Ampco Pittsburgh Corp: Form 10-Q for the period ended Sep 30, 2023

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(in thousands, except per share amounts)

Forward-Looking Statements

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

• economic downturns, cyclical demand for our products and insufficient demand for our products,
• excess global capacity in the steel industry,
• fluctuations in the value of the U.S. dollar relative to other currencies,
• increases in commodity prices or insufficient hedging against increases in commodity prices, reductions in electricity and natural gas supply or shortages of key production materials for us or our customers,
• limitations in availability of capital to fund our strategic plan,
• inability to maintain adequate liquidity to meet our operating cash flow requirements, repay maturing debt and meet other financial obligations,
• inability to obtain necessary capital or financing on satisfactory terms to acquire capital expenditures necessary to support our growth strategy,
• inoperability of certain equipment on which we rely and/or our inability to execute our capital plan,
• impairment of our long-lived assets as a result of any of these, or a combination of these, risks and uncertainties,
• liability of our subsidiaries for claims alleging personal injury from exposure to asbestos-containing components historically used in certain products of our subsidiaries,
• changes in the existing regulatory environment,
• inability to successfully restructure our operations and/or invest in operations yielding the best long-term value to our shareholders,
• consequences of global pandemics and international conflicts,
• work stoppage or another industrial action on the part of any of our unions,
• inability to satisfy the continued listing requirements of the New York Stock Exchange or the NYSE American Exchange,
• potential attacks on information technology infrastructure and other cyber-based business disruptions,
• failure to maintain an effective system of internal control, and
• those discussed more fully elsewhere in this report and in documents filed with the Securities and Exchange Commission by us, particularly in Item 1A, Risk Factors, in Part I of our latest Annual Report on Form 10-K for the year ended December 31, 2022, and as supplemented by the risks described herein and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023.

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

The Business

The Corporation manufactures and sells highly engineered, high-performance specialty metal products and customized equipment utilized by industry throughout the world. It operates in two business segments – the *Forged and Cast Engineered Products (“*FCEP”) segment and the *Air and Liquid Processing (“*ALP”) segment. This segment presentation is consistent with how the Corporation’s chief operating decision-maker evaluates financial performance and makes resource allocation and strategic decisions about the business.

The FCEP segment produces forged hardened steel rolls, cast rolls and forged engineered products (“FEP”). Forged hardened steel rolls are used primarily in cold rolling mills by producers of steel, aluminum and other metals. Cast rolls, which are produced in a variety of iron and steel qualities, are used mainly in hot and cold strip mills, medium/heavy section mills and plate mills. FEP principally are sold to customers in the steel distribution market, oil and gas industry and the aluminum and plastic extrusion industries. The segment has operations in the United States, England, Sweden, and Slovenia, and an equity interest in three joint venture companies in China. Collectively, the segment primarily competes with European, Asian and North and South American companies in both domestic and foreign markets and distributes a significant portion of its products through sales offices located throughout the world.

The ALP segment includes Aerofin, Buffalo Air Handling and Buffalo Pumps, all divisions of Air & Liquid Systems Corporation (“Air & Liquid”), a wholly owned subsidiary of the Corporation. Aerofin produces custom-engineered finned tube heat exchange coils and related heat transfer products for a variety of industries including original equipment manufacturers and commercial, nuclear power generation and industrial manufacturing. Buffalo Air Handling produces large custom-designed air handling systems for institutional (e.g., hospital, university), pharmaceutical and general industrial building markets. Buffalo Pumps manufactures centrifugal pumps for the fossil-fueled power generation, marine defense and industrial refrigeration industries. The segment has operations in Virginia and New York with headquarters in Carnegie, Pennsylvania. The segment distributes a significant portion of its products through an independent group of sales offices located throughout the United States and Canada.

Executive Overview

While the Corporation is currently operating at normal levels, it continues to be challenged by lingering global economic effects of a post-pandemic environment and repercussions from the Russia-Ukraine conflict, among other events, including:

• Periodic disruptions to the global supply chain for the Corporation, its vendors and its customers,
• Global inflationary pressures,
• Depressed business activity in Europe and Asia (specifically China), and
• Global economic uncertainty.

The Corporation is actively monitoring, and will continue to actively monitor, the geopolitical and economic consequence of these conditions and any other developments relevant to the Corporation's business including the potential impact on its operations, financial condition, liquidity, suppliers, industry, and workforce.

For the FCEP segment, the forged roll market in North America has improved, driven by U.S. domestic demand, and better pricing. However, expectations are for flat to declining demand during the first half of 2024 with recovery in the second half of 2024. Improved pricing and increased market share will help minimize the impact of this decline. The cast roll market has softened, which is expected to continue for the remainder of 2023 and into 2024, as Europe experiences economic uncertainty, the entry of low-priced product from China and relatively high cast roll inventories. The FEP market continues to be challenged by increased imports and high 2022 year-end inventory levels at bar distributors. In February 2023, Union Electric Steel Corporation, a wholly owned subsidiary of the Corporation, (“UES”) announced a price increase on all new quotations and orders for forged and cast roll products. The primary focus for this segment is to maintain a strong position in the roll market; continue diversification and development of FEP for use in other industries; improve operational efficiency at its facilities; and complete its capital equipment investment to upgrade existing equipment with a goal of reducing operating costs, improving reliability and increasing FEP capacity and capabilities.

The ALP businesses are benefiting from steady demand and increased market share but are facing increasing production and transportation costs and supply chain issues. The segment has been implementing price increases for certain of its products to help mitigate these inflationary effects. The focus for this segment is to grow revenues, strengthen engineering and manufacturing capabilities to keep pace with growth opportunities and continue to improve its sales distribution network.

Selected Financial Information

Net sales approximated $102,218 and $99,647 for the three months ended September 30, 2023 and 2022, respectively, and $314,232 and $296,655 for the nine months ended September 30, 2023 and 2022, respectively. The increase is attributable to higher sales for the ALP segment. A discussion of net sales for the Corporation’s two segments is included below.

Income from operations approximated $1,722 and $203 for the three months ended September 30, 2023 and 2022, respectively, and $7,003 and $1,834 for the nine months ended September 30, 2023 and 2022, respectively. Included in operating income for the three and nine months ended September 30, 2023 is a credit of approximately $191 for proceeds received from an insolvent asbestos-related insurance carrier (the “Asbestos-Related Credit”) and, for the nine months ended September 30, 2023, a credit of approximately $1,874 for the reimbursement of past energy costs at one of the Corporation's foreign operations by its local government (the “Foreign Energy Credit”). Included in operating income for the nine months ended September 30, 2022 is a charge of approximately $664 for excess COVID-19 subsidies received in 2020 and returned in 2022 (the “Refund of Excess COVID-19 Subsidies”) and a benefit of approximately $1,431 resulting from a change in how certain employees earn certain benefits (the “Change in Employee Benefit Policy”). A discussion of income from operations for the Corporation’s two segments is included below.

Backlog equaled $403,182 as of September 30, 2023 versus $369,018 as of December 31, 2022. Backlog represents the accumulation of firm orders on hand which: (i) are supported by evidence of a contractual arrangement, (ii) include a fixed and determinable sales price, (iii) have reasonably assured collectability, and (iv) generally are expected to ship within two years from the backlog reporting date. Backlog at a certain date may not be a direct measure of future revenue for a particular order because price increases, negotiated subsequently to the original order, are not included in backlog until the updated contract is received from the customer and certain surcharges are not determinable until the order is completed and ready for shipment to the customer. Approximately 69% of the backlog is expected to be released after 2023. A discussion of backlog by segment is included below.

Costs of products sold, excluding depreciation and amortization, as a percentage of net sales, for the three months ended September 30, 2023 and 2022 approximated 82.7% and 84.4%, respectively, and for the nine months ended September 30, 2023 and 2022 approximated 81.6% and 84.2%, respectively. While gross margins for the ALP segment for each of the current year periods were less when compared to the same periods of the prior year, primarily as a result of higher costs and an unfavorable product mix, gross margins for the FCEP segment continue to improve primarily as a result of higher pricing. Costs of products sold, excluding depreciation and amortization, for the nine months ended September 30, 2023 include the Foreign Energy Credit. Costs of products sold, excluding depreciation and amortization, for the nine months ended September 30, 2022 included the Refund of Excess COVID-19 Subsidies and approximately $411 of the benefit from the Change in Employee Benefit Policy.

Selling and administrative expenses approximated $11,821 and $11,089 for the three months ended September 30, 2023 and 2022, respectively, and $38,101 and $31,941 for the nine months ended September 30, 2023 and 2022, respectively. Selling and administrative expenses for the 2023 periods include higher employee-related costs and a higher inflationary effect on costs whereas selling and administrative expenses for the first nine months of 2022 include approximately $1,020 of the benefit from the Change in Employee Benefit Policy.

Credit for asbestos litigation of $191 in 2023 represents a credit for proceeds received from an insolvent asbestos-related insurance carrier.

Investment-related income relates primary to dividends from one of the Corporation's Chinese joint ventures. In the third quarter of 2023 and 2022, the Chinese joint venture declared dividends totaling $92 and $504 for the Corporation, respectively.

Interest expense approximated $2,468 and $1,486 for the three months ended September 30, 2023 and 2022, respectively, and $6,784 and $3,684 for the nine months ended September 30, 2023 and 2022, respectively. The increase for the current year periods when compared to the same periods of the prior year is principally due to:

• Interest on the sale and leaseback financing transactions and the equipment financing arrangement completed during the second half of 2022,
• Higher average interest rates for 2023 versus 2022, and
• Higher average borrowings outstanding under the revolving credit facility in 2023 versus 2022.

Other income – net is comprised of the following:

Other income – net fluctuated period over period due to:

• Lower pension and other postretirement income due to higher interest costs on employee benefit obligations as a result of higher discount rates;
• Changes in foreign exchange gains and losses, and
• Changes in unrealized gains and losses in the market value of the Rabbi trust investments corresponding to the volatility in the financial markets.

Income tax provision for each of the periods includes income taxes associated with the Corporation’s profitable operations. An income tax benefit is not able to be recognized on losses of certain of the Corporation’s entities since it is “more likely than not” the asset will not be realized. Accordingly, changes in the income tax provision for each of the periods include the effects of changes in the pre-tax income of the Corporation’s profitable operations in each jurisdiction. In late 2022, as a result of significant increases in energy costs for the U.K. resulting from the Russia-Ukraine conflict, the Corporation moved certain of its cast roll production from the U.K. to Sweden. Accordingly, profitability of the Corporation's U.K. operations has declined and profitability of the Corporation's Sweden operations has increased. While the associated tax expense for the Corporation's U.K. operations also has declined, there is no corresponding increase in tax expense for the Sweden operations given net operating loss carryforwards, fully offset by valuation allowances.

Valuation allowances are recorded against the majority of the Corporation's deferred income tax assets. The Corporation will maintain the valuation allowances until there is sufficient evidence to support the reversal of all or some portion of the allowances. Given the Corporation's current earnings and anticipated future earnings in Sweden, the Corporation believes there is a reasonable possibility within the next 12 months, sufficient positive evidence may become available to allow the Corporation to conclude some portion of the valuation allowance will no longer be needed. Release of any portion of the valuation allowance would result in the recognition of deferred income tax assets on the Corporation's consolidated balance sheet and a decrease to the Corporation's income tax expense in the period the release is recorded. The exact timing and the amount of the valuation allowance released are subject to, among many items, the level of profitability achieved. Once the valuation allowance is completely reversed, a tax provision would be recognized on future earnings.

Conversely, given the Corporation's current losses in the U.K. and anticipated changes to the net deferred tax position in the U.K., the Corporation believes there is a reasonable possibility within the next 12 months, sufficient negative evidence may become available to conclude a valuation allowance is warranted on the net deferred income tax assets of the Corporation's U.K. operations. Creation of a new valuation allowance would result in the derecognition of deferred income tax assets on the Corporation's consolidated balance sheet and an increase to the Corporation's income tax expense in the period the valuation allowance is established. The exact timing and the amount of the valuation allowance established are subject to, among many items, the level of profitability achieved.

The income tax provision for the three and nine months ended September 30, 2022 includes expense of $316 resulting from the revaluation of the deferred income tax assets of the ALP segment following new legislation enacted in 2022, which will decrease the Pennsylvania state income tax rate from 9.99% to 4.99% by 2031.

Net income attributable to Ampco-Pittsburgh and net income per common share attributable to Ampco-Pittsburgh equaled $809 and $0.04 per common share and $1,123 and $0.06 per common share for the three months ended September 30, 2023 and 2022, respectively, and $1,908 and $0.10 per common share and $3,879 and $0.20 per common share for the nine months ended September 30, 2023 and 2022, respectively.

Net income attributable to Ampco-Pittsburgh and net income per common share attributable to Ampco-Pittsburgh for the three months ended September 30, 2023 include an after-tax benefit of $185 or $0.01 per common share associated with the Asbestos-Related Credit.

Net income attributable to Ampco-Pittsburgh and net income per common share attributable to Ampco-Pittsburgh for the nine months ended September 30, 2023 include an after-tax benefit of $2,059 or $0.11 per common share associated with the Asbestos-Related Credit and the Foreign Energy Credit.

Net income attributable to Ampco-Pittsburgh and net income per common share attributable to Ampco-Pittsburgh for the three months ended September 30, 2022 include expense of $316 or $0.02 per common share for the revaluation of certain deferred income tax assets of the ALP segment following new legislation enacted in 2022, which will decrease the Pennsylvania state income tax rate.

Net income attributable to Ampco-Pittsburgh and net income per common share attributable to Ampco-Pittsburgh for the nine months ended September 30, 2022 include a net benefit of $427 or $0.02 per common share for the after-tax benefit from the Change in Employee Benefit Policy of $1,407 offset by the after-tax charge associated with the Refund of Excess COVID-19 Subsidies of $664 and the revaluation of certain deferred income tax assets of the ALP segment associated with the change in the Pennsylvania state income tax rate of $316.

Net Sales and Operating Results by Segment

Forged and Cast Engineered Products

Net sales for the three and nine months ended September 30, 2023, when compared to the three and nine months ended September 30, 2022, were impacted by:

• Lower volume of FEP shipments, which decreased net sales by approximately $4,300 and $22,500 for the three and nine months ended September 30, 2023, respectively;
• Lower volume of cast roll shipments, which decreased net sales by approximately $3,800 and $4,000 for the three and nine months ended September 30, 2023, respectively;
• Lower variable-index surcharges passed through to customers as a result of fluctuation in the price of raw material, energy and transportation, net of improved pricing, which decreased net sales by approximately $3,100 for the three months ended September 30, 2023; however, improved pricing, net of lower variable-index surcharges, increased net sales by approximately $9,400 for the nine months ended September 30, 2023;
• Higher volume of forged roll shipments, which increased net sales by approximately $8,900 and $19,000 for the three and nine months ended September 30, 2023, respectively; and
• Changes in exchange rates used to translate the net sales of the segment’s foreign subsidiaries into the U.S. dollar, which increased net sales by approximately $600 for the three months ended September 30, 2023 and decreased net sales by approximately $3,700 for the nine months ended September 30, 2023.

Income from operations for the three and nine months ended September 30, 2023, when compared to the same periods of the prior year, were impacted by:

• Improved pricing, net of lower variable-index surcharges and fluctuations in manufacturing costs, which increased operating results by approximately $1,400 and $7,900 for the three and nine months ended September 30, 2023, respectively;
• Net benefit resulting from the Foreign Energy Credit in 2023 versus the Refund of Excess COVID-19 Subsidies and the Change in Employee Benefit Policy in 2022, which improved operating income by approximately $2,000 for the nine months ended September 30, 2023, respectively;
• Lower absorption resulting from the temporary and periodic idling of certain equipment to align production with customer demand, which reduced operating results by approximately $600 and $1,300 for the three and nine months ended September 30, 2023, respectively;
• Selling and administrative expenses, principally due to changes in employee-related costs, increased operating results by approximately $600 for the three months ended September 30, 2023, but decreased operating results by approximately $1,300 for the nine months ended September 30, 2023; and
• Lower net volume of shipments, which reduced operating results by approximately $200 and $1,900 for the three and nine months ended September 30, 2023, respectively.

Changes in exchange rates did not have a significant impact on operating results for the three and nine months ended September 30, 2023 when compared to the three and nine months ended September 30, 2022.

Backlog increased at September 30, 2023 from December 31, 2022 by $8,231. The backlog for mill roll orders at September 30, 2023 increased from December 31, 2022 by approximately $18,100 with backlog for forged rolls increasing, driven by U.S. domestic demand and better pricing, and backlog for cast rolls decreasing due to economic uncertainty across Europe, the entry of low-priced product from China and relatively high cast roll inventories. The backlog for FEP decreased at September 30, 2023 from December 31, 2022 by approximately $6,400 due to softening of the energy and steel distribution markets and increased imports. Lower foreign exchange rates used to translate the backlog of the Corporation’s foreign subsidies into the U.S. dollar decreased backlog at September 30, 2023 when compared to backlog at December 31, 2022 by approximately $3,400. At September 30, 2023, approximately 64% of backlog is expected to ship after 2023.

Air and Liquid Processing

28

Net sales for the three and nine months ended September 30, 2023 improved over the comparable prior year periods by approximately $4,500 and $19,400, respectively. More specifically,

• Sales of heat exchange coils benefited from a higher volume of shipments to commercial customers and, for the nine months ended September 30, 2023, to industrial customers.
• Sales of air handling systems improved due to increased order intake.
• Sales of centrifugal pumps increased from a higher volume of shipments to commercial customers and U.S. Navy-related customers.

Operating income for the three and nine months ended September 30, 2023 improved when compared to the three and nine months ended September 30, 2022 principally due to:

• Higher volume of sales, net of higher costs and an unfavorable product mix, which improved operating results by approximately $700 and $3,400 for the three and nine months ended September 30, 2023, respectively; and
• The Asbestos-Related Credit of $191 for the three and nine months ended September 30, 2023; offset by
• Higher selling and administrative costs of approximately $300 and $1,700 for the three and nine months ended September 30, 2023, respectively, primarily as a result of higher commissions and employee-related costs including costs associated with expansion of the segment’s sales distribution network; and
• Recognition of a $680 benefit to operating income for the nine months ended September 30, 2022 resulting from the Change in Employee Benefit Policy.

Backlog at September 30, 2023 increased from December 31, 2022 by $25,933 with backlog for each product line improving. At September 30, 2023, approximately 78% of backlog is expected to ship after 2023.

Non-GAAP Financial Measures

The Corporation presents non-GAAP adjusted income from operations, which is calculated as income from operations excluding the Asbestos-Related Credit, the Foreign Energy Credit, the Refund of Excess COVID-19 Subsidies and the Change in Employee Benefit Policy. This non-GAAP financial measure is not based on any standardized methodology prescribed by accounting principles generally accepted in the United States of America (“GAAP”) and may not be comparable to similarly titled measures presented by other companies. Non-GAAP financial measures should be viewed as supplements to, and not substitutes for, the Corporation's presentation of the applicable most directly comparable GAAP financial measures.

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

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

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

The following is a reconciliation of income from operations to non-GAAP adjusted income from operations for the three and nine months ended September 30, 2023 and 2022, respectively:

(1) Represents proceeds received from an insolvent asbestos-related insurance carrier.

(2) Represents reimbursement of past energy costs at one of the Corporation's foreign operations by its local government.

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

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

Liquidity and Capital Resources

Net cash flows used in operating activities equaled $(10,327) and $(20,405) for the nine months ended September 30, 2023 and 2022, respectively, and principally is attributable to the Corporation's investment in working capital. The change in net cash flows used in operating activities for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 primarily is due to lower investment in working capital. Net cash flows used in operating activities for 2023 include proceeds from the Asbestos-Related Credit and the Foreign Energy Credit. Net cash flows used in operating activities for 2022 include repayment of the Refund of Excess COVID-19 Subsidies.

Net cash flows used in investing activities equaled $(13,515) and $(12,516) for the nine months ended September 30, 2023 and 2022, respectively, and primarily represented capital expenditures for the FCEP segment related to the $26,000 capital program undertaken to upgrade existing equipment at certain of its locations. The capital program is anticipated to be substantially completed by December 31, 2023. At September 30, 2023, commitments for future capital expenditures, including those associated with the FCEP capital program, approximated $7,300 which is expected to be spent over the next 12-15 months.

Net cash flows provided by financing activities equaled $21,323 and $35,908 for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $14,585 primarily due to:

• Lower net borrowings from the Corporation’s revolving credit facility of $3,205;
• Lower proceeds from the sale and leaseback financing arrangements of $15,500; and
• Lower net proceeds from related-party borrowings of $1,522; offset by
• Higher proceeds from the equipment financing facility of $2,808 and
• Proceeds from the Disbursement Agreement for leasehold improvements between UES and Store Capital Acquisitions, LLC of $2,500.

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

As a result of the above, cash and cash equivalents decreased by $2,665 during 2023 and ended the period at $6,070 in comparison to $8,735 at December 31, 2022. The majority of the Corporation’s cash and cash equivalents is held by its foreign operations. Domestic customer remittances are used to pay down borrowings under the Corporation’s revolving credit facility daily, resulting in minimal cash maintained by the Corporation’s domestic operations. Cash held by the Corporation’s foreign operations is considered to be permanently re-invested; accordingly, a provision for estimated local and withholding tax has not been made. If the Corporation were to remit any foreign earnings to it or any of its U.S. entities, the estimated tax impact would be insignificant.

Funds on hand, funds generated from future operations and availability under the Corporation’s revolving credit facility are expected to be sufficient to finance the Corporation’s operational requirements and debt service costs. The maturity date for the revolving credit facility is June 29, 2026 and, subject to the other terms and conditions of the revolving credit agreement, will become due on that date. As of September 30, 2023, remaining availability under the revolving credit facility approximated $21,724, net of standard availability reserves.

Availability under the Corporation’s equipment financing facility is expected to be sufficient to finance the remaining expenditures associated with the capital program for the FCEP segment, in the time frame currently anticipated. At September 30, 2023, availability under the equipment financing facility approximated $6,790. Each borrowing on the equipment financing facility will constitute a secured loan transaction (each, a “Term Loan”). Each Term Loan will convert to a Term Note on the earlier of (i) the date in which the associated equipment is placed in service or (ii) December 29, 2023. Each Term Note will have a term of 84 months, with payment commencing on the date of the Term Note. Since a significant portion of the Corporation's debt includes variable interest, increases in the underlying benchmark rates will increase the Corporation's debt service costs.

Valuation allowances are recorded against the majority of the Corporation's deferred income tax assets. Release of any portion of the valuation allowance would result in the recognition of deferred income tax assets on the Corporation's consolidated balance sheet and a decrease to the Corporation's income tax expense in the period the release is recorded but would not impact the liquidity of the Corporation. Similarly, any new valuation allowance against the Corporation's deferred income tax assets would result in the derecognition of deferred income tax assets on the Corporation's consolidated balance sheet and an increase to the Corporation's income tax expense in the period the valuation allowance is created but would not impact the Corporation's liquidity.

Litigation and Environmental Matters

See Note 16 and Note 17 to the condensed consolidated financial statements.

Critical Accounting Pronouncements

The Corporation’s critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2022, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

Disclosure controls and procedures. An evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision, and with the participation, of management, including the principal executive officer and principal financial officer. Disclosure controls and procedures are defined under Securities and Exchange Commission (“SEC”) rules as controls and other procedures designed to ensure information required to be disclosed by a company in the reports it files under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by an issuer in the reports it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Corporation’s management, including the principal executive officer and principal financial officer, has concluded, as of September 30, 2023, the Corporation’s disclosure controls and procedures were not effective due to material weaknesses (as defined in SEC Rule 12b-2) in its internal control over financial reporting.

Previously reported material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, management determined there were material weaknesses related to (i) the accounting for the claims asserted alleging personal injury from exposure to asbestos-containing components historically used in some products manufactured by predecessors of Air & Liquid Systems Corporation (“Asbestos Liability”) and (ii) management review control activities related to the tax accounting for a non-routine transaction. Although substantial progress has been made in the Corporation’s remediation plan (discussed below), the Corporation’s management has concluded these material weaknesses continue to exist as of September 30, 2023.

Management’s remediation plans and progress. Asbestos Liability: The material weakness related to the Asbestos Liability is a result of the aggregation of the following control deficiencies: insufficient design and business process controls surrounding a new asbestos claims management database, insufficient testing of data migration from the previous asbestos claims management database to the new asbestos claims management database, and inadequate information technology (“IT”) general controls which ensure the integrity of the data and processes that the new asbestos claims management system supports. The Corporation has initiated efforts to remediate these items. It has dedicated a full-time employee to manage the accounting for asbestos claims and costs associated with the Asbestos Liability, with oversight provided by the Corporation’s Chief Financial Officer (“CFO”). The asbestos claims and costs associated with the Asbestos Liability will continue to be managed using the new third-party asbestos claims management database. The third-party service provider has engaged an independent consulting firm to provide an appropriate Service Organization Control (“SOC”) report, which will give assurance over the functioning of the third-party system and the sufficiency of its internal controls. The SOC report will be obtained and reviewed by the CFO ensuring the SOC report is appropriate, no material deficiencies exist to cause the inability to rely on the third-party system, and any additional management controls are designed and assessed for operating effectiveness. The Corporation has established limits of authority for its employees utilizing the new third-party asbestos claims management database, which provides an appropriate segregation of duties. Annually, user access to, and user rights within, the new third-party asbestos claims management database will be independently reviewed and approved.

Non-routine Transaction: The material weakness related to management review control activities was attributable to the tax accounting for a non-routine transaction in 2022. Specifically, management determined its management review control activities did not operate at a sufficient level of precision to detect errors related to the tax accounting for the non-routine transaction. The Corporation has initiated efforts to remediate this item. It has enhanced its management review control activities when assessing the propriety of the accounting for the income tax consequences of a non-routine transaction including engaging external consultants, under the Corporation’s supervision, to provide support and assist the Corporation in its evaluation of such transactions. In addition, the Corporation has enhanced its management review controls over income taxes on an interim basis to include specific activities at a more precise level to assess the impacts of non-routine transactions.

Despite management’s remediation plans and progress related to the Asbestos Liability and the non-routine transaction, the material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, these controls are operating effectively.

Changes in internal control. Except for the remediation measures discussed above, there has been no other change in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

In addition to the risks set forth below and elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the “Risk Factors” included under Item 1A. to Part I of our Annual Report on Form 10-K for the year ended December 31, 2022. You should be aware that these risk factors and other information may not describe every risk facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could adversely affect our business, financial condition and results of operations.

Impact on financial institutions may affect our access, or our customers’ access to, capital resources.

In the first quarter of 2023, several financial institutions failed or required outside liquidity support. The impact of this situation could place additional stress on other financial institutions, which may limit our, or our customers', access to short-term financing or result in higher interest rates. Our inability to access, or our customers' inability to access, short-term financing at competitive rates may adversely affect our liquidity, financial condition or results of operations.

We may not be able to scale our operational capacity in line with demand for our products.

Demand for our products, particularly in our Air & Liquid Processing segment, may grow at a pace that exceeds our operational capacity, including our manufacturing capabilities. We may be required to expand our facilities or contract with third parties to meet such growth, which we may not be able to do in a timely manner, if at all. If we are required to expand our facilities to meet growth in client demand, we may not have access to sufficient capital resources to expand in a timely manner, if at all. As a result, we may not be able to maximize sales growth and, therefore, could lose opportunities to produce additional revenue.

Items 2-4 None.