999
at 10:00 a.m..
Transfer Agent
ChaseMellon Shareholder Services
Commerce Court, 3rd Floor
4 Station Square
Pittsburgh, Pennsylvania 15219
www.chasemellon.com
10K Report
Form 10-K is available without
charge to shareholders upon
written request to:
Corporate Secretary
Ampco-Pittsburgh Corporation
600 Grant Street
Pittsburgh, Pennsylvania
15219-2700
<PAGE>
AMPCO-PITTSBURGH CORPORATION
Pittsburgh, PA 15219
<PAGE>
Exhibit 21
SUBSIDIARIES
------------
<TABLE>
<CAPTION>
Jurisdiction of
Name Ownership Incorporation
- ---- --------- -------------
<S> <C> <C>
1027226 Ontario Ltd. 100% owned by
Aerofin Corporation Canada
AP Venture Corp. III 100% owned by
Ampco-Pittsburgh Corporation Delaware
Aerofin Corporation 100% owned by
Ampco-Pittsburgh Securities V
Corporation New York
Ampco NCII Sub, Inc. 100% owned by
New Castle Industries, Inc. Delaware
Ampco-Pittsburgh Securities 100% owned by
III Corporation Ampco-Pittsburgh Corporation Delaware
Ampco-Pittsburgh Securities 100% owned by
V Corporation Ampco-Pittsburgh Corporation Delaware
Ampco UES Sub, Inc. 100% owned by
Union Electric Steel Corporation Delaware
Atlantic Grinding &
Welding, Inc. 100% owned by
Ampco NCII Sub, Inc. Pennsylvania
Bimex Industries, Inc. 100% owned by
Ampco NCII Sub, Inc. Delaware
Buffalo Air Handling Company 100% owned by
Ampco-Pittsburgh Corporation Delaware
Buffalo Pumps, Inc. 100% owned by
Ampco-Pittsburgh Corporation Delaware
F. R. Gross Co., Inc. 100% owned by
Ampco-Pittsburgh Securities
V Corporation Pennsylvania
New Castle Industries, Inc. 100% owned by
Ampco UES Sub, Inc. Pennsylvania
</TABLE>
<PAGE>
Exhibit 21 (Cont')
SUBSIDIARIES (Cont')
--------------------
<TABLE>
<CAPTION>
Jurisdiction of
Name Ownership Incorporation
- ---- --------- -------------
<S> <C> <C>
Union Electric Steel Corporation 100% owned by
Ampco-Pittsburgh Securities
V Corporation Pennsylvania
Union Electric Steel N.V. 100% owned by 1027226
Ontario Limited Belgium
</TABLE>
The financial statements of all subsidiaries have been consolidated with
those of the Corporation. Names of other subsidiaries have been omitted
because, considered in the aggregate as a single subsidiary, they would not
constitute a significant subsidiary.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,107,815
<SECURITIES> 0
<RECEIVABLES> 35,709,009
<ALLOWANCES> 691,090
<INVENTORY> 35,492,440
<CURRENT-ASSETS> 107,694,513
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0
0
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</TABLE>
