NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
1.
FINANCIAL STATEMENTS
Basis of
Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
However, actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The year-end Condensed
Consolidated Balance Sheet as of December 31, 2015 was derived from audited financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2015. In this Quarterly Report on Form 10-Q, references to we, us, our, and the Company refer collectively to L.B. Foster
Company and its consolidated subsidiaries.
Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from
Contracts with Customers (Topic 606), (ASU 2014-09), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. ASU 2014-09 is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU
2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating its implementation approach and assessing the impact of ASU 2014-09 on our
financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new
accounting requirements include the accounting for, presentation of, and classification of leases. The guidance will result in most leases being capitalized as a right of use asset with a related liability on our balance sheets. The requirements of
the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is in the process of analyzing the impact of ASU 2016-02 on our financial position and
results of operations.
In March 2016, the FASB issued ASU No. 2016-09, CompensationStock Compensation (Topic 718).
This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also
clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The
Company is in the process of analyzing the impact of ASU 2016-09 on our financial position and results of operations.
2.
BUSINESS
SEGMENTS
The Company is a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy, and
utility markets. The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is
produced internally and is subject to evaluation by the Companys chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon its respective contribution to the Companys consolidated results
based upon segment profit.
8
The following table illustrates revenues and profits (losses) from operations of the Company by segment for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2016
|
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
Rail Products and Services
|
|
$
|
67,503
|
|
|
$
|
(25,168
|
)
|
|
$
|
131,795
|
|
|
$
|
(24,427
|
)
|
Construction Products
|
|
|
40,348
|
|
|
|
3,944
|
|
|
|
72,228
|
|
|
|
4,392
|
|
Tubular and Energy Services
|
|
|
28,143
|
|
|
|
(102,983
|
)
|
|
|
58,281
|
|
|
|
(104,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
135,994
|
|
|
$
|
(124,207
|
)
|
|
$
|
262,304
|
|
|
$
|
(124,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2015
|
|
|
Six Months Ended
June 30, 2015
|
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
Rail Products and Services
|
|
$
|
86,882
|
|
|
$
|
6,413
|
|
|
$
|
164,558
|
|
|
$
|
12,485
|
|
Construction Products
|
|
|
49,516
|
|
|
|
5,158
|
|
|
|
83,806
|
|
|
|
6,386
|
|
Tubular and Energy Services
|
|
|
35,021
|
|
|
|
358
|
|
|
|
60,962
|
|
|
|
2,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,419
|
|
|
$
|
11,929
|
|
|
$
|
309,326
|
|
|
$
|
21,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits (losses) from operations, as shown above, include internal cost of capital charges for assets used in the
segment at a rate of generally 1% per month. There has been no change in the measurement of segment profit from operations from December 31, 2015. The internal cost of capital charges are eliminated during the consolidation process.
The following table provides a reconciliation of reportable segment net profit from operations to the Companys consolidated total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
(Loss) income for reportable segments
|
|
$
|
(124,207
|
)
|
|
$
|
11,929
|
|
|
$
|
(124,945
|
)
|
|
$
|
21,187
|
|
Interest expense
|
|
|
(1,652
|
)
|
|
|
(1,288
|
)
|
|
|
(2,822
|
)
|
|
|
(1,901
|
)
|
Interest income
|
|
|
52
|
|
|
|
37
|
|
|
|
107
|
|
|
|
94
|
|
Other (expense) income
|
|
|
(107
|
)
|
|
|
(95
|
)
|
|
|
(822
|
)
|
|
|
708
|
|
LIFO income
|
|
|
452
|
|
|
|
406
|
|
|
|
525
|
|
|
|
400
|
|
Equity in loss of nonconsolidated investments
|
|
|
(487
|
)
|
|
|
(186
|
)
|
|
|
(683
|
)
|
|
|
(13
|
)
|
Corporate expense, cost of capital elimination, and other unallocated charges
|
|
|
(3,476
|
)
|
|
|
(2,980
|
)
|
|
|
(4,934
|
)
|
|
|
(5,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(129,425
|
)
|
|
$
|
7,823
|
|
|
$
|
(133,574
|
)
|
|
$
|
14,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates assets of the Company by segment:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Rail Products and Services
|
|
$
|
199,217
|
|
|
$
|
241,222
|
|
Construction Products
|
|
|
90,382
|
|
|
|
86,335
|
|
Tubular and Energy Services
|
|
|
112,465
|
|
|
|
216,715
|
|
Unallocated corporate assets
|
|
|
67,952
|
|
|
|
22,388
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
470,016
|
|
|
$
|
566,660
|
|
|
|
|
|
|
|
|
|
|
9
3.
ACQUISITIONS
TEW Plus, LTD
On November 23, 2015, the Company acquired the 75% balance of the
remaining shares of TEW Plus, LTD (Tew Plus) for $2,130, net of cash acquired. Headquartered in Nottingham, UK, Tew Plus provides telecommunications and security systems to the railway and commercial markets. Their offerings include full
installation services including: design; project management; survey; and commissioning along with future maintenance. The results of Tew Plus operations are included within the Rail Products and Services segment from the date of acquisition.
Inspection Oilfield Services
On March 13, 2015, the Company acquired IOS Holdings, Inc. (IOS or test and inspection services) for $167,404, net of cash
acquired and a net working capital receivable adjustment of $2,363. The purchase agreement includes an earn-out provision for the seller to generate an additional $60,000 of proceeds upon achieving certain levels of EBITDA during the three-year
period beginning on January 1, 2015. The Company has not accrued an estimated earn-out obligation based upon a probability weighted valuation model of the projected EBITDA results, which indicates that the minimum target will not be achieved.
Approximately $7,600 of the purchase price relates to amounts held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Houston, TX, IOS is a leading independent provider of tubular management services
with operations in every significant oil and gas producing region in the continental United States. The results of IOS operations are included within our Tubular and Energy Services segment from the date of acquisition.
Tew Holdings, LTD
On January 13,
2015, the Company acquired Tew Holdings, LTD (Tew) for $26,467, net of cash acquired. The purchase price includes approximately $4,200 related to working capital and net debt adjustments. The non-domestic cash payment includes
approximately $600 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Nottingham, UK, Tew provides application engineering solutions primarily to the rail market and other major
industries. The results of Tews operations are included within the Rail Products and Services segment from the date of acquisition.
Acquisition Summary
Each transaction
was accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles, which requires an acquiring entity to recognize, with limited exceptions, all of the assets acquired and liabilities assumed in a
transaction at fair value as of the acquisition date. Goodwill primarily represents the value paid for each acquisitions enhancement to the Companys product and service offerings and capabilities, as well as a premium payment related to
the ability to control the acquired assets. The Company has concluded that intangible assets and goodwill values resulting from the IOS, Tew, and Tew Plus transactions are not deductible for tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price
|
|
November 23,
2015 - Tew Plus
|
|
|
March 13,
2015 - IOS
|
|
|
January 13,
2015 -
Tew
|
|
Current assets
|
|
$
|
4,420
|
|
|
$
|
19,877
|
|
|
$
|
12,125
|
|
Other assets
|
|
|
|
|
|
|
708
|
|
|
|
|
|
Property, plant, and equipment
|
|
|
47
|
|
|
|
51,453
|
*
|
|
|
2,398
|
|
Goodwill
|
|
|
822
|
|
|
|
69,908
|
*
|
|
|
8,772
|
|
Other intangibles
|
|
|
1,074
|
|
|
|
50,354
|
*
|
|
|
14,048
|
|
Liabilities assumed
|
|
|
(3,597
|
)
|
|
|
(23,596
|
)
|
|
|
(6,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,766
|
|
|
$
|
168,704
|
|
|
$
|
30,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
- As a result of the impact of the downturn within the energy markets, the expectations of a prolonged period before recovery, and the reduction in active U.S. land oil
rig count, the Company performed an interim test for impairment of goodwill during the third quarter of 2015 that resulted in the full impairment of goodwill related to the IOS acquisition. Additionally, during the second quarter of 2016, the
Company performed an interim impairment test due to further deterioration in projections that resulted in impairment of property, plant, and equipment and intangible assets as described in Notes 4 and 5.
|
10
The following table summarizes the estimates of the fair values of the identifiable intangible assets
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset
|
|
November 23,
2015 - Tew Plus
|
|
|
March 13,
2015 - IOS
|
|
|
January 13,
2015 -
Tew
|
|
Trade name
|
|
$
|
|
|
|
$
|
2,641
|
|
|
$
|
870
|
|
Customer relationships
|
|
|
817
|
|
|
|
41,171
|
|
|
|
10,035
|
|
Technology
|
|
|
203
|
|
|
|
4,364
|
|
|
|
2,480
|
|
Non-competition agreements
|
|
|
54
|
|
|
|
2,178
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets
|
|
$
|
1,074
|
|
|
$
|
50,354
|
**
|
|
$
|
14,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
|
- See Note 5 regarding intangible asset impairments.
|
4.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at June 30, 2016 and
December 31, 2015 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
14,592
|
|
|
$
|
17,054
|
|
Improvements to land and leaseholds
|
|
|
16,598
|
|
|
|
16,590
|
|
Buildings
|
|
|
33,252
|
|
|
|
39,366
|
|
Machinery and equipment, including equipment under capitalized leases
|
|
|
116,470
|
|
|
|
118,677
|
|
Construction in progress
|
|
|
4,917
|
|
|
|
11,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,829
|
|
|
|
203,531
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases
|
|
|
77,204
|
|
|
|
76,786
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,625
|
|
|
$
|
126,745
|
|
|
|
|
|
|
|
|
|
|
We review our property, plant, and equipment for recoverability whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. We recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. Due to the deterioration in projected results from the IOS subsidiary within the
Tubular and Energy Services segment, the undiscounted cash flows were unable to support the carrying value of the asset group. The Company utilized level 3 unobservable inputs, specifically, the discounted cash flow method, to determine the expected
net cash flows generated by the continued use of the assets. As a result of the testing, the Company recorded a non-cash impairment of $14,956 during the period ended June 30, 2016. The impairment is included within Asset
impairments caption of the Condensed Consolidated Statements of Operations. The results of the impairment analysis are substantially complete and will be finalized during the third quarter 2016.
5.
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
The following table represents the goodwill balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail Products and
Services
|
|
|
Construction
Products
|
|
|
Tubular and Energy
Services
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
48,188
|
|
|
$
|
5,147
|
|
|
$
|
28,417
|
|
|
$
|
81,752
|
|
Foreign currency translation impact
|
|
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
(867
|
)
|
Disposition
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
Impairment charges
|
|
|
(28,342
|
)
|
|
|
|
|
|
|
(28,417
|
)
|
|
|
(56,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
18,825
|
|
|
$
|
5,147
|
|
|
$
|
|
|
|
$
|
23,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill
impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the
11
carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. During the current
quarter, various reporting units underperformed against their projections and revised their forecasts downward. The revised forecasts, which were primarily attributable to weakness in the rail and energy markets, indicated longer recovery horizons
than we previously projected. In connection with the revisions to the longer term projections and a substantial decline in market capitalization, the Company concluded that these qualitative factors indicated that there was a more likely than not
risk that the carrying value of goodwill exceeded its fair value.
As a result of the Companys qualitative review, with the assistance
of an independent valuation firm, the Company performed a quantitative interim test for impairment of goodwill as of June 1, 2016. The valuation included the use of both the income and market approaches. Greater weighting was applied to the
income approach as the Company believes it is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. In addition,
a lack of comparable market transactions in recent months has limited the availability of information necessary for the market approach.
The
results of the test indicated that the Rail Technologies (within the Rail Products and Services segment), Chemtec (or precision measurement systems), and coated services (Chemtec and coated services are within the Tubular and Energy
Services segment) reporting units respective fair values were less than their carrying value. All other reporting units that maintain goodwill substantially exceeded their carrying value and were not at risk of impairment. As a result of the
continued weakness in the commodity cycles impacting the energy and rail markets, the near term projections of these reporting units have deteriorated and the expected future growth of the Rail Technologies, Chemtec, and coated services reporting
units was determined to be insufficient to support the carrying values.
The Company determined the implied fair values of the Rail
Technologies, Chemtec, and coated services reporting units by using level 3 unobservable inputs, which incorporated assumptions that we believe would be a reasonable market participants view in a hypothetical purchase, to develop the
discounted cash flows of the respective reporting units. Significant level 3 inputs included the projected revenue and cost growth rates, capital expenditures, and weighted average costs of capital assumptions. The resulting fair values of each
reporting unit were allocated to the assets and liabilities of the respective reporting unit as if each reporting unit had been acquired in business combinations as of the test date and the fair value was the purchase price paid to acquire each
reporting unit. The results of the step 2 analysis indicated that the carrying amounts of the goodwill of Rail Technologies, Chemtec, and coated services exceeded the implied fair values of that goodwill. Accordingly, the Company recognized a
non-cash goodwill impairment of $56,759, which represented the full impairment of goodwill within the Chemtec and coated services reporting units and approximately 60% of the Rail Technologies goodwill value. The results of the step 2 analysis are
substantially complete and will be finalized during the third quarter 2016.
The following table represents the definite-lived other
intangible assets balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Rail Products and Services
|
|
$
|
57,470
|
|
|
$
|
59,226
|
|
Construction Products
|
|
|
1,348
|
|
|
|
1,348
|
|
Tubular and Energy Services
|
|
|
31,742
|
|
|
|
98,166
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,560
|
|
|
$
|
158,740
|
|
|
|
|
|
|
|
|
|
|
Due to the indicators previously noted, the Company performed recoverability tests on reporting units when it was more
likely than not that the carrying value of the long-lived asset group would not be recoverable. The results of our testing indicated that the long-lived assets related to the IOS and Chemtec divisions, within the Tubular and Energy Services segment,
had carrying values in excess of the asset groups fair value. Based upon level 3 unobservable inputs, the Company incorporated assumptions that we believe would be a reasonable market participants view in a hypothetical purchase, to
develop the discounted cash flows. Significant level 3 inputs included the projected revenue and cost growth rates, capital expenditures, and weighted average costs of capital assumptions. As a result of the analysis, the Company recorded a $42,982
non-cash impairment of definite-lived intangible assets related to the IOS division and a $14,241 non-cash impairment of definite-lived intangible assets related to the Chemtec division. The results of the impairment analysis are substantially
complete and will be finalized during the third quarter 2016.
12
The components of the Companys definite-lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Weighted Average
Amortization
In Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete agreements
|
|
|
5
|
|
|
$
|
4,319
|
|
|
$
|
(1,782
|
)
|
|
$
|
2,537
|
|
Patents
|
|
|
10
|
|
|
|
387
|
|
|
|
(142
|
)
|
|
|
245
|
|
Customer relationships
|
|
|
17
|
|
|
|
39,707
|
|
|
|
(5,518
|
)
|
|
|
34,189
|
|
Trademarks and trade names
|
|
|
14
|
|
|
|
10,199
|
|
|
|
(2,831
|
)
|
|
|
7,368
|
|
Technology
|
|
|
14
|
|
|
|
35,948
|
|
|
|
(9,867
|
)
|
|
|
26,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,560
|
|
|
$
|
(20,140
|
)
|
|
$
|
70,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Weighted Average
Amortization
In Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete agreements
|
|
|
4
|
|
|
$
|
6,984
|
|
|
$
|
(2,495
|
)
|
|
$
|
4,489
|
|
Patents
|
|
|
10
|
|
|
|
378
|
|
|
|
(124
|
)
|
|
|
254
|
|
Customer relationships
|
|
|
16
|
|
|
|
94,338
|
|
|
|
(8,441
|
)
|
|
|
85,897
|
|
Supplier relationships
|
|
|
5
|
|
|
|
350
|
|
|
|
(335
|
)
|
|
|
15
|
|
Trademarks and trade names
|
|
|
13
|
|
|
|
14,252
|
|
|
|
(3,025
|
)
|
|
|
11,227
|
|
Technology
|
|
|
13
|
|
|
|
42,438
|
|
|
|
(9,393
|
)
|
|
|
33,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
158,740
|
|
|
$
|
(23,813
|
)
|
|
$
|
134,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets are amortized over their useful lives ranging from 2 to 25 years, with a total weighted
average amortization period of approximately 15 years at June 30, 2016. Amortization expense for the three-month periods ended June 30, 2016 and 2015 was $2,789 and $3,456, respectively. Amortization expense for the six-month periods ended
June 30, 2016 and 2015 was $6,055 and $5,613, respectively.
Estimated amortization expense for the remainder of 2016 and thereafter is
as follows:
|
|
|
|
|
|
|
Amortization Expense
|
|
2016
|
|
$
|
3,687
|
|
2017
|
|
|
7,361
|
|
2018
|
|
|
7,256
|
|
2019
|
|
|
6,525
|
|
2020
|
|
|
6,142
|
|
2021 and thereafter
|
|
|
39,449
|
|
|
|
|
|
|
|
|
$
|
70,420
|
|
|
|
|
|
|
6.
ACCOUNTS RECEIVABLE
Credit is extended based upon an evaluation of the customers financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit
terms are consistent with industry standards and practices. The amounts of trade accounts receivable at June 30, 2016 and December 31, 2015 have been reduced by an allowance for doubtful accounts of $1,417 and $1,485, respectively.
13
7.
INVENTORIES
Inventories at June 30, 2016 and December 31, 2015 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Finished goods
|
|
$
|
60,185
|
|
|
$
|
62,547
|
|
Work-in-process
|
|
|
20,252
|
|
|
|
20,178
|
|
Raw materials
|
|
|
20,009
|
|
|
|
19,492
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current costs
|
|
|
100,446
|
|
|
|
102,217
|
|
Less: LIFO reserve
|
|
|
(5,296
|
)
|
|
|
(5,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,150
|
|
|
$
|
96,396
|
|
|
|
|
|
|
|
|
|
|
Inventory is generally valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories of
the Company are valued at average cost or market, whichever is lower. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on
managements estimates of expected year-end levels and costs.
8.
INVESTMENTS
The Company is a member of a joint venture, LB Pipe & Coupling Products, LLC (LB Pipe JV), in which it maintains a 45% ownership
interest. LB Pipe JV manufactures, markets, and sells various precision coupling products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019.
Under applicable guidance for variable interest entities in ASC 810, Consolidation, the Company determined that the LB Pipe JV is a variable
interest entity. The Company concluded that it is not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly
impact the economic performance of the LB Pipe JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.
As of June 30, 2016 and December 31, 2015, the Company had a nonconsolidated equity method investment of $4,521 and $5,246, respectively, in LB
Pipe JV and other equity investments totaling $117 and $75, respectively.
The Company recorded equity in the loss of LB Pipe JV of $476 and
$186 for the three months ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded equity in the loss of LB Pipe JV of $725 and equity in the income of the LB Pipe JV of $3,
respectively.
The Company tested the investment for recoverability during the period ended June 30, 2016 and concluded that the
investment value was recoverable based upon the undiscounted cash flows of the LB Pipe JV. The Company continues to monitor the recoverability of the assets associated with LB Pipe JV and the long-term financial projections of the businesses.
During the six-month period ended June 30, 2015, the Company received cash distributions of $90. There were no changes to the
members ownership interests as a result of the distribution. During 2016, the Company and the other 45% member each executed a revolving line of credit with the LB Pipe JV with an available limit of $750. The Company and the other 45% member
each loaned $575 to the LB Pipe JV in an effort to maintain compliance with the LB Pipe JVs debt covenants with an unaffiliated bank. The Companys loan with the LB Pipe JV matures on December 15, 2016.
14
The Companys exposure to loss results from its capital contributions and lending activity, net of the
Companys share of the LB Pipe JVs income or loss, and its net investment in the direct financing lease covering the facility used by the LB Pipe JV for its operations, which is described below. The carrying amounts with the maximum
exposure to loss of the Company at June 30, 2016 and December 31, 2015, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
LB Pipe JV equity method investment
|
|
$
|
4,521
|
|
|
$
|
5,246
|
|
Loan receivable
|
|
|
575
|
|
|
|
|
|
Net investment in direct financing lease
|
|
|
929
|
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,025
|
|
|
$
|
6,241
|
|
|
|
|
|
|
|
|
|
|
The Company is leasing five acres of land and two facilities to the LB Pipe JV through June 30, 2019, with a
5.5-year renewal period. The current monthly lease payments approximate $17, with a balloon payment of approximately $488, which is required to be paid either at the termination of the lease, allocated over the renewal period, or during the initial
term of the lease. This lease qualifies as a direct financing lease under the applicable guidance in ASC 840-30, Leases.
The
following is a schedule of the direct financing minimum lease payments for the remainder of 2016 and the years 2017 and thereafter:
|
|
|
|
|
|
|
Minimum Lease Payments
|
|
2016
|
|
$
|
65
|
|
2017
|
|
|
140
|
|
2018
|
|
|
150
|
|
2019
|
|
|
574
|
|
|
|
|
|
|
|
|
$
|
929
|
|
|
|
|
|
|
9.
LONG-TERM DEBT
United States
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revolving credit facility
|
|
$
|
165,270
|
|
|
$
|
165,000
|
|
Capital leases and financing agreements
|
|
|
3,095
|
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
168,365
|
|
|
|
168,754
|
|
Less current maturities
|
|
|
1,335
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
167,030
|
|
|
$
|
167,419
|
|
|
|
|
|
|
|
|
|
|
On June 29, 2016, L.B. Foster Company, its domestic subsidiaries, and certain of its Canadian subsidiaries
(L.B. Foster) entered into the First Amendment (the First Amendment) to the Second Amended and Restated Credit Agreement dated March 13, 2015 (the Amended and Restated Credit Agreement), with PNC Bank, N.A.,
Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This First Amendment modifies the Amended and Restated Credit Agreement, which had a maximum credit line of $335,000. The First
Amendment reduces the permitted borrowings to $275,000.
The Companys and the domestic guarantors obligations under the First
Amendment is secured by the grant of a security interest by the domestic borrowers and domestic guarantors in substantially all of the personal property owned by such entities. Additionally, the equity interests in each of the domestic loan parties,
other than the Company, and the equity interests held by each domestic loan party in their domestic subsidiaries, are pledged to the lenders as collateral for the lending obligations.
Borrowings under the First Amendment bear interest at rates based upon either the base rate or Euro-rate plus applicable margins. Applicable margins are dictated by the ratio of the Companys
indebtedness less consolidated cash on hand to
15
the Companys consolidated EBITDA, as defined in the underlying Amended and Restated Credit Agreement. The base rate is the highest of (a) PNC Banks prime rate, (b) the
Federal Funds Rate plus 0.50% or (c) the daily Euro-rate (as defined in the Amended and Restated Credit Agreement) plus 1.00%. The base rate and Euro-rate spreads range from 0.025% to 2.25% and 1.25% to 3.25%, respectively.
The First Amendment provides that liens on the collateral will be released upon satisfaction of certain conditions, including the submission by the loan
parties of a compliance certificate for two consecutive fiscal quarters, calculated for the four consecutive fiscal quarters then ending, each evidencing a Leverage Ratio (defined as the Companys indebtedness less cash on hand in excess of
$15,000, divided by the Companys consolidated EBITDA) of less than or equal to 2.75 to 1.00; provided that the last day of such two consecutive fiscal quarters cannot be earlier than June 30, 2018.
Certain financial covenants in the Amended and Restated Credit Agreement were also amended. The First Amendment revises the maximum Leverage Ratio, which
must not exceed the amounts set forth below for applicable fiscal quarters: June 30, 2016 and September 30, 2016, 4.75 to 1.00; December 31, 2016, 4.50 to 1.00; March 31, 2017, 4.25 to 1.00; June 30, 2017,
4.00 to 1.00; September 30, 2017, 3.75 to 1.00; December 31, 2017, 3.50 to 1.00; and March 31, 2018 and all fiscal quarters ending thereafter, 3.25 to 1.00.
At June 30, 2016, the Company was in compliance with the covenants in the Amended and Restated Credit Agreement as revised by the First Amendment.
Loans and advances to non-loan parties and loans, advances, and investments by domestic loan parties to subsidiaries that are not loan parties and to
foreign loan parties is not permitted to exceed $10,000 in the aggregate at any one time, provided that, on March 31, 2018, when the maximum Leverage Ratio requirement is 3.25 to 1.00, this limit will increase to $75,000.
The First Amendment permits the Company to pay dividends, distributions, and make redemptions with respect to its stock provided no event of default or
potential default (as defined in the Amended and Restated Credit Agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $4,000 per year when funds
are drawn on the facility until March 31, 2018, when the maximum Leverage Ratio requirement is 3.25 to 1.00, at which time this limit will increase to $25,000. Dividends of $829 or $0.08 per share were distributed for the six-month period ended
June 30, 2016.
If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $4,000 (or $25,000, as
appropriate) per year are subjected to a limitation of $75,000 in the aggregate. The $75,000 aggregate limitation also permits certain loans, investments, and acquisitions.
The First Amendment provides that each of the loan parties and their subsidiaries shall not enter into any merger, consolidation, or other reorganization, or acquire all or substantially all of the
assets, division, business, stock, or other ownership interests or permit any consolidation or merger with an aggregate consideration in excess of $12,000 until after March 31, 2018.
At June 30, 2016, the Company had outstanding letters of credit of approximately $425 and had gross available borrowing capacity of $109,305. The maturity date of the facility is March 13, 2020.
United Kingdom
A subsidiary
of the Company has a credit facility with NatWest Bank for its United Kingdom operations that includes an overdraft availability of £1,500 pounds sterling (approximately $1,997 at June 30, 2016). This credit facility supports the
subsidiarys working capital requirements and is collateralized by substantially all of the assets of its United Kingdom operations. The interest rate on this facility is the financial institutions base rate plus 1.50%. Outstanding
performance bonds reduce availability under this credit facility. The subsidiary of the Company had no outstanding borrowings under this credit facility as of June 30, 2016. There was approximately $352 in outstanding guarantees (as defined in
the underlying agreement) at June 30, 2016. This credit facility was renewed and amended during the fourth quarter of 2015 to include Tew and Tew Plus as parties to the agreement. All other underlying terms and conditions remained unchanged as
a result of the renewal. It is the Companys intention to renew this credit facility with NatWest Bank during the annual review in 2016.
The United Kingdom credit facility contains certain financial covenants that require that subsidiary to maintain senior interest and cash flow coverage
ratios. The subsidiary was in compliance with these financial covenants as of June 30, 2016. The subsidiary had available borrowing capacity of $1,645 as of June 30, 2016.
16
10.
Fair Value Measurements
The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk
and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Companys own assumptions of what market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
A financial asset or
liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash equivalents -
Included within Cash and cash equivalents are investments in non-domestic term deposits. The carrying amounts approximate fair value because of the short
maturity of the instruments.
LIBOR-Based interest rate swaps
- To reduce the impact of interest rate changes on outstanding
variable-rate debt, the Company entered into forward starting LIBOR-Based interest rate swaps with notional values totaling $50,000. The swaps will become effective in February 2017 at which point it will effectively convert a portion of the debt
from variable to fixed-rate borrowings during the term of the swap contract. The fair value of the interest rate swaps is based on market-observable forward interest rates and represents the estimated amount that the Company would pay to terminate
the agreements. As such, the swap agreements are classified as Level 2 within the fair value hierarchy. At June 30, 2016 the interest rate swaps were recorded within other accrued liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
June 30,
2016
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31,
2015
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Term deposits
|
|
$
|
3,016
|
|
|
$
|
3,016
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,939
|
|
|
$
|
1,939
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,016
|
|
|
$
|
3,016
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,939
|
|
|
$
|
1,939
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2,532
|
|
|
$
|
|
|
|
$
|
2,532
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,532
|
|
|
$
|
|
|
|
$
|
2,532
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
11.
EARNINGS PER COMMON SHARE
(Share amounts in thousands)
The following table sets forth the computation of basic and diluted
(loss) earnings per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted earnings per common share - (Loss) income available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(91,996
|
)
|
|
$
|
5,362
|
|
|
$
|
(94,828
|
)
|
|
$
|
9,649
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
10,263
|
|
|
|
10,284
|
|
|
|
10,248
|
|
|
|
10,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
10,263
|
|
|
|
10,284
|
|
|
|
10,248
|
|
|
|
10,272
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other stock compensation plans
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares outstanding and assumed
conversions
|
|
|
10,263
|
|
|
|
10,370
|
|
|
|
10,248
|
|
|
|
10,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share
|
|
$
|
(8.96
|
)
|
|
$
|
0.52
|
|
|
$
|
(9.25
|
)
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share
|
|
$
|
(8.96
|
)
|
|
$
|
0.52
|
|
|
$
|
(9.25
|
)
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three- and six-month periods ended June 30, 2016, there were approximately 47 and 46 anti-dilutive shares
excluded from the preceding calculation, respectively.
12.
STOCK-BASED COMPENSATION
The Company applies the provisions of FASB ASC 718, Compensation Stock Compensation, to account for the Companys share-based
compensation. Share-based compensation cost is measured at the grant date based on the calculated fair value of the award and is recognized over the employees requisite service period. The Company recorded stock compensation expense
of $807 and $1,276 for the three-month periods ended June 30, 2016 and 2015, respectively, related to restricted stock awards and performance unit awards. Stock compensation expense of $555 and $1,896 was recorded for the six-month periods
ended June 30, 2016 and 2015, respectively. At June 30, 2016, unrecognized compensation expense for awards that the Company expects to vest approximated $2,170. The Company will recognize this expense over the upcoming three years through
June 2019.
Shares issued as a result of vested stock-based compensation generally will be from previously issued shares that have been
reacquired by the Company and held as Treasury shares or authorized but previously unissued common stock.
During the six-month periods ended
June 30, 2016 and 2015, the Company recognized reductions in excess tax benefits related to stock-based compensation of $124 and excess tax benefits of $310, respectively. The change in excess income tax benefits have been included in cash
flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
Stock Option Awards
At June 30, 2016, there were no outstanding and exercisable stock options. During the first quarter of 2015, the remaining 7,500 outstanding stock
options were exercised at a weighted average exercise price of $9.08. There were no new grants of stock option awards during the six-month periods ended June 30, 2016 and 2015.
18
Restricted Stock Awards and Performance Unit Awards
Under the amended and restated 2006 Omnibus Stock Incentive Plan, the Company grants eligible employees restricted stock and performance unit awards. The
forfeitable restricted stock awards granted prior to March 2015 generally time-vest after a four-year holding period, and those granted subsequent to March 2015 generally time-vest ratably over a three-year period, unless indicated otherwise by the
underlying restricted stock award agreement. Performance unit awards are offered annually under separate three-year long-term incentive plans. Performance units are subject to forfeiture and will be converted into common stock of the Company based
upon the Companys performance relative to performance measures and conversion multiples as defined in the underlying plan. If the Companys estimate of the number of performance stock awards expected to vest changes in a subsequent
accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change future expense over the remaining vesting period.
During the quarter ended June 30, 2016, the Company amended its 2006 Omnibus Incentive Plan and registered 370,000 additional shares under the
amendment. During the quarter ended March 31, 2016, the Compensation Committee approved the 2016 Performance Share Unit Program, the Executive Annual Incentive Compensation Plan (consisting of cash and equity components) and the 2016 Free Cash
Flow Program (cash award only). The Compensation Committee also certified the actual performance achievement of participants in the 2013 Performance Share Unit Program. Actual performance resulted in no payout relative to the target performance
metrics.
The following table summarizes the restricted stock award and performance unit award activity for the period ended June 30,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
|
Performance
Stock Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding at December 31, 2015
|
|
|
93,817
|
|
|
|
35,999
|
|
|
$
|
39.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
43,283
|
|
|
|
129,844
|
|
|
|
12.59
|
|
Vested
|
|
|
(43,453
|
)
|
|
|
|
|
|
|
29.30
|
|
Adjustment for incentive awards not expected to vest
|
|
|
|
|
|
|
(93,103
|
)
|
|
|
24.79
|
|
Canceled
|
|
|
(6,021
|
)
|
|
|
(9,050
|
)
|
|
|
18.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
87,626
|
|
|
|
63,690
|
|
|
$
|
22.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
RETIREMENT PLANS
Retirement Plans
The Company has seven retirement plans which cover its hourly and
salaried employees in the United States: three defined benefit plans (one active / two frozen) and four defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Companys
funding contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), applicable plan policy and investment guidelines. The Companys policy is to
contribute at least the minimum in accordance with the funding standards of ERISA.
The Companys subsidiary, L.B. Foster Rail
Technologies, Inc. (Rail Technologies), maintains two defined contribution plans for its employees in Canada, as well as a post-retirement benefit plan. In the United Kingdom, Rail Technologies maintains two defined contribution plans
and a defined benefit plan.
19
United States Defined Benefit Plans
Net periodic pension costs for the United States defined benefit pension plans for the three- and six-month periods ended June 30, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
18
|
|
|
$
|
19
|
|
Interest cost
|
|
|
186
|
|
|
|
185
|
|
|
|
372
|
|
|
|
370
|
|
Expected return on plan assets
|
|
|
(179
|
)
|
|
|
(204
|
)
|
|
|
(358
|
)
|
|
|
(408
|
)
|
Recognized net actuarial loss
|
|
|
69
|
|
|
|
69
|
|
|
|
138
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
85
|
|
|
$
|
59
|
|
|
$
|
170
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not expect to contribute to its United States defined benefit plans in 2016.
United Kingdom Defined Benefit Plans
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three- and six-month periods ended June 30, 2016 and 2015 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest cost
|
|
$
|
75
|
|
|
$
|
77
|
|
|
$
|
150
|
|
|
$
|
153
|
|
Expected return on plan assets
|
|
|
(84
|
)
|
|
|
(83
|
)
|
|
|
(168
|
)
|
|
|
(166
|
)
|
Amortization of prior service costs and transition amount
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
|
|
10
|
|
Recognized net actuarial loss
|
|
|
39
|
|
|
|
59
|
|
|
|
78
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
35
|
|
|
$
|
58
|
|
|
$
|
70
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined
benefit pension plans. Employer contributions of approximately $247 are anticipated to the United Kingdom L.B. Foster Rail Technologies, Inc. pension plan during 2016. For the six months ended June 30, 2016, the Company contributed
approximately $120 to the plan.
Defined Contribution Plans
The Company sponsors eight defined contribution plans for hourly and salaried employees across our domestic and international facilities. The following table summarizes the expense associated with the
contributions made to these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
445
|
|
|
$
|
747
|
|
|
$
|
1,137
|
|
|
$
|
1,429
|
|
Canada
|
|
|
67
|
|
|
|
55
|
|
|
|
118
|
|
|
|
114
|
|
United Kingdom
|
|
|
160
|
|
|
|
115
|
|
|
|
218
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
672
|
|
|
$
|
917
|
|
|
$
|
1,473
|
|
|
$
|
1,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
COMMITMENTS AND CONTINGENT LIABILITIES
Product Liability Claims
The Company is subject to product warranty claims that arise in
the ordinary course of its business. For certain manufactured products, the Company maintains a product warranty accrual which is adjusted on a monthly basis as a percentage of cost of sales. The product warranty accrual is periodically adjusted
based on the identification or resolution of known individual product warranty claims.
20
The following table sets forth the Companys product warranty accrual:
|
|
|
|
|
|
|
Warranty Liability
|
|
Balance at December 31, 2015
|
|
$
|
8,755
|
|
Additions to warranty liability
|
|
|
461
|
|
Warranty liability utilized
|
|
|
(467
|
)
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
8,749
|
|
|
|
|
|
|
Included within the above table are concrete tie warranty reserves of approximately $7,490 and $7,544 as of June 30,
2016 and December 31, 2015, respectively.
Union Pacific Railroad (UPRR) Concrete Tie Matter
On July 12, 2011, UPRR notified (the UPRR Notice) the Company and its subsidiary, CXT Incorporated (CXT), of a warranty claim
under CXTs 2005 supply contract relating to the sale of pre-stressed concrete railroad ties to UPRR. UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at CXTs Grand Island, NE facility failed
to meet contract specifications, had workmanship defects and were cracking and failing prematurely. Of the 3.0 million ties manufactured between 1998 and 2011 from the Grand Island, NE facility, approximately 1.6 million ties were sold
during the period UPRR had claimed nonconformance. The 2005 contract called for each concrete tie which failed to conform to the specifications or had a material defect in workmanship to be replaced with 1.5 new concrete ties, provided, that, within
five years of the sale of a concrete tie, UPRR notified CXT of such failure to conform or such defect in workmanship. The UPRR Notice did not specify how many ties manufactured during this period were defective nor the exact nature of the alleged
workmanship defect.
Following the UPRR Notice, the Company worked with material scientists and pre-stressed concrete experts to test a
representative sample of Grand Island, NE concrete ties and assess warranty claims for certain concrete ties made in its Grand Island, NE facility between 1998 and 2011. The Company discontinued manufacturing operations in Grand Island, NE in early
2011.
2012
During 2012, the
Company completed sufficient testing and analysis to further understand this matter. Based upon testing results and expert analysis, the Company believed it discovered conditions, which largely related to the 2006 to 2007 manufacturing period, that
can shorten the life of the concrete ties produced during this period. During the fourth quarter of 2012 and first quarter of 2013, the Company reached agreement with UPRR on several matters including a process for the Company and UPRR to work
together to identify, prioritize, and replace defective ties that meet the criteria for replacement. This process applies to the ties the Company shipped to UPRR from its Grand Island, NE facility from 1998 to 2011. During most of this period the
Companys warranty policy for UPRR carried a 5 year warranty with a 1.5:1 replacement ratio for any defective ties. In order to accommodate UPRR and other customer concerns, the Company also reverted to a previously used warranty policy
providing a 15-year warranty with a 1:1 replacement ratio. This change provided an additional 10 years of warranty protection. In the amended 2005 supply agreement, the Company and UPRR also extended the supply of Tucson ties by five years and
agreed on a cash payment of $12,000 to UPRR as compensation for concrete ties already replaced by UPRR during the investigation period.
During 2012, as a result of the testing that the Company conducted on concrete ties manufactured at its former Grand Island, NE facility and the
developments related to UPRR and other customer matters, the Company recorded pre-tax warranty charges of $22,000 in Cost of Goods Sold within its Rail Products and Services segment based on the Companys estimate of the number of
defective concrete ties that will ultimately require replacement during the applicable warranty periods.
2013
Throughout 2013, at UPRRs request and under the terms of the amended 2005 supply agreement, the Company provided warranty replacement concrete ties
for use across certain UPRR subdivisions. The Company attempted to reconcile the quantity of warranty claims for ties replaced and obtain supporting detail for the ties removed. The Company believes that UPRR did not replace concrete ties in
accordance with the amended agreement and has not furnished adequate documentation throughout the replacement process in these subdivisions to support its full warranty claim. Based on the information received by the Company to date, the Company
believes that a significant number of ties which UPRR replaced in these subdivisions did not meet the criteria to be covered as warranty replacement ties under the amended 2005 supply agreement. The disagreement related to the 2013 warranty
replacement activity includes approximately 170,000 ties where the Company provided detailed documentation supporting our position with reason codes that detail why these ties are not eligible for a warranty claim.
21
In late November 2013, the Company received notice from UPRR asserting a material breach of the amended 2005
supply agreement. UPRRs notice asserted that the failure to honor its claims for warranty ties in these subdivisions was a material breach. Following receipt of this notice, the Company provided information to UPRR to refute UPRRs claim
of breach and included the reconciliation of warranty claims supported by substantial findings from the Companys track observation team, all within the 90-day cure period. The Company also proposed further discussions to reach agreement on
reconciliation for 2013 replacement activities and future replacement activities and a recommended process that will ensure future replacement activities are done with appropriate documentation and per the terms of the amended 2005 supply agreement.
2014
During the first
quarter of 2014, the Company further responded within the 90-day cure period to UPRRs claim and presented a reconciliation for the subdivisions at issue. This proposed reconciliation was based on empirical data and visual observation from
Company employees that were present during the replacement process for a substantial majority of the concrete ties replaced. The Company spent considerable time documenting facts related to concrete tie condition and track condition to assess
whether the ties replaced met the criteria to be eligible for replacement under the terms of the amended 2005 supply agreement.
During 2014,
the Company increased its accrual by an additional $8,766 based on revised estimates of ties to be replaced based upon scientific testing and other analysis, adjusted for ties already provided to UPRR. The Company continued to work with UPRR to
identify, replace, and reconcile defective ties related to the warranty claim in accordance with the amended 2005 supply agreement. The Company and UPRR met during the third quarter of 2014 to evaluate each others position in an effort to work
towards agreement on the unreconciled 2013 and 2014 replacement activity as well as the standards and practices to be implemented for future replacement activity and warranty tie replacement.
In November and December of 2014, the Company received additional notices from UPRR asserting that ties manufactured in 2000 were defective and again asserting material breaches of the amended 2005 supply
agreement relating to warranty tie replacements as well as certain new ties provided to UPRR being out of specification.
As of
December 31, 2014, the Company and UPRR had not been able to reconcile the disagreement related to the 2013 and 2014 warranty replacement activity. The disagreement relating to the 2014 warranty replacement activity includes approximately
90,100 ties that the Company believes are not warranty-eligible.
2015
On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT, asserting, among other matters, that
the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRRs exclusive and limited remedy provisions in the supply agreement have
failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining rights under the contracts,
and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various incidental and consequential
damages. The amended 2005 supply agreement provides that UPRRs exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or otherwise contained a
material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Companys warranty does not apply to ties that
(a) have been repaired or altered without the Companys written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been improperly
maintained or used contrary to the specifications for which such ties were produced. The amended 2005 supply agreement also continues to provide that the Companys warranty is in lieu of all other express or implied warranties and that neither
party shall be subject to or liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are
inaccurately rated and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRRs assertion, which the Company vigorously disputes, that UPRR in future years will be entitled
to warranty replacement ties for virtually all of the Grand Island ties. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the
excellent category of the rating system.
In June 2015, UPRR delivered an additional notice alleging deficiencies in certain ties produced in
the Companys Tucson and Spokane locations and other claimed material breaches which the Company contends are unfounded. The Company again responded to UPRR that it was not in material breach of the amended 2005 supply agreement relating to
warranty tie replacements and that the ties in question complied with the specifications provided by UPRR.
On June 16 and 17, 2015, UPRR
issued formal notice of the termination of the concrete tie supply agreement as well as the termination of the lease agreement at the Tucson, AZ production facility and rejection and revocation of its prior acceptance of certain ties manufactured at
the Companys Spokane, WA production facility. Since that time, UPRR has discontinued submitting purchase orders to the Company for shipment of warranty replacement ties.
22
On May 29, 2015, the Company and CXT filed an Answer, Affirmative Defenses and Counterclaims in
response to the Complaint, denying liability to UPRR. As a result of UPRRs subsequent June 16-17, 2015 actions and certain related conduct, the Company on October 5, 2015 amended the pending Answer, Affirmative Defenses and
Counterclaims to add, among other things, assertions that UPRRs conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to UPRRs claims and also for the Companys
counterclaims.
2016
By
Scheduling Order dated June 29, 2016, an August 31, 2017 deadline for the completion of fact discovery has been established and trial may proceed at some future date after October 30, 2017, and UPRR has filed an amended notice of
trial to commence on October 30, 2017. During the first six months of 2016, the parties continue conducting discovery. The Company intends to continue to engage in discussions in an effort to resolve the UPRR matter. However, we cannot predict
that such discussions will be successful, or that the results of the litigation with UPRR, or any settlement or judgment amounts, will reasonably approximate our estimated accruals for loss contingencies. Future potential costs pertaining to
UPRRs claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows.
As a result of the preliminary status of the litigation and the uncertainty of any potential judgment, an estimate of any additional loss, or a range of loss, associated with this litigation cannot be
made based upon currently available information.
Environmental and Legal Proceedings
The Company is subject to national, state, foreign, provincial, and/or local laws and regulations relating to the protection of the environment. The
Companys efforts to comply with environmental regulations may have an adverse effect on its future earnings. In the opinion of management, compliance with the present environmental protection laws will not have a material adverse effect
on the financial condition, results of operations, cash flows, competitive position, or capital expenditures of the Company.
At June 30,
2016 and December 31, 2015, the Company maintained environmental reserves approximating $6,622 and $6,640, respectively. The following table sets forth the Companys environmental obligation:
|
|
|
|
|
|
|
Environmental liability
|
|
Balance at December 31, 2015
|
|
$
|
6,640
|
|
Additions to environmental obligations
|
|
|
24
|
|
Environmental obligations utilized
|
|
|
(42
|
)
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
6,622
|
|
|
|
|
|
|
The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. The
amounts currently reserved are immaterial to our financial position and liquidity and the estimate of additional loss exposure is immaterial to our results of operations.
15.
INCOME TAXES
The Companys effective income tax rate for the three and six months
ended June 30, 2016 was 28.9% and 29.0%, respectively, and 31.5% and 33.4% for the three and six months ended June 30, 2015, respectively. The Companys effective tax rate for the three and six months ended June 30, 2016 differed
from the federal statutory rate of 35% primarily due to the discrete impact of asset impairments in the quarter ended June 30, 2016. The $128,938 asset impairment related to both tax deductible and nondeductible assets, and resulted in a
$38,038 income tax benefit.
16.
SUBSEQUENT EVENTS
Management evaluated all of the activity of the Company and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or
disclosure in the Notes to the Condensed Consolidated Financial Statements.
23