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, 2017
. The year-end Condensed Consolidated Balance Sheet as of
December 31, 2016
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 Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. 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.
Assets Held for Sale
The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell. See Note 7 Investments of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.
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” (“ASC 605”). 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, 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 continues its project adoption plan by performing a detailed evaluation of contracts and sales orders with customers and assessing the impact that this standard will have on the Company’s results of operations, cash flows, financial position, and backlog. We have also been assessing the impact to internal controls over financial reporting and disclosure requirements. We regularly brief our Audit Committee on our overall project plan as well as our progress towards adoption. The Company will adopt this standard as of January 1, 2018 and anticipates using the modified retrospective approach at adoption as it relates to ASU 2014-09.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). 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. The Company has a significant number of operating leases, and, as a result, expects this guidance to have a material impact on its Condensed Consolidated Balance Sheet. The Company does not anticipate early adoption as it relates to ASU 2016-02.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory (Topic 740),” (“ASU 2016-16”) 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 continues to evaluate the impact this standard will have on the Company’s financial statements but believes there will not be a material change once adopted. The Company will not elect early adoption of ASU 2016-16.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715),” (“ASU 2017-07”) which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires that the entity report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and report the other components of net periodic pension cost and net
periodic postretirement benefit cost in the income statement separately from the service cost component and outside a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. The new standard will be effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company is evaluating its implementation approach and assessing the impact of ASU 2017-07 on the presentation of operations.
2.
BUSINESS SEGMENTS
The Company is a leading manufacturer and distributor of products and services for transportation and energy infrastructure with locations in North America and Europe. 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 that is subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon its segment profit contribution to the Company’s consolidated results.
The following table illustrates revenues and profits (losses) from operations of the Company by segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2017
|
|
|
Net Sales
|
|
Segment Profit
|
|
Net Sales
|
|
Segment Profit
|
Rail Products and Services
|
|
$
|
62,095
|
|
|
$
|
3,472
|
|
|
$
|
187,922
|
|
|
$
|
8,938
|
|
Construction Products
|
|
39,118
|
|
|
3,387
|
|
|
121,905
|
|
|
9,156
|
|
Tubular and Energy Services
|
|
30,279
|
|
|
2,298
|
|
|
85,227
|
|
|
1,774
|
|
Total
|
|
$
|
131,492
|
|
|
$
|
9,157
|
|
|
$
|
395,054
|
|
|
$
|
19,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Segment profit (loss) 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 (loss) from operations since
December 31, 2016
. The internal cost of capital charges are eliminated during the consolidation process.
The following table provides a reconciliation of reportable segment net profit (loss) from operations to the Company’s consolidated total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Profit (loss) for reportable segments
|
|
$
|
9,157
|
|
|
$
|
(7,657
|
)
|
|
$
|
19,868
|
|
|
$
|
(132,602
|
)
|
Interest expense
|
|
(2,026
|
)
|
|
(1,520
|
)
|
|
(6,315
|
)
|
|
(4,342
|
)
|
Interest income
|
|
56
|
|
|
50
|
|
|
166
|
|
|
157
|
|
Other income
|
|
551
|
|
|
1,085
|
|
|
564
|
|
|
263
|
|
LIFO (expense) income
|
|
(1,552
|
)
|
|
917
|
|
|
(1,733
|
)
|
|
1,442
|
|
Equity in income (loss) of nonconsolidated investments
|
|
50
|
|
|
(263
|
)
|
|
(5
|
)
|
|
(946
|
)
|
Corporate expense, cost of capital elimination, and other unallocated charges
|
|
(3,222
|
)
|
|
(1,973
|
)
|
|
(8,023
|
)
|
|
(6,907
|
)
|
Income (loss) before income taxes
|
|
$
|
3,014
|
|
|
$
|
(9,361
|
)
|
|
$
|
4,522
|
|
|
$
|
(142,935
|
)
|
The following table illustrates assets of the Company by segment:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Rail Products and Services
|
|
$
|
198,761
|
|
|
$
|
174,049
|
|
Construction Products
|
|
88,542
|
|
|
81,074
|
|
Tubular and Energy Services
|
|
100,046
|
|
|
100,006
|
|
Unallocated corporate assets
|
|
21,815
|
|
|
37,894
|
|
Total
|
|
$
|
409,164
|
|
|
$
|
393,023
|
|
3.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the goodwill balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail Products and
Services
|
|
Construction
Products
|
|
Tubular and Energy
Services
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
13,785
|
|
|
$
|
5,147
|
|
|
$
|
—
|
|
|
$
|
18,932
|
|
Foreign currency translation impact
|
|
767
|
|
|
—
|
|
|
—
|
|
|
767
|
|
Balance at September 30, 2017
|
|
$
|
14,552
|
|
|
$
|
5,147
|
|
|
$
|
—
|
|
|
$
|
19,699
|
|
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. No goodwill impairment test was required in connection with these evaluations for the
nine months ended September 30, 2017
. The Company continues to monitor the recoverability of the long-lived assets associated with certain reporting units of the Company and the long-term financial projections of the businesses. Sustained declines in the markets we serve may result in future long-lived asset impairment.
The following table represents the gross other intangible assets balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Rail Products and Services
|
|
$
|
57,538
|
|
|
$
|
56,476
|
|
Construction Products
|
|
1,348
|
|
|
1,348
|
|
Tubular and Energy Services
|
|
29,179
|
|
|
29,179
|
|
|
|
$
|
88,065
|
|
|
$
|
87,003
|
|
The components of the Company’s intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Weighted Average
Amortization
Period In Years
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Non-compete agreements
|
|
5
|
|
$
|
4,233
|
|
|
$
|
(2,872
|
)
|
|
$
|
1,361
|
|
Patents
|
|
10
|
|
392
|
|
|
(160
|
)
|
|
232
|
|
Customer relationships
|
|
17
|
|
37,597
|
|
|
(8,542
|
)
|
|
29,055
|
|
Trademarks and trade names
|
|
14
|
|
10,078
|
|
|
(3,879
|
)
|
|
6,199
|
|
Technology
|
|
14
|
|
35,765
|
|
|
(13,477
|
)
|
|
22,288
|
|
|
|
|
|
$
|
88,065
|
|
|
$
|
(28,930
|
)
|
|
$
|
59,135
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Weighted Average
Amortization
Period In Years
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Non-compete agreements
|
|
5
|
|
$
|
4,219
|
|
|
$
|
(2,217
|
)
|
|
$
|
2,002
|
|
Patents
|
|
10
|
|
373
|
|
|
(143
|
)
|
|
230
|
|
Customer relationships
|
|
18
|
|
36,843
|
|
|
(6,582
|
)
|
|
30,261
|
|
Trademarks and trade names
|
|
14
|
|
10,018
|
|
|
(3,238
|
)
|
|
6,780
|
|
Technology
|
|
14
|
|
35,550
|
|
|
(11,304
|
)
|
|
24,246
|
|
|
|
|
|
$
|
87,003
|
|
|
$
|
(23,484
|
)
|
|
$
|
63,519
|
|
Intangible assets are amortized over their useful lives, which range from
4
to
25
years, with a total weighted average amortization period of approximately
15
years at
September 30, 2017
. Amortization expense for the
three months ended September 30, 2017
and
2016
was
$1,764
and
$1,763
, respectively. Amortization expense for the
nine months ended September 30, 2017
and
2016
was
$5,218
and
$7,818
, respectively.
Estimated amortization expense for the remainder of
2017
and thereafter is as follows:
|
|
|
|
|
|
Amortization Expense
|
2017
|
$
|
1,782
|
|
2018
|
7,024
|
|
2019
|
6,302
|
|
2020
|
5,980
|
|
2021
|
5,960
|
|
2022 and thereafter
|
32,087
|
|
|
$
|
59,135
|
|
4.
ACCOUNTS RECEIVABLE
Credit is extended based upon an evaluation of the customer’s 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
September 30, 2017
and
December 31, 2016
have been reduced by an allowance for doubtful accounts of
$2,138
and
$1,417
, respectively.
5.
INVENTORIES
Inventories at
September 30, 2017
and
December 31, 2016
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Finished goods
|
|
$
|
58,588
|
|
|
$
|
46,673
|
|
Work-in-process
|
|
30,507
|
|
|
21,716
|
|
Raw materials
|
|
19,851
|
|
|
18,032
|
|
Total inventories at current costs
|
|
108,946
|
|
|
86,421
|
|
Less: LIFO reserve
|
|
(4,911
|
)
|
|
(3,178
|
)
|
|
|
$
|
104,035
|
|
|
$
|
83,243
|
|
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 net realizable value, 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 management’s estimates of expected year-end levels and costs.
6.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at
September 30, 2017
and
December 31, 2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Land
|
|
$
|
14,866
|
|
|
$
|
14,826
|
|
Improvements to land and leaseholds
|
|
17,404
|
|
|
17,408
|
|
Buildings
|
|
34,503
|
|
|
33,910
|
|
Machinery and equipment, including equipment under capitalized leases
|
|
120,414
|
|
|
118,060
|
|
Construction in progress
|
|
1,431
|
|
|
1,291
|
|
|
|
188,618
|
|
|
185,495
|
|
Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases
|
|
90,082
|
|
|
81,522
|
|
|
|
$
|
98,536
|
|
|
$
|
103,973
|
|
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. There were
no
asset impairments of property, plant, and equipment during the
nine months ended
September 30, 2017
.
Depreciation expense for the
three-month periods ended September 30, 2017
and
2016
was
$3,178
and
$3,295
, respectively. For the
nine-month periods ended September 30, 2017
and
2016
, depreciation expense was
$9,705
and
$10,620
, respectively.
7.
INVESTMENTS
The Company is a member of a joint venture, L B Pipe & Coupling Products, LLC (“L B Pipe JV”), in which it maintains a
45%
ownership interest. L B Pipe JV manufactures, markets, and sells various machined components and precision coupling products for the energy, water well, 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 previously determined that L B Pipe JV was a variable interest entity. The Company concluded that it was not the primary beneficiary of the variable interest entity, as the Company did not have a controlling financial interest and did not have the power to direct the activities that most significantly impact the economic performance of L B Pipe JV.
During the quarter ended
September 30, 2017
, pursuant to the limited liability company agreement, the Company determined to sell its
45%
ownership interest to the other
45%
equity holder. The Company concluded that it has met the criteria under applicable guidance for a long-lived asset to be held for sale, and has, accordingly, reclassified L B Pipe JV investment of
$4,288
as a current asset held for sale within other current assets. The asset was subsequently remeasured to its fair market value of
$3,875
. The difference between the fair market value and the Company's carrying amount of
$413
was recorded as an other-than-temporary impairment for the
three and nine
months ended
September 30, 2017
.
At
September 30, 2017
and
December 31, 2016
, the Company had a nonconsolidated equity method investment of
$0
and
$3,902
, respectively, in L B Pipe JV and other equity investments totaling
$151
and
$129
, respectively.
The Company recorded equity in the income of L B Pipe JV of
$434
and loss of
$276
for the
three months ended September 30, 2017
and
2016
, respectively. For the
nine months ended September 30, 2017
and
2016
, the Company recorded equity in the income of L B Pipe JV of
$386
and loss of
$1,001
, respectively.
During
2016
, the Company and the other
45%
member each executed a revolving line of credit with L B Pipe JV with an available limit of
$1,350
. The Company and the other
45%
member each loaned
$1,235
to L B Pipe JV in an effort to maintain compliance with L B Pipe JV’s debt covenants with an unaffiliated bank. The Company is to receive its outstanding loan balance at the 45% equity interest sale date.
The Company’s exposure to loss results from its capital contributions and loans, net of the Company’s share of L B Pipe JV’s income or loss, and its net investment in the direct financing lease covering the facility used by L B Pipe JV for its operations, which is described below. The carrying amounts with the Company’s maximum exposure to loss at
September 30, 2017
and
December 31, 2016
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
L B Pipe JV equity method investment
|
|
$
|
3,875
|
|
|
$
|
3,902
|
|
Revolving line of credit
|
|
1,235
|
|
|
1,235
|
|
Net investment in direct financing lease
|
|
770
|
|
|
871
|
|
|
|
$
|
5,880
|
|
|
$
|
6,008
|
|
The Company is leasing
five
acres of land and
two
facilities to L B 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
2017
and the years
2018
and thereafter:
|
|
|
|
|
|
Minimum Lease Payments
|
2017
|
$
|
35
|
|
2018
|
150
|
|
2019
|
585
|
|
|
$
|
770
|
|
8.
LONG-TERM DEBT
United States
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Revolving credit facility
|
|
$
|
123,494
|
|
|
$
|
127,073
|
|
Term loan
|
|
13,131
|
|
|
30,000
|
|
Capital leases and financing agreements
|
|
1,660
|
|
|
2,492
|
|
Total
|
|
138,285
|
|
|
159,565
|
|
Less current maturities
|
|
9,887
|
|
|
10,386
|
|
Long-term portion
|
|
$
|
128,398
|
|
|
$
|
149,179
|
|
On November 7, 2016, 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 modified the Amended and Restated Credit Agreement, which had a maximum revolving credit line of
$275,000
. The Second Amendment reduced the permitted revolving credit borrowings to
$195,000
and provided
for additional term loan borrowing of
$30,000
(the “Term Loan”). The Term Loan is 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 are not 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 provided 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 ending 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 ending 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 ended
December 31, 2016
through the quarter ended June 30, 2017, the Minimum EBITDA had to be at least
$18,500
. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement will increase by various increments. The incremental Minimum EBITDA requirement for the period ended
September 30, 2017
was at least
$23,000
. At June 30, 2018, the Minimum EBITDA requirement will be
$31,000
. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the Amended and Restated Credit Agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s 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 ending June 30, 2018. The Second Amendment includes several changes to certain non-financial covenants as defined in the Amended and Restated 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 Company’s stock was 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.
At
September 30, 2017
, L.B. Foster was in compliance with the Second Amendment’s covenants.
The Second Amendment provided 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 ending 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 Company’s 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.
At
September 30, 2017
, L.B. Foster had outstanding letters of credit of approximately
$425
and had net available borrowing capacity of
$46,081
. 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, which includes an overdraft availability of
£1,500
pounds sterling (approximately
$2,010
at
September 30, 2017
). This credit facility supports the subsidiary’s 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 institution’s base rate plus
2.50%
. Outstanding performance bonds reduce availability under this credit facility. The subsidiary of the Company had
no
outstanding borrowings under this credit facility at
September 30, 2017
. There was approximately
$999
in outstanding guarantees (as defined in the underlying agreement) at
September 30, 2017
. This credit facility was renewed and amended during the fourth quarter of
2016
with all underlying terms and conditions remaining unchanged as a result of the renewal. It is the Company’s intention to renew this credit facility with NatWest Bank during the annual review within the forth quarter of
2017
.
The United Kingdom credit facility contains certain financial covenants that require the subsidiary to maintain senior interest and cash flow coverage ratios. The subsidiary was in compliance with these financial covenants at
September 30, 2017
. The subsidiary had available borrowing capacity of
$1,011
at
September 30, 2017
.
9.
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 Company’s 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.
The classification of a financial asset or liability 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 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, 2017
, the interest rate swaps were recorded within other accrued liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date and Using
|
|
Fair Value Measurements at Reporting Date and Using
|
|
|
September 30,
2017
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
December 31,
2016
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Term deposits
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
334
|
|
|
$
|
—
|
|
|
$
|
334
|
|
|
$
|
—
|
|
Total liabilities
|
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
323
|
|
|
$
|
—
|
|
|
$
|
334
|
|
|
$
|
—
|
|
|
$
|
334
|
|
|
$
|
—
|
|
The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest income or expense, in our Condensed Consolidated Statements of Operations. For the
three months ended September 30, 2017
, interest expense from interest rate swaps was
$98
. For the
nine months ended September 30, 2017
, interest expense from interest rate swaps was
$302
.
In accordance with the provisions of ASC 820, "Fair Value Measurement," the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis. During the quarter ended
September 30, 2017
, a
$413
other-than-temporary impairment charge was recorded against L B Pipe JV assets held for sale utilizing a Level 2 fair value measurement. The impairment was a result of the Company's carrying value being greater than the agreed-upon sales price, or fair market value. See Note 7 Investments of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.
10.
EARNINGS PER COMMON SHARE
(Share amounts in thousands)
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator for basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,222
|
|
|
$
|
(5,982
|
)
|
|
$
|
3,824
|
|
|
$
|
(100,810
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
10,341
|
|
|
10,296
|
|
|
10,332
|
|
|
10,264
|
|
Denominator for basic earnings per common share
|
|
10,341
|
|
|
10,296
|
|
|
10,332
|
|
|
10,264
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
|
138
|
|
|
—
|
|
|
103
|
|
|
—
|
|
Dilutive potential common shares
|
|
138
|
|
|
—
|
|
|
103
|
|
|
—
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares outstanding and assumed conversions
|
|
10,479
|
|
|
10,296
|
|
|
10,435
|
|
|
10,264
|
|
Basic earnings (loss) per common share
|
|
$
|
0.31
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.37
|
|
|
$
|
(9.82
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
0.31
|
|
|
$
|
(0.58
|
)
|
|
$
|
0.37
|
|
|
$
|
(9.82
|
)
|
Dividends paid per common share
|
|
$
|
—
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
|
$
|
0.12
|
|
There were approximately
34
and
80
anti-dilutive shares during the
three- and nine-month periods ended
September 30, 2016
, respectively, excluded from the above calculation.
11.
STOCK-BASED COMPENSATION
The Company applies the provisions of FASB ASC 718, “Compensation – Stock Compensation,” to account for the Company’s stock-based compensation. Stock-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
$503
and
$320
for the
three-month periods ended September 30, 2017
and
2016
, respectively, related to fully-vested stock awards, restricted stock awards, and performance unit awards. Stock compensation expense of
$1,228
and
$875
was recorded for the
nine-month periods ended September 30, 2017
and
2016
, respectively. At
September 30, 2017
, unrecognized compensation expense for awards that the Company expects to vest approximated
$4,140
. The Company will recognize this expense over the upcoming
3.5 years
through March 2021.
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 stock or authorized and previously unissued common stock.
During the
nine months ended September 30, 2017
, the Company recognized a tax deficiency of
$127
related to stock-based compensation, which was fully offset by a valuation allowance, and
$124
for the
nine months ended September 30, 2016
. Applying the prospective approach in accordance with ASU 2016-09, the change in excess income tax deficiency has been included in cash flows from operating activities for the
nine months ended September 30, 2017
in the Condensed Consolidated Statements of Cash Flows.
Restricted Stock Awards and Performance Unit Awards
Under the 2006 Omnibus 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 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 agreement. Performance unit awards are offered annually under separate
three
-year long-term incentive programs. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples, as defined in the underlying program. If the Company’s 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, 2017, the Nomination and Governance Committee and Board of Directors jointly approved the Deferred Compensation Plan for Non-Employee Directors under the 2006 Omnibus Incentive Plan, which permits Non-Employee Directors of the Company to defer receipt of earned cash and/or stock compensation for service on the Board. During the quarter ended March 31, 2017, the Compensation Committee approved the
2017
Performance Share Unit Program and the Executive Annual Incentive Compensation Plan (consisting of cash and equity components). The Compensation Committee also certified the actual performance achievement of participants in the
2014
Performance Share Unit Program. Actual performance resulted in no payout relative to the
2014
Performance Share Unit Program target performance metrics.
The following table summarizes the restricted stock award, deferred stock award, and performance unit award activity for the period ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
Deferred
Stock
|
|
Performance
Stock Units
|
|
Weighted Average
Grant Date Fair Value
|
Outstanding at December 31, 2016
|
|
79,272
|
|
|
—
|
|
|
63,690
|
|
|
$
|
21.66
|
|
Granted
|
|
170,196
|
|
|
24,927
|
|
|
120,583
|
|
|
14.24
|
|
Vested
|
|
(22,808
|
)
|
|
—
|
|
|
—
|
|
|
28.88
|
|
Adjustment for incentive awards expected to vest
|
|
—
|
|
|
—
|
|
|
53,385
|
|
|
18.33
|
|
Cancelled
|
|
(44,854
|
)
|
|
—
|
|
|
(49,062
|
)
|
|
15.40
|
|
Outstanding at September 30, 2017
|
|
181,806
|
|
|
24,927
|
|
|
188,596
|
|
|
$
|
16.48
|
|
12.
RETIREMENT PLANS
Retirement Plans
The Company has
seven
retirement plans that cover its hourly and salaried employees in the United States:
three
defined benefit plans, all of which are frozen, and
four
defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Company’s contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Company’s policy and investment guidelines applicable to each respective plan. The Company’s policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
The Company’s 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.
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, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
27
|
|
Interest cost
|
|
171
|
|
|
186
|
|
|
513
|
|
|
559
|
|
Expected return on plan assets
|
|
(178
|
)
|
|
(179
|
)
|
|
(533
|
)
|
|
(538
|
)
|
Recognized net actuarial loss
|
|
33
|
|
|
69
|
|
|
98
|
|
|
207
|
|
Net periodic pension cost
|
|
$
|
26
|
|
|
$
|
85
|
|
|
$
|
78
|
|
|
$
|
255
|
|
The Company does not expect to contribute to its United States defined benefit plans in
2017
.
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, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest cost
|
|
$
|
56
|
|
|
$
|
73
|
|
|
$
|
168
|
|
|
$
|
223
|
|
Expected return on plan assets
|
|
(67
|
)
|
|
(82
|
)
|
|
(201
|
)
|
|
(250
|
)
|
Amortization of prior service costs and transition amount
|
|
4
|
|
|
5
|
|
|
12
|
|
|
15
|
|
Recognized net actuarial loss
|
|
72
|
|
|
38
|
|
|
216
|
|
|
116
|
|
Net periodic pension cost
|
|
$
|
65
|
|
|
$
|
34
|
|
|
$
|
195
|
|
|
$
|
104
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. Employer contributions of approximately
$251
are anticipated to the United Kingdom Rail Technologies pension plan during
2017
. For the
nine months ended September 30, 2017
, the Company contributed approximately
$188
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
|
$
|
415
|
|
|
$
|
152
|
|
|
$
|
1,276
|
|
|
$
|
1,289
|
|
Canada
|
|
53
|
|
|
46
|
|
|
167
|
|
|
164
|
|
United Kingdom
|
|
93
|
|
|
64
|
|
|
306
|
|
|
281
|
|
|
|
$
|
561
|
|
|
$
|
262
|
|
|
$
|
1,749
|
|
|
$
|
1,734
|
|
13.
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.
The following table sets forth the Company’s product warranty accrual:
|
|
|
|
|
|
Warranty Liability
|
Balance at December 31, 2016
|
$
|
10,154
|
|
Additions to warranty liability
|
3,203
|
|
Warranty liability utilized
|
(3,743
|
)
|
Balance at September 30, 2017
|
$
|
9,614
|
|
Included within the above table are concrete tie warranty reserves of approximately
$7,607
and
$7,574
at
September 30, 2017
and
December 31, 2016
, 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 CXT’s 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 CXT’s Grand Island, NE facility failed to meet contract specifications, had workmanship defects and were cracking and failing prematurely. Of the
3 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 tie rating 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 Company’s 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 Company’s estimate of the number of defective concrete ties that will ultimately require replacement during the applicable warranty periods.
2013
Throughout
2013
, at UPRR’s 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.
In late November
2013
, the Company received notice from UPRR asserting a material breach of the amended 2005 supply agreement. UPRR’s 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 UPRR’s claim of breach and included the reconciliation of warranty claims supported by substantial findings from the Company’s 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 UPRR’s 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 other’s 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 (“Complaint”) 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 UPRR’s 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 UPRR’s 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 Company’s warranty does not apply to ties that (a) have been repaired or altered without the Company’s 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 Company’s 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 under concrete tie rating guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement rated and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRR’s 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 Company’s 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 a 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 Company’s Spokane, WA production facility. Since that time, UPRR has discontinued submitting purchase orders to the Company for shipment of warranty replacement ties.
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 UPRR’s 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 UPRR’s conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to UPRR’s claims and also for the Company’s counterclaims.
2016
By Scheduling Order dated June 29, 2016, an August 31, 2017 deadline for the completion of fact discovery was established with trial to proceed at some future date after October 30, 2017, and UPRR filed an amended notice of trial to commence on October 30, 2017.
2017
By Third Amended Scheduling Order dated September 26, 2017, a June 29, 2018 deadline for completion of discovery has been established with trial to proceed at some future date on or after October 1, 2018. During the first
nine months ended September 30, 2017
, the parties continued to conduct discovery, with various disputes that required and will likely require court resolution. 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 UPRR’s 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 additional 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 Company’s efforts to comply with environmental regulations may have an adverse effect on its future earnings. On June 5, 2017, a General Notice Letter was received from the United States Environmental Protection Agency ("EPA") indicating that the Company may be a potentially responsible party regarding the Portland Harbor Superfund Site cleanup along with numerous other companies. The Company is reviewing the basis for its identification by the EPA and the nature of the historic operations of an L.B. Foster predecessor on the site. Management does not believe that compliance with the present environmental protection laws will 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, 2017
and
December 31, 2016
, the Company maintained environmental reserves approximating
$6,255
and
$6,270
, respectively. The following table sets forth the Company’s environmental obligation:
|
|
|
|
|
|
Environmental liability
|
Balance at December 31, 2016
|
$
|
6,270
|
|
Additions to environmental obligations
|
7
|
|
Environmental obligations utilized
|
(22
|
)
|
Balance at September 30, 2017
|
$
|
6,255
|
|
The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. Legal actions are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened legal actions. Based on available information, it is the opinion of management that the ultimate resolution of pending or threatened legal actions, both individually and in the aggregate, will not result in losses having a material adverse effect on the Company's financial position or liquidity at
September 30, 2017
.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions, the Company discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Company's assessment at
September 30, 2017
, no such disclosures were considered necessary.
14.
INCOME TAXES
For the
three months ended September 30, 2017
and
2016
, the Company recorded an income tax benefit of
$208
on pretax income of
$3,014
and
$3,379
on pretax losses of
$9,361
, respectively, for an effective income tax rate of
(6.9)%
and
36.1%
, respectively. For the
nine months ended September 30, 2017
and
2016
, the Company recorded an income tax provision of
$698
on pretax income of
$4,522
and an income tax benefit of
$42,125
on pretax losses of
$142,935
, respectively, for an effective income tax rate of
15.4%
and
29.5%
, respectively. The Company’s tax provision for the
nine months ended September 30, 2017
is primarily comprised of taxes on our Canadian and United Kingdom operations. However, as a result of the U.S. consolidated group's current year income, the Company's estimated annual effective tax rate was adjusted during the third quarter to include the realization of a portion of its U.S. deferred tax assets previously offset by a valuation allowance. The Company continued to maintain a full valuation allowance against its U.S. deferred tax assets, which is likely to result in significant variability of the effective tax rate in the current year. Changes in pretax income projections and the mix of income across jurisdictions could also impact the effective tax rate.
15.
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 Condensed Consolidated Financial Statements.