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 Standards 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.
In October 2016, the FASB issued ASU No.
2016-16, Income Taxes Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory,
when the transfer occurs. The ASU is effective on January 1, 2018 with early adoption permitted. The Company is evaluating the effect that ASU 2016-16 will have on our financial position and results of operations.
8
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.
The following table illustrates revenues and profits (losses) from operations of the Company by segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
Rail Products and Services
|
|
$
|
56,891
|
|
|
$
|
(2,047
|
)
|
|
$
|
188,686
|
|
|
$
|
(26,474
|
)
|
Construction Products
|
|
|
34,870
|
|
|
|
1,356
|
|
|
|
107,098
|
|
|
|
5,748
|
|
Tubular and Energy Services
|
|
|
22,883
|
|
|
|
(6,966
|
)
|
|
|
81,164
|
|
|
|
(111,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114,644
|
|
|
$
|
(7,657
|
)
|
|
$
|
376,948
|
|
|
$
|
(132,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2015
|
|
|
Nine Months Ended
September 30, 2015
|
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
|
Net
Sales
|
|
|
Segment
Profit (loss)
|
|
Rail Products and Services
|
|
$
|
87,972
|
|
|
$
|
6,984
|
|
|
$
|
252,530
|
|
|
$
|
19,469
|
|
Construction Products
|
|
|
54,093
|
|
|
|
4,456
|
|
|
|
137,899
|
|
|
|
10,842
|
|
Tubular and Energy Services
|
|
|
33,994
|
|
|
|
(79,873
|
)
|
|
|
94,956
|
|
|
|
(77,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,059
|
|
|
$
|
(68,433
|
)
|
|
$
|
485,385
|
|
|
$
|
(47,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 since 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Loss for reportable segments
|
|
$
|
(7,657
|
)
|
|
$
|
(68,433
|
)
|
|
$
|
(132,602
|
)
|
|
$
|
(47,246
|
)
|
Interest expense
|
|
|
(1,520
|
)
|
|
|
(1,265
|
)
|
|
|
(4,342
|
)
|
|
|
(3,166
|
)
|
Interest income
|
|
|
50
|
|
|
|
66
|
|
|
|
157
|
|
|
|
160
|
|
Other income
|
|
|
1,085
|
|
|
|
537
|
|
|
|
263
|
|
|
|
1,245
|
|
LIFO income
|
|
|
917
|
|
|
|
181
|
|
|
|
1,442
|
|
|
|
581
|
|
Equity in loss of nonconsolidated investments
|
|
|
(263
|
)
|
|
|
(299
|
)
|
|
|
(946
|
)
|
|
|
(312
|
)
|
Corporate expense, cost of capital elimination, and other unallocated charges
|
|
|
(1,973
|
)
|
|
|
(989
|
)
|
|
|
(6,907
|
)
|
|
|
(6,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(9,361
|
)
|
|
$
|
(70,202
|
)
|
|
$
|
(142,935
|
)
|
|
$
|
(55,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The following table illustrates assets of the Company by segment:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Rail Products and Services
|
|
$
|
155,657
|
|
|
$
|
241,222
|
|
Construction Products
|
|
|
83,061
|
|
|
|
86,335
|
|
Tubular and Energy Services
|
|
|
103,976
|
|
|
|
216,715
|
|
Unallocated corporate assets
|
|
|
68,586
|
|
|
|
22,388
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
411,280
|
|
|
$
|
566,660
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
*
|
- 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.
|
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 September 30, 2016
and December 31, 2015 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
14,848
|
|
|
$
|
17,054
|
|
Improvements to land and leaseholds
|
|
|
17,626
|
|
|
|
16,590
|
|
Buildings
|
|
|
33,917
|
|
|
|
39,366
|
|
Machinery and equipment, including equipment under capitalized leases
|
|
|
116,355
|
|
|
|
118,677
|
|
Construction in progress
|
|
|
3,598
|
|
|
|
11,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,344
|
|
|
|
203,531
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases
|
|
|
80,197
|
|
|
|
76,786
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,147
|
|
|
$
|
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 nine-month period ended September 30, 2016. The impairment is included within
Asset impairments caption of the Condensed Consolidated Statements of Operations.
11
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
|
|
|
(1,069
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,069
|
)
|
Disposition
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
Impairment charges
|
|
|
(32,725
|
)
|
|
|
|
|
|
|
(28,417
|
)
|
|
|
(61,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
14,240
|
|
|
$
|
5,147
|
|
|
$
|
|
|
|
$
|
19,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 year, 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 Energy Services, LLC (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 $61,142, which represented the full impairment of goodwill within
the Chemtec and coated services reporting units and approximately 68% of the Rail Technologies goodwill value. The impairment charge includes $4,383 related to Rail Technologies goodwill which was recorded during the three-month period ended
September 30, 2016 as a result of the finalization of the interim impairment assessment, which the Company commenced during the second quarter.
The following table represents the gross definite-lived intangible assets balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Rail Products and Services
|
|
$
|
57,134
|
|
|
$
|
59,226
|
|
Construction Products
|
|
|
1,348
|
|
|
|
1,348
|
|
Tubular and Energy Services
|
|
|
29,179
|
|
|
|
98,166
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,661
|
|
|
$
|
158,740
|
|
|
|
|
|
|
|
|
|
|
12
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 $16,804 non-cash impairment of definite-lived intangible assets related to the Chemtec division. Included within the Chemtec impairment is
$2,563 recorded during the three-month period ended September 30, 2016 as a result of the finalization of the Companys interim impairment review, which the Company commenced during the second quarter.
The components of the Companys definite-lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Weighted Average
Amortization
Period In Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete agreements
|
|
|
5
|
|
|
$
|
4,252
|
|
|
$
|
(2,005
|
)
|
|
$
|
2,247
|
|
Patents
|
|
|
10
|
|
|
|
380
|
|
|
|
(145
|
)
|
|
|
235
|
|
Customer relationships
|
|
|
17
|
|
|
|
37,295
|
|
|
|
(6,069
|
)
|
|
|
31,226
|
|
Trademarks and trade names
|
|
|
14
|
|
|
|
10,054
|
|
|
|
(3,036
|
)
|
|
|
7,018
|
|
Technology
|
|
|
14
|
|
|
|
35,680
|
|
|
|
(10,593
|
)
|
|
|
25,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,661
|
|
|
$
|
(21,848
|
)
|
|
$
|
65,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Weighted Average
Amortization
Period 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 September 30, 2016. Amortization expense for the three-month periods ended September 30, 2016 and 2015 was $1,763 and $3,337, respectively. Amortization expense for the
nine-month periods ended September 30, 2016 and 2015 was $7,818 and $8,950, respectively.
Estimated amortization expense for the
remainder of 2016 and thereafter is as follows:
|
|
|
|
|
|
|
Amortization Expense
|
|
2016
|
|
$
|
1,780
|
|
2017
|
|
|
7,112
|
|
2018
|
|
|
7,008
|
|
2019
|
|
|
6,276
|
|
2020
|
|
|
5,909
|
|
2021 and thereafter
|
|
|
37,728
|
|
|
|
|
|
|
|
|
$
|
65,813
|
|
|
|
|
|
|
13
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. The
amounts of trade accounts receivable at September 30, 2016 and December 31, 2015 have been reduced by an allowance for doubtful accounts of $1,750 and $1,485, respectively.
7.
INVENTORIES
Inventories at September 30, 2016 and December 31, 2015 are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Finished goods
|
|
$
|
54,659
|
|
|
$
|
62,547
|
|
Work-in-process
|
|
|
20,418
|
|
|
|
20,178
|
|
Raw materials
|
|
|
20,683
|
|
|
|
19,492
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current costs
|
|
|
95,760
|
|
|
|
102,217
|
|
Less: LIFO reserve
|
|
|
(4,379
|
)
|
|
|
(5,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,381
|
|
|
$
|
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.
At September 30, 2016 and
December 31, 2015, the Company had a nonconsolidated equity method investment of $4,245 and $5,246, respectively, in LB Pipe JV and other equity investments totaling $129 and $75, respectively.
The Company recorded equity in the loss of LB Pipe JV of $276 and $292 for the three months ended September 30, 2016 and 2015, respectively. For the
nine months ended September 30, 2016 and 2015, the Company recorded equity in the loss of LB Pipe JV of $1,001 and $289, respectively.
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 nine-month period ended September 30, 2015, the Company received cash distributions from LB Pipe JV 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 $635 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 September 30, 2016 and December 31, 2015, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
LB Pipe JV equity method investment
|
|
$
|
4,245
|
|
|
$
|
5,246
|
|
Loan receivable
|
|
|
635
|
|
|
|
|
|
Net investment in direct financing lease
|
|
|
899
|
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,779
|
|
|
$
|
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
|
|
$
|
35
|
|
2017
|
|
|
140
|
|
2018
|
|
|
150
|
|
2019
|
|
|
574
|
|
|
|
|
|
|
|
|
$
|
899
|
|
|
|
|
|
|
9.
LONG-TERM DEBT
United States
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revolving credit facility
|
|
$
|
132,847
|
|
|
$
|
165,000
|
|
Capital leases and financing agreements
|
|
|
2,778
|
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
135,625
|
|
|
|
168,754
|
|
Less current maturities
|
|
|
1,326
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
134,299
|
|
|
$
|
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 Amended and Restated Credit Agreement has been amended subsequent to September 30, 2016. See Note 16 Subsequent Events.
The Companys and the domestic guarantors obligations under the First Amendment are 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.
15
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 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 September 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 $1,244 or $0.12 per share were distributed for the nine-month period ended
September 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 September 30, 2016, the Company had outstanding letters of credit of approximately $425 and had gross available borrowing capacity of $141,728. The current quarter reduction in debt was largely
attributable to $26,000 of short-term intercompany advances from foreign subsidiaries into the U.S., which was used to fund our revolving credit facility at September 30, 2016. The maturity date of the First Amendment 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 $1,946 at September 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 September 30, 2016. There was approximately $311 in outstanding guarantees (as
defined in the underlying agreement) at September 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 the fourth quarter 2016.
16
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 September 30, 2016. The subsidiary had available borrowing capacity of $1,635 as of September 30, 2016.
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 September 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
|
|
|
|
September 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
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,939
|
|
|
$
|
1,939
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,939
|
|
|
$
|
1,939
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
$
|
196
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
2,307
|
|
|
$
|
|
|
|
$
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted earnings per common share - (Loss) available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,982
|
)
|
|
$
|
(57,422
|
)
|
|
$
|
(100,810
|
)
|
|
$
|
(47,773
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
10,296
|
|
|
|
10,256
|
|
|
|
10,264
|
|
|
|
10,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
10,296
|
|
|
|
10,256
|
|
|
|
10,264
|
|
|
|
10,266
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares outstanding and assumed
conversions
|
|
|
10,296
|
|
|
|
10,256
|
|
|
|
10,264
|
|
|
|
10,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.58
|
)
|
|
$
|
(5.60
|
)
|
|
$
|
(9.82
|
)
|
|
$
|
(4.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.58
|
)
|
|
$
|
(5.60
|
)
|
|
$
|
(9.82
|
)
|
|
$
|
(4.65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2016 and 2015, there were approximately 34 and 48 anti-dilutive shares
excluded from the preceding calculation, respectively. During the nine-month periods ended September 30, 2016 and 2015, there were 80 and 81 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 $320 and $(514) for the three-month periods ended September 30, 2016 and 2015, respectively, related
to restricted stock awards and performance unit awards. Stock compensation expense of $875 and $1,382 was recorded for the nine-month periods ended September 30, 2016 and 2015, respectively. At September 30, 2016, unrecognized compensation
expense for awards that the Company expects to vest approximated $1,955. The Company will recognize this expense over the upcoming four years through August 2020.
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 nine-month periods ended September 30, 2016 and 2015, the Company recognized reductions in
excess tax benefits related to stock-based compensation of $124 and excess tax benefits of $289, 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 September 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 nine-month periods ended September 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, with shareholder approval, 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
September 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
|
|
|
48,283
|
|
|
|
129,844
|
|
|
|
12.50
|
|
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 September 30, 2016
|
|
|
92,626
|
|
|
|
63,690
|
|
|
$
|
21.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-month periods ended September 30, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
27
|
|
|
$
|
29
|
|
Interest cost
|
|
|
186
|
|
|
|
185
|
|
|
|
559
|
|
|
|
555
|
|
Expected return on plan assets
|
|
|
(179
|
)
|
|
|
(203
|
)
|
|
|
(538
|
)
|
|
|
(611
|
)
|
Recognized net actuarial loss
|
|
|
69
|
|
|
|
69
|
|
|
|
207
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
85
|
|
|
$
|
61
|
|
|
$
|
255
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-month periods ended September 30, 2016 and 2015 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest cost
|
|
$
|
73
|
|
|
$
|
78
|
|
|
$
|
223
|
|
|
$
|
231
|
|
Expected return on plan assets
|
|
|
(82
|
)
|
|
|
(83
|
)
|
|
|
(250
|
)
|
|
|
(249
|
)
|
Amortization of prior service costs and transition amount
|
|
|
5
|
|
|
|
5
|
|
|
|
15
|
|
|
|
15
|
|
Recognized net actuarial loss
|
|
|
38
|
|
|
|
60
|
|
|
|
116
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
34
|
|
|
$
|
60
|
|
|
$
|
104
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined
benefit pension plans. Employer contributions of approximately $240 are anticipated to the United Kingdom L.B. Foster Rail Technologies, Inc. pension plan during 2016. For the nine months ended September 30, 2016, the Company contributed
approximately $180 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
152
|
|
|
$
|
413
|
|
|
$
|
1,289
|
|
|
$
|
1,842
|
|
Canada
|
|
|
46
|
|
|
|
54
|
|
|
|
164
|
|
|
|
167
|
|
United Kingdom
|
|
|
64
|
|
|
|
162
|
|
|
|
281
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
262
|
|
|
$
|
629
|
|
|
$
|
1,734
|
|
|
$
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
961
|
|
Warranty liability utilized
|
|
|
(682
|
)
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
9,034
|
|
|
|
|
|
|
Included within the above table are concrete tie warranty reserves of approximately $7,460 and $7,544 at September 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.
At 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 nine months of 2016, the parties continued to conduct 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
In September 2015, the Company was notified of a collective action complaint by current and former test and inspection services employees to recover
unpaid overtime wages and other damages under the Fair Labor Standards Act. The parties commenced court ordered mediation on October 17, 2016. The Company has engaged a third party specialist to assist in claim valuation, but the parties have
not engaged in any discovery to date, and there is no certainty of a potential resolution at this time. An estimate of any range of potential loss associated with this claim cannot be made based upon currently available information.
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 September 30,
2016 and December 31, 2015, the Company maintained environmental reserves approximating $6,587 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
|
|
|
26
|
|
Environmental obligations utilized
|
|
|
(79
|
)
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
6,587
|
|
|
|
|
|
|
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 nine
months ended September 30, 2016 was 36.1% and 29.5%, respectively, and 18.2% and 14.3% for the three and nine months ended September 30, 2015, respectively. The Companys effective tax rate for the 2016 periods differed from the federal
statutory rate of 35% primarily due to the discrete impact of current year asset impairments. The Companys asset impairments of $6,946 and $135,884 for the three- and nine-month periods ended September 30, 2016, respectively, were related
to both tax deductible and nondeductible assets and resulted in income tax benefits of $1,000 and $39,038, respectively.
23
16.
SUBSEQUENT EVENTS
Due to the continued weakness in the markets that we serve, during the fourth quarter of 2016, the Company estimates severance charges of approximately $1,000 will be recorded related to reduction in
force activity as the Company continues to react to changes in market conditions.
On November 7, 2016, L. B. Foster Company (the
Company), its domestic subsidiaries, and certain of its Canadian subsidiaries entered into the Second Amendment (the Second Amendment) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as
amended by the First Amendment dated June 29, 2016 (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 Second Amendment modifies the Amended and Restated Credit Agreement which had a maximum revolving credit line of $275,000. The Second Amendment reduces the permitted revolving credit borrowings to $195,000 and provides for additional term loan
borrowing of up to $30,000. The term loan will be subject to quarterly straight line amortization until fully paid off upon the final payment on January 1, 2020. Furthermore, certain matters, including excess cash flow, asset sales, and
equity issuances, trigger mandatory prepayments to the Term Loan. Term loan borrowings will not be available to draw upon once they have been repaid. Capitalized terms used but not defined herein shall have the meanings ascribed to them in
the Second Amendment or Amended and Restated Credit Agreement, as applicable.
The Second Amendment further provides for modifications to the
financial covenants as defined in the Amended and Restated Credit Agreement. The Second Amendment calls for the elimination of the Maximum Leverage Ratio covenant through the quarter ended June 30, 2018. After that period, the Maximum
Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ended September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the
credit facility. The Second Amendment also includes a Minimum Last Twelve Months EBITDA covenant (Minimum EBITDA). For the quarter ending December 31, 2016 through the quarter ending June 30, 2017, the Minimum EBITDA must be at
least $18,500. For each quarter thereafter, through the quarter ended June 30, 2018, the Minimum EBITDA requirement will increase by various increments. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the
quarter ended June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the credit agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio
of the Companys fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter ended December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit
facility. The final financial covenant included in the Second Amendment is a Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ended June 30,
2018.
The Second Amendment includes several changes to certain non-financial covenants as defined in the Credit Agreement. Through the
maturity date of the loan, the Company is now prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Companys stock has been decreased from $4,000 to
$1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000
from the prior year to $25,000 in the aggregate through the maturity date of the credit facility.
The Second Amendment provides for the
elimination of the three lowest tiers of the pricing grid that had previously been defined in the First Amendment. Upon execution of the Second Amendment through the quarter ended March 31, 2018, the Company will be locked into the highest tier
of the pricing grid which provides for pricing of the prime rate plus 225 basis points on base rate loans and the applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of
the credit facility, the Companys position on the pricing grid will be governed by a Minimum Net Leverage ratio which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018 the
Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing grid, pricing will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans.
The Company anticipates a fourth quarter 2016 charge of approximately $500 related to the write-off of unamortized deferred financing fees as a result of
the amendment.
Lastly, on November 7, 2016, the Company announced that its Board of Directors decided to suspend the quarterly dividend
beginning in the fourth quarter 2016.
Management evaluated all other activity of the Company and concluded that no subsequent events have
occurred that would require recognition in the Condensed Consolidated Financial Statements or further disclosure in the Notes to the Condensed Consolidated Financial Statements.
24