NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
FINANCIAL
STATEMENTS
(Dollars in thousands, except share data unless otherwise noted)
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 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, 2013. Amounts included in the balance sheet as of December 31, 2012 were derived from our audited balance sheet. For further
information, refer to the consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2012. In this Quarterly Report on Form 10-Q, references to
we, us, our, L.B. Foster, and the Company refer collectively to L.B. Foster Company and its consolidated subsidiaries.
During 2012, the Company sold substantially all of the assets and liabilities of its railway securement business, Shipping Systems Division (SSD), and its Precise Structural Products business, Precise.
Certain amounts included in the prior year period Condensed Consolidated Financial Statements have been reclassified for comparative purposes to conform with the presentation of discontinued operations and other historical changes in the current
year period.
2.
RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
On January 1, 2013, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to the testing of indefinite-lived intangible assets for impairment. These changes provide an
entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset
is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity
elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity
also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. Notwithstanding the adoption of these changes, management plans to proceed directly to the two-step quantitative
test for the Companys indefinite-lived intangible assets. The adoption of these changes had no impact on the Companys Condensed Consolidated Financial Statements.
On January 1, 2013, the Company adopted changes issued by the FASB to the reporting of amounts reclassified out of accumulated other comprehensive income. These changes require an entity to report
the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts
that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. These requirements are to be
applied to each component of accumulated other comprehensive income. The adoption of these changes is displayed in the Companys Condensed Consolidated Statements of Comprehensive Income.
In March 2013, the FASB issued changes to a parent entitys accounting for the cumulative translation adjustment upon derecognition of certain
subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. A parent entity is required to release any related cumulative foreign currency translation adjustment from accumulated other comprehensive income into
net income in the following circumstances: (i) a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity if the sale or transfer results in the complete or
substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided; (ii) a partial sale of an equity method investment that is a foreign entity; (iii) a partial sale of an equity method
investment that is not a foreign entity whereby the partial sale represents a complete or substantially complete liquidation of the foreign entity that held the equity method investment; and (iv) the sale of an investment in a foreign entity.
These changes become effective for the Company on January 1, 2014. Management has determined that the adoption of these changes will not have an impact on the Companys Condensed Consolidated Financial Statements, unless the Company
disposes of one of its foreign entities.
8
3.
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
their contribution to the Companys consolidated results based upon segment profit. Segment profit represents pre-tax income excluding certain corporate items, cost of capital charges and LIFO as reconciled below.
The following table illustrates revenues and profits from continuing operations of the Company by segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2013
|
|
|
Nine Months Ended
September 30, 2013
|
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
Rail products
|
|
$
|
105,552
|
|
|
$
|
9,713
|
|
|
$
|
277,843
|
|
|
$
|
21,749
|
|
Construction products
|
|
|
49,320
|
|
|
|
2,855
|
|
|
|
129,828
|
|
|
|
5,373
|
|
Tubular products
|
|
|
7,376
|
|
|
|
985
|
|
|
|
33,834
|
|
|
|
8,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
162,248
|
|
|
$
|
13,553
|
|
|
$
|
441,505
|
|
|
$
|
35,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2012
|
|
|
Nine Months Ended
September 30, 2012
|
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
|
Net
Sales
|
|
|
Segment
Profit
|
|
Rail products
|
|
$
|
110,993
|
|
|
$
|
7,904
|
|
|
$
|
278,993
|
|
|
$
|
1,743
|
|
Construction products
|
|
|
45,948
|
|
|
|
3,083
|
|
|
|
132,173
|
|
|
|
6,062
|
|
Tubular products
|
|
|
13,405
|
|
|
|
3,783
|
|
|
|
36,651
|
|
|
|
9,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
170,346
|
|
|
$
|
14,770
|
|
|
$
|
447,817
|
|
|
$
|
17,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits from continuing 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 continuing operations from December 31, 2012. Internal cost of capital charges are eliminated during the consolidation
process.
The following table provides a reconciliation of reportable segment net profit from continuing operations to the Companys
consolidated total:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Income for reportable segments
|
|
$
|
13,553
|
|
|
$
|
14,770
|
|
|
$
|
35,261
|
|
|
$
|
17,306
|
|
Interest expense
|
|
|
(118
|
)
|
|
|
(141
|
)
|
|
|
(376
|
)
|
|
|
(405
|
)
|
Interest income
|
|
|
149
|
|
|
|
126
|
|
|
|
494
|
|
|
|
319
|
|
Other income (expense)
|
|
|
638
|
|
|
|
(612
|
)
|
|
|
953
|
|
|
|
(4
|
)
|
LIFO income
|
|
|
553
|
|
|
|
432
|
|
|
|
299
|
|
|
|
333
|
|
Equity in income of nonconsolidated investment
|
|
|
296
|
|
|
|
310
|
|
|
|
892
|
|
|
|
643
|
|
Corporate expense, cost of capital elimination and other unallocated charges
|
|
|
(1,049
|
)
|
|
|
(1,774
|
)
|
|
|
(4,962
|
)
|
|
|
(5,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
14,022
|
|
|
$
|
13,111
|
|
|
$
|
32,561
|
|
|
$
|
13,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill at September 30, 2013 and December 31, 2012 was $41,237, of which $38,026 is attributable to the Companys Rail Products segment and $3,211 is attributable
to the Construction Products segment.
The Company performs goodwill impairment tests at least annually 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 as a
basis for determining whether it is necessary to perform the two-step goodwill impairment test. No goodwill impairment test was required in connection with these evaluations for the nine months ended September 30, 2013. In 2012, the Company
performed its annual evaluation of the carrying value of its goodwill during the fourth quarter of 2012. No goodwill impairment charge was required in connection with this evaluation in 2012.
As of September 30, 2013 and December 31, 2012, identified intangible assets of $2,305 are attributable to the Companys Construction Products segment. As of September 30, 2013 and
December 31, 2012, $44,588 and $44,506 are attributable to the Companys Rail Products segment, respectively. The components of the Companys intangible assets are as follows:
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|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
|
Weighted Average
Amortization
In Years
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete agreements
|
|
5
|
|
$
|
380
|
|
|
$
|
(372
|
)
|
|
$
|
8
|
|
Patents
|
|
10
|
|
|
897
|
|
|
|
(462
|
)
|
|
|
435
|
|
Customer relationships
|
|
23
|
|
|
19,960
|
|
|
|
(3,303
|
)
|
|
|
16,657
|
|
Supplier relationships
|
|
5
|
|
|
350
|
|
|
|
(196
|
)
|
|
|
154
|
|
Trademarks
|
|
17
|
|
|
6,280
|
|
|
|
(1,202
|
)
|
|
|
5,078
|
|
Technology
|
|
18
|
|
|
19,026
|
|
|
|
(3,213
|
)
|
|
|
15,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,893
|
|
|
$
|
(8,748
|
)
|
|
$
|
38,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Weighted Average
Amortization
In Years
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete agreements
|
|
5
|
|
$
|
380
|
|
|
$
|
(367
|
)
|
|
$
|
13
|
|
Patents
|
|
10
|
|
|
815
|
|
|
|
(412
|
)
|
|
|
403
|
|
Customer relationships
|
|
23
|
|
|
19,960
|
|
|
|
(2,488
|
)
|
|
|
17,472
|
|
Supplier relationships
|
|
5
|
|
|
350
|
|
|
|
(143
|
)
|
|
|
207
|
|
Trademarks
|
|
17
|
|
|
6,280
|
|
|
|
(879
|
)
|
|
|
5,401
|
|
Technology
|
|
18
|
|
|
19,026
|
|
|
|
(2,357
|
)
|
|
|
16,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,811
|
|
|
$
|
(6,646
|
)
|
|
$
|
40,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average
amortization period of approximately 20 years. Amortization expense from continuing operations for the three-month periods ended September 30, 2013 and 2012 were $701 and $703, respectively. Amortization expense from continuing operations for
the nine-month periods ended September 30, 2013 and 2012 was $2,102 and $2,097, respectively.
10
Estimated amortization expense from continuing operations for the remainder of 2013 and the years 2014 and
thereafter is as follows:
|
|
|
|
|
|
|
Amortization Expense
|
|
2013
|
|
$
|
700
|
|
2014
|
|
|
2,789
|
|
2015
|
|
|
2,514
|
|
2016
|
|
|
2,420
|
|
2017
|
|
|
2,353
|
|
2018 and thereafter
|
|
|
27,369
|
|
|
|
|
|
|
|
|
$
|
38,145
|
|
|
|
|
|
|
5.
ACCOUNTS RECEIVABLE
Credit is extended based upon an evaluation of the customers financial condition and while collateral is not required, the Company often receives surety bonds that guarantee payment. Credit terms
are consistent with industry standards and practices. Trade accounts receivable from continuing operations at September 30, 2013 and December 31, 2012 have been reduced by an allowance for doubtful accounts of $941 and $899, respectively.
6.
INVENTORIES
Inventories
of continuing operations of the Company at September 30, 2013 and December 31, 2012 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Finished goods
|
|
$
|
67,018
|
|
|
$
|
78,715
|
|
Work-in-process
|
|
|
13,127
|
|
|
|
17,693
|
|
Raw materials
|
|
|
22,117
|
|
|
|
19,764
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current costs
|
|
|
102,262
|
|
|
|
116,172
|
|
Less: LIFO reserve
|
|
|
(8,765
|
)
|
|
|
(9,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,497
|
|
|
$
|
107,108
|
|
|
|
|
|
|
|
|
|
|
Inventories of the Companys continuing operations are 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.
7.
INVESTMENTS
The Company is a member of a joint venture, L B Pipe & Coupling Products, LLC (the JV) with L B Industries, Inc. and James Legg until
June 30, 2019. The Company and L B Industries, Inc. each have a 45% ownership interest in the JV. The JV manufactures, markets and sells various precision coupling products for the energy, utility and construction markets. Under the terms
of the JV agreement, as amended, the Company was required to make capital contributions totaling approximately $3,000. The Company fulfilled these commitments during 2011. The other JV members are required to make proportionate contributions in
accordance with their ownership percentages in the JV.
Under applicable guidance for variable interest entities in ASC 810,
Consolidation, the Company determined that the 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 JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.
As of September 30, 2013 and December 31, 2012, the Company had a nonconsolidated equity method investment of $4,666 and $4,332, respectively.
11
The Company recorded equity in the income of the JV of approximately $296 and $310 for the three months
ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, the Company recorded equity in the income of the JV of approximately $892 and $643, respectively.
During the three and nine months ended September 30, 2013, each of the JV members received a proportional distribution of equity from the JV. The
Companys 45% ownership interest resulted in a cash distribution of $90 and $558 for the three and nine months ended September 30, 2013, respectively. There were no changes to the members ownership interests as a result of the
distribution.
The Companys exposure to loss results from its capital contributions, net of the Companys share of the JVs
income or loss, and its net investment in the direct financing lease related to the facility used by the JV for its operations. The carrying amounts of these items have a maximum exposure to loss at September 30, 2013 and December 31,
2012, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Equity method investment
|
|
$
|
4,666
|
|
|
$
|
4,332
|
|
Net investment in direct financing lease
|
|
|
1,250
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,916
|
|
|
$
|
5,659
|
|
|
|
|
|
|
|
|
|
|
The Company is leasing five acres of land and two facilities to the JV over a period of 9.5 years, with a 5.5 year
renewal period. In November 2012, the Company executed the first amendment to its lease with the JV. The amendment included the addition of a second facility built by the Company that was leased to the JV. The current monthly lease payments,
including interest, 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 Company maintained a net investment in this direct financing lease of approximately $1,250 and $1,327 at September 30, 2013 and December 31,
2012, respectively.
The following is a schedule of the direct financing minimum lease payments for the remainder of 2013 and the years 2014
and thereafter:
|
|
|
|
|
|
|
Minimum Lease Payments
|
|
2013
|
|
$
|
29
|
|
2014
|
|
|
114
|
|
2015
|
|
|
122
|
|
2016
|
|
|
131
|
|
2017
|
|
|
140
|
|
2018 and thereafter
|
|
|
714
|
|
|
|
|
|
|
|
|
$
|
1,250
|
|
|
|
|
|
|
8.
DEFERRED REVENUE
Deferred revenue of $3,981 and $7,447 as of September 30, 2013 and December 31, 2012, respectively, consists of customer payments received or contracts for which collectability is reasonably
assured however all of the revenue recognition criteria have not yet been met. The Company has significantly fulfilled its obligations under the contracts, but due to the Companys continuing involvement with the material, revenue is precluded
from being recognized until title passes to the customer.
9.
BORROWINGS
United States
On May 2, 2011, the Company, its domestic subsidiaries, and certain of
its Canadian subsidiaries entered into a new $125,000 Revolving Credit Facility Credit Agreement (Credit Agreement) with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A. and Citizens Bank of Pennsylvania. This Credit Agreement replaced
a prior revolving credit facility with a maximum credit line of $90,000 and a $20,000 term loan. The Credit Agreement provides for a five-year,
12
unsecured revolving credit facility that permits borrowing up to $125,000 for the U.S. borrowers and a sublimit of the equivalent of $15,000 U.S. dollars that is available to the Canadian
borrowers. Provided no event of default exists, the Credit Agreement contains a provision that provides for an increase in the revolver facility of $50,000 that can be allocated to existing or new lenders if the Companys borrowing requirements
should increase. The Credit Agreement includes a sublimit of $20,000 for the issuance of trade and standby letters of credit.
Borrowings
under the Credit Agreement will bear interest at rates based upon either the base rate or LIBOR-based rate plus applicable margins. Applicable margins are dictated by the ratio of the Companys indebtedness, less cash on hand in excess of
$15,000, to the Companys consolidated EBITDA, as defined in the underlying 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 LIBOR rate, as
defined in the underlying Credit Agreement, plus 1.00%. The base rate spread ranges from 0.00% to 1.00%. LIBOR-based rates are determined by dividing the published LIBOR rate by a number equal to 1.00 minus the percentage prescribed by the Federal
Reserve for determining the maximum reserve requirements with respect to any Eurocurrency funding by banks on such day. The LIBOR-based rate spread ranges from 1.00% to 2.00%.
The Credit Agreement includes two financial covenants: (a) the Leverage Ratio, defined as the Companys Indebtedness, less cash on hand in excess of $15,000, divided by the Companys
consolidated EBITDA, which must not exceed 3.00 to 1.00 and (b) Minimum Interest Coverage, defined as consolidated EBITDA less Capital Expenditures divided by consolidated interest expense, which must be no less than 3.00 to 1.00.
The Credit Agreement permits the Company to pay dividends and distributions and make redemptions with respect to its stock provided no event of default
or potential default (as defined in the Credit Agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $15,000 per year when funds are drawn on the
facility. If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $15,000 per year are subjected to a limitation of $75,000 in the aggregate. The $75,000 aggregate limitation also includes certain loans,
investments, and acquisitions. The Company is permitted to acquire the stock or assets of other entities with limited restrictions, provided that the Leverage Ratio does not exceed 2.50 to 1.00 after giving effect to the acquisition.
Other restrictions exist at all times including, but not limited to, limitation of the Companys sale of assets, other indebtedness incurred by
either the borrowers or the non-borrower subsidiaries of the Company, guaranties, and liens.
On July 9, 2012, the Company amended the
Credit Agreement to increase the limit applicable to the Companys sale of assets from $10,000 to $25,000.
As of September 30,
2013, the Company was in compliance with the Credit Agreements covenants.
The Company had no outstanding borrowings under the revolving
credit facility at September 30, 2013 or December 31, 2012 and had available borrowing capacity of $124,186 at September 30, 2013.
Letters of Credit
At September 30, 2013, the Company had outstanding letters of
credit of approximately $814.
United Kingdom
A subsidiary of the Company has a working capital facility with NatWest Bank for its United Kingdom operations which includes an overdraft availability of £1,500 pounds sterling (approximately
$2,428 at September 30, 2013). 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, 2013.
There was approximately $186 in outstanding guarantees (as defined in the underlying agreement) at September 30, 2013. This credit facility was renewed during the three month period ended September 30, 2013 with no significant changes to
the underlying terms or conditions in the facility. The facility will expire on July 31, 2014, however it is the Companys intention to renew this credit facility with NatWest Bank during the annual review of the credit facility.
The United Kingdom loan agreements contain 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, 2013. The subsidiary had available borrowing capacity of $2,242 at September 30, 2013.
13
10.
DISCONTINUED OPERATIONS
On June 4, 2012, the Company sold substantially all of the assets and liabilities of its railway securement business, SSD, for $8,579, resulting in a pre-tax gain of $3,508. As a result of the sale,
the Company divested $2,588 in goodwill attributed to the Rail Products segment in connection with the sale of its railway securement business. The goodwill balance was not deductible for income tax purposes. Intangible assets with net carrying
value of $170 were also included with this sale.
On August 30, 2012, the Company sold substantially all of the assets and liabilities of
its precise structural products business (Precise), for $2,643.
The operations of these divisions qualify as a component of an
entity under FASB ASC 205-20, Presentation of Financial Statements Discontinued Operations and thus, the operations have been reclassified as discontinued and prior periods have been reclassified to conform to this
presentation. Future expenses of discontinued operations are not expected to be material.
Net sales and income, including the prior year
pre-tax gain of $3,508, from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net sales
|
|
$
|
|
|
|
$
|
1,159
|
|
|
$
|
73
|
|
|
$
|
8,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
(343
|
)
|
|
$
|
23
|
|
|
$
|
3,805
|
|
Income tax expense
|
|
|
|
|
|
|
(104
|
)
|
|
|
9
|
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
(239
|
)
|
|
$
|
14
|
|
|
$
|
1,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax rates for discontinued operations in the prior year were significantly impacted by $2,588 of goodwill
allocated to discontinued operations which was not deductible for income tax purposes.
The Company maintained current assets from
discontinued operations of $167 and $464 as of September 30, 2013 and December 31, 2012, respectively. Current liabilities related to discontinued operations were $26 and $106 as of September 30, 2013 and December 31, 2012,
respectively.
14
11.
EARNINGS PER COMMON SHARE
(Average share data in thousands)
The following table sets forth the computation of basic and
diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Numerator for basic and diluted earnings per common share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
9,793
|
|
|
$
|
8,464
|
|
|
$
|
22,001
|
|
|
$
|
8,122
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
(239
|
)
|
|
|
14
|
|
|
|
1,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,793
|
|
|
$
|
8,225
|
|
|
$
|
22,015
|
|
|
$
|
9,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
10,182
|
|
|
|
10,141
|
|
|
|
10,171
|
|
|
|
10,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
10,182
|
|
|
|
10,141
|
|
|
|
10,171
|
|
|
|
10,117
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
11
|
|
|
|
15
|
|
|
|
11
|
|
|
|
16
|
|
Other stock compensation plans
|
|
|
88
|
|
|
|
50
|
|
|
|
73
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
99
|
|
|
|
65
|
|
|
|
84
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions
|
|
|
10,281
|
|
|
|
10,206
|
|
|
|
10,255
|
|
|
|
10,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.96
|
|
|
$
|
0.83
|
|
|
$
|
2.16
|
|
|
$
|
0.80
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
0.00
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.96
|
|
|
$
|
0.81
|
|
|
$
|
2.16
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.95
|
|
|
$
|
0.83
|
|
|
$
|
2.15
|
|
|
$
|
0.80
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
0.00
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.95
|
|
|
$
|
0.81
|
|
|
$
|
2.15
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
0.030
|
|
|
$
|
0.025
|
|
|
$
|
0.090
|
|
|
$
|
0.075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2013, the Companys Board of Directors authorized an increase to the regular quarterly dividend to $0.03
per common share.
15
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 $437 and $477 for the three-month period ended
September 30, 2013 and 2012, respectively, related to restricted stock awards and performance unit awards. Stock compensation expense of $1,528 and $1,312 was recorded for the nine-month periods ended September 30, 2013 and 2012,
respectively.
Shares issued as a result of vested stock-based compensation generally will be from previously issued shares which have been
reacquired by the Company and held as Treasury shares or authorized but previously unissued common stock.
The excess tax benefit realized for
the tax deduction from stock-based compensation approximated $192 and $121 for the nine months ended September 30, 2013 and 2012, respectively. This excess tax benefit is included in cash flows from financing activities in the Condensed
Consolidated Statements of Cash Flows.
Stock Option Awards
A summary of the option activity as of September 30, 2013 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Value
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
(Dollars in
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
thousands)
|
|
Outstanding and Exercisable at January 1, 2013
|
|
|
22,500
|
|
|
$
|
10.41
|
|
|
|
2.2
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,750
|
)
|
|
|
9.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at September 30, 2013
|
|
|
18,750
|
|
|
$
|
10.64
|
|
|
|
1.5
|
|
|
$
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2013, common stock options outstanding and exercisable under the Companys equity plans had
option prices ranging from $7.81 to $14.77, with a weighted average exercise price of $10.64. At September 30, 2012, common stock options outstanding and exercisable under the Companys equity plans had option prices ranging from $4.10 to
$14.77, with a weighted average exercise price of $9.94 per share.
The total intrinsic value of stock options outstanding and exercisable at
September 30, 2012 was $638.
The weighted average remaining contractual life of the stock options outstanding at September 30, 2013
and 2012 was 1.5 and 2.4 years, respectively.
There were 3,750 stock options exercised during the three-month period ended September 30,
2013 with an average exercise price of $9.30. There were 10,000 stock options exercised with a weighted average exercise price per share of $6.02 exercised during the three-month period ended September 30, 2012. The total intrinsic value of
stock options exercised for the three-month periods ended September 30, 2013 and 2012 were $79 and $225, respectively.
There were 3,750
stock options exercised during the nine-month period ended September 30, 2013 with a weighted average exercise price of $9.30. There were 11,450 stock options, with a weighted average exercise price per share of $6.44, exercised during the
nine-month period ended September 30, 2012. The total intrinsic value of stock options exercised during the nine-month periods ended September 30, 2013 and 2012 were $79 and $255, respectively.
16
Restricted Stock Awards
For the nine-month periods ended September 30, 2013 and 2012, the Company granted 12,973 and 92,347 shares, respectively, of restricted stock to employees. A summary of restricted stock award
activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Grant Date
|
|
|
Fair Value
|
|
Grant Date
|
|
Shares
|
|
|
Share Price
|
|
|
(Dollars in Thousands)
|
|
February 1, 2012
|
|
|
66,000
|
|
|
$
|
30.15
|
|
|
$
|
1,990
|
|
March 6, 2012
|
|
|
18,347
|
|
|
|
27.49
|
|
|
|
504
|
|
May 23, 2012
|
|
|
8,000
|
|
|
|
28.05
|
|
|
|
224
|
|
February 27, 2013
|
|
|
12,973
|
|
|
|
42.49
|
|
|
|
551
|
|
These restricted stock awards, which are subject to forfeiture, time-vest after a four-year holding period, unless
indicated otherwise by the underlying restricted stock agreement. Certain awards of restricted stock included in the above table provide for incremental vesting over a period up to the vesting date listed.
Performance Unit Awards
Annually, under
separate three-year long-term incentive plans, pursuant to the Omnibus Plan, the Company grants performance units. A summary of performance unit stock award activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
Grant Date
|
|
Units
|
|
|
Grant Date
Share Price
|
|
|
Aggregate
Grant Date
Fair Value
(Dollars in Thousands)
|
|
2011 - 2013
|
|
March 15, 2011
|
|
|
34,002
|
|
|
$
|
38.46
|
|
|
$
|
1,308
|
|
2012 - 2014
|
|
March 6, 2012
|
|
|
43,042
|
|
|
|
27.49
|
|
|
|
1,183
|
|
2013 - 2015
|
|
February 27, 2013
|
|
|
31,418
|
|
|
|
42.49
|
|
|
|
1,335
|
|
Performance units are subject to forfeiture, time-vest over a three year period 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 Omnibus plan. The aggregate fair value in the above table is based upon achieving 100% of the
performance targets as defined in the underlying Omnibus plan. During the second quarter of 2012, the Company reversed $1,157 of incentive compensation expense caused by the impact of a $19,000 product warranty charge on plan performance conditions,
as the vesting of the performance units was determined to be improbable at that time.
17
13.
RETIREMENT PLANS
Retirement Plans
The Company has five retirement plans which cover its hourly and salaried
employees in the United States: three defined benefit plans (one active / two frozen) and two defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Companys funding 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 both a defined contribution plan and a defined benefit plan. These plans are
discussed in further detail below.
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, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
25
|
|
|
$
|
24
|
|
Interest cost
|
|
|
177
|
|
|
|
187
|
|
|
|
530
|
|
|
|
561
|
|
Expected return on plan assets
|
|
|
(214
|
)
|
|
|
(203
|
)
|
|
|
(642
|
)
|
|
|
(607
|
)
|
Recognized net actuarial loss
|
|
|
53
|
|
|
|
49
|
|
|
|
159
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
24
|
|
|
$
|
41
|
|
|
$
|
72
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute approximately $555 to its United States defined benefit plans in 2013. For the nine
months ended September 30, 2013, the Company contributed approximately $332.
United Kingdom Defined Benefit Plan
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three and nine-month periods ended September 30, 2013 and 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Interest cost
|
|
$
|
85
|
|
|
$
|
89
|
|
|
$
|
255
|
|
|
$
|
252
|
|
Expected return on plan assets
|
|
|
(73
|
)
|
|
|
(76
|
)
|
|
|
(219
|
)
|
|
|
(215
|
)
|
Amortization of transition amount
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Recognized net actuarial loss
|
|
|
57
|
|
|
|
58
|
|
|
|
171
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
57
|
|
|
$
|
59
|
|
|
$
|
171
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined
benefit pension plans. Employer contributions of $264 are anticipated to be made to the United Kingdom L.B. Foster Rail Technologies, Inc. pension plan during 2013. For the nine months ended September 30, 2013, the Company contributed
approximately $191 to the plan.
18
Defined Contribution Plans
The Company has a domestic defined contribution plan that covers all non-union hourly and all salaried employees (Salaried Plan). The Salaried Plan permits both pre-tax and after-tax employee
contributions. Participants can contribute, subject to statutory limitations, between 1% and 75% of eligible pre-tax pay and between 1% and 100% of eligible after-tax pay. The Companys employer match is 100% of the first 1% of deferred
eligible compensation and up to 50% of the next 6%, based on years of service, of deferred eligible compensation, for a total maximum potential match of 4%. The Company may also make discretionary contributions to the Salaried Plan.
The Company also has a domestic defined contribution plan for union hourly employees with contributions made by both the participants and the Company
based on various formulas (Union Plan).
Rail Technologies, maintains a defined contribution plan covering all non-union employees at its
Montreal, Quebec, Canada location (Montreal Plan). Under the terms of the Montreal Plan, the employer may contribute 4% of each employees compensation as a non-elective contribution and may also contribute 30% of the first 6% of each
employees compensation contributed to the Montreal Plan.
The subsidiary also maintains a defined contribution plan covering
substantially all employees at its United Kingdom locations (U.K. Plan). Benefits under the U.K. Plan are provided under no formal written agreement. Under the terms of the defined contribution U.K. Plan, the employer may make non-elective
contributions of between 3% and 10% of each employees compensation.
Finally, Rail Technologies maintains a defined contribution plan
covering substantially all of the employees of L.B. Foster Rail Technologies, Corp. in Burnaby, British Columbia, Canada, a wholly-owned subsidiary of the Company (Burnaby Plan). Under the terms of the Burnaby Plan, the employer may contribute 4% of
each employees compensation as a non-elective contribution and may also contribute 30% of the first 6% of each employees compensation contributed to the Burnaby Plan.
The following table summarizes the expense associated with the contributions made to these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Salaried Plan
|
|
$
|
478
|
|
|
$
|
599
|
|
|
$
|
1,422
|
|
|
$
|
1,674
|
|
Union Plan
|
|
|
18
|
|
|
|
23
|
|
|
|
53
|
|
|
|
59
|
|
Montreal Plan
|
|
|
28
|
|
|
|
30
|
|
|
|
88
|
|
|
|
89
|
|
U.K. Plan
|
|
|
27
|
|
|
|
29
|
|
|
|
95
|
|
|
|
84
|
|
Burnaby Plan
|
|
|
34
|
|
|
|
34
|
|
|
|
111
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
585
|
|
|
$
|
715
|
|
|
$
|
1,769
|
|
|
$
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
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.
The Company has an established process for determining fair value for its financial assets and liabilities, principally cash and cash equivalents and foreign currency exchange contracts. Fair value
is based on quoted market prices, where available. If quoted market prices are not available, fair value is based on assumptions that use as inputs market-based parameters. The following sections describe the valuation methodologies used by the
Company to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified. Where appropriate the description includes details of the key
inputs to the valuations and any significant assumptions.
19
Cash equivalents.
Included within Cash and cash equivalents are highly liquid
investments in money market funds with various underlying securities all of which maintain AAA credit ratings. Also included within cash equivalents are our highly liquid investments in non-domestic bank term deposits. The Company uses quoted
market prices to determine the fair value of these investments and they are classified in Level 1 of the fair value hierarchy. The carrying amounts approximate fair value because of the short maturity of the instruments.
The following assets and liabilities of the Company were measured at fair value on a recurring basis subject to the disclosure requirements of ASC Topic
820 at September 30, 2013 and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date
Using
|
|
|
|
September 30,
2013
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic money market funds
|
|
$
|
50,902
|
|
|
$
|
50,902
|
|
|
$
|
|
|
|
$
|
|
|
Non domestic bank term deposits
|
|
|
31,943
|
|
|
|
31,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents at fair value
|
|
|
82,845
|
|
|
|
82,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
82,845
|
|
|
$
|
82,845
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date
Using
|
|
|
|
December 31,
2012
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic money market funds
|
|
$
|
58,620
|
|
|
$
|
58,620
|
|
|
$
|
|
|
|
$
|
|
|
Non domestic bank term deposits
|
|
|
26,045
|
|
|
|
26,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents at fair value
|
|
|
84,665
|
|
|
|
84,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
84,665
|
|
|
$
|
84,665
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
15.
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. This product warranty accrual is periodically adjusted
based on the identification or resolution of known individual product warranty claims. The following table sets forth the Companys continuing operations product warranty accrual:
|
|
|
|
|
|
|
Warranty Liability
|
|
Balance at December 31, 2012
|
|
$
|
15,727
|
|
Additions to warranty liability
|
|
|
1,136
|
|
Warranty liability utilized
|
|
|
(9,102
|
)
|
|
|
|
|
|
Balance at September 30, 2013
|
|
$
|
7,761
|
|
|
|
|
|
|
Included within the above table are concrete tie warranty reserves of approximately $6,940 and $14,837 as of
September 30, 2013 and December 31, 2012, respectively.
The Company continues to work with the Union Pacific Railroad (UPRR) to
identify and replace defective ties related to the warranty claim asserted under CXT Incorporateds (CXT) 2005 supply contract. The Company believes the UPRR will complete the physical replacement of ties pursuant to the 2013 replacement
program during the fourth quarter of 2013. During the nine months ended September 30, 2013 there were no changes to the Companys estimate of the number of defective concrete ties that will ultimately require replacement. Replaced ties
have been deducted from the Companys warranty liability. The Company will continue to assess the adequacy of its reserve as information from the UPRR replacement activity becomes available.
While the Company believes this is a reasonable estimate of the potential warranty claims, these estimates could change due to the emergence of new
information and/or future events. There can be no assurance at this point that future potential costs pertaining to these claims or other potential future claims will not have a material impact on the Companys results of operations.
Environmental and Legal Proceedings
The Company is subject to national, state, foreign, provincial and/or local laws and regulations relating to the protection of the environment. The Companys efforts to comply with environmental
regulations may have an adverse effect on its future earnings. In the opinion of management, compliance with the present environmental protection laws will not have a material adverse effect on the financial condition, results of operations,
cash flows, competitive position or capital expenditures of the Company.
The Company is also subject to legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition or liquidity of the Company. The resolution, in
any reporting period, of one or more of these matters could have a material effect on the Companys results of operations for that period.
As of September 30, 2013 and December 31, 2012, the Company maintained environmental and litigation reserves approximating $2,092 and $2,141,
respectively.
On January 11, 2012, CXT received a subpoena from the United States Department of Transportation Inspector General (IG)
requesting records related to its manufacture of concrete railroad ties in Grand Island, NE. CXT and the Company have been cooperating fully with the IG.
16.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company does not purchase
or hold any derivative financial instruments for trading purposes.
At contract inception, the Company designates its derivative instruments as
hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive (loss)
income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in the derivative does not perfectly offset the change in value of the risk being hedged, the ineffective portion
is recognized in earnings immediately.
21
The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage
its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Companys risk management objective is to reduce its exposure to the effects of changes in
exchange rates on these transactions over the duration of the transactions.
The Company did not engage in any foreign currency hedging
transactions during the nine-month period ended September 30, 2013. During the third quarter of 2012, the Company executed derivative contracts with notional amounts totaling approximately $3,186 to sell Canadian funds based on the anticipated
receipt of Canadian funds from the sale of certain rail products in the third quarter of 2012. The receipt of Canadian funds did not occur in line with the terms of the initial derivative contract and the Company entered into another commitment to
buy Canadian funds with notional amounts totaling approximately $3,388. During the third quarter of 2012, the Company settled these contracts for a recognized loss of approximately $204. The loss is included within other (income) expense
in the Condensed Consolidated Statement of Operations.
During the third quarter of 2012, the Company entered into a new commitment with
notional amounts totaling approximately $3,280 to sell Canadian funds based on the anticipated receipt of Canadian funds from the sale of certain rail products in the fourth quarter of 2012. The fair value of this instrument was a liability of $47
as of September 30, 2012 and was recorded in Other accrued liabilities in the Condensed Consolidated Balance Sheet.
17.
INCOME TAXES
The Companys effective income tax rate from continuing operations for the quarter and nine months ended
September 30, 2013 was 30.2% and 32.4%, respectively and 35.4% and 37.6% for the quarter and nine months ended September 30, 2012, respectively. The Companys effective income tax rate for the quarter and nine months ended
September 30, 2013 differed from the federal statutory rate of 35% primarily due to the recognition of $618 in previously unrecognized state tax benefits.
18.
SUBSEQUENT EVENTS
Management evaluated all activity of the Company and concluded that
no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.
22