L.B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
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, 2014. Amounts included in the balance sheet as of
December 31, 2013 were derived from our audited balance sheet. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2013. In this Quarterly Report on Form 10-Q, references to Foster, we, us, our, and the Company refer collectively to L.B. Foster and its
consolidated subsidiaries.
Reclassifications
Certain
amounts in previously issued financial statements have been reclassified to conform to the current period presentation.
2.
BUSINESS SEGMENTS
The Company is a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy, and utility markets. The Company is
organized and evaluated by product group, which is the basis for identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is produced internally and is subject to
evaluation by the Companys chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon their contribution to the Companys consolidated results based upon segment profit.
The following table illustrates revenues and profits from continuing operations of the Company by segment for the periods indicated:
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Three Months Ended
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|
March 31, 2014
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|
March 31, 2013
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|
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Net
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Segment
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|
Net
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|
|
Segment
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|
|
|
Sales
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|
|
Profit
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|
|
Sales
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|
|
Profit
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|
Rail Products
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|
$
|
73,496
|
|
|
$
|
5,316
|
|
|
$
|
81,399
|
|
|
$
|
6,201
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|
Construction Products
|
|
|
27,383
|
|
|
|
1,216
|
|
|
|
36,811
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|
|
|
462
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|
Tubular Products
|
|
|
10,535
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|
|
|
586
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|
|
|
11,111
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|
|
|
2,607
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|
|
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Total
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$
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111,414
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|
|
$
|
7,118
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|
|
$
|
129,321
|
|
|
$
|
9,270
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|
|
|
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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, 2013. The internal cost of capital charges are eliminated during the consolidation
process.
8
The following table provides a reconciliation of reportable segment net profit from continuing operations to the
Companys consolidated total:
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Three Months Ended
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March 31,
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2014
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|
|
2013
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|
Income for reportable segments
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$
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7,118
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|
|
$
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9,270
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Interest expense
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|
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(123
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)
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|
|
(133
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)
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Interest income
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144
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|
|
|
206
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|
Other income
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|
135
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178
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|
LIFO expense
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(4
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)
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(240
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)
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Equity in income of nonconsolidated investment
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204
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|
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176
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Corporate expense, cost of capital elimination, and other unallocated charges
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(2,153
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)
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(2,013
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)
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Income from continuing operations before income taxes
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$
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5,321
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$
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7,444
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3.
ACQUISITIONS
During
the prior year, the Company acquired substantially all of the assets and liabilities of Ball Winch, LLC (Ball Winch). Cash payments totaling $37,500 were made during 2013 and a post-closing working capital adjustment of $495 was paid in February
2014 resulting in a total purchase price of $37,995. Included within the purchase price was $3,300 which is held in escrow to satisfy any indemnity claims under the purchase agreement. The results of operations for Ball Winch are included in the
Companys Tubular segment for the quarter ended March 31, 2014.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of the acquisition:
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Allocation of Purchase Price
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Fair Value
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Current assets
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$
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1,857
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Other assets
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64
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Property, plant, and equipment
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5,555
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Goodwill
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16,544
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Other intangibles
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14,682
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Current liabilities
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(707
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)
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Total
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$
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37,995
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|
The Company has concluded that intangible assets and goodwill values resulting from this transaction will be deductible for
tax purposes.
9
The following table summarizes the estimates of the fair values and amortizable lives of the identifiable
intangible assets acquired:
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Intangible Asset
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Fair Value
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Weighted Average Amortizable
Life (years)
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Trade name
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$
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723
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|
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0.5
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Technology
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11,129
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7.5
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Non-competition agreements
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2,830
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1.0
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Total identified intangible assets
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$
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14,682
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The Company continues to evaluate certain current liabilities assumed in the acquisition. If new information is obtained about
facts and circumstances that existed as of the acquisition date that, if known, would have affected their measurement, the Company will retrospectively adjust the amounts recognized as of the acquisition date.
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying
amount of goodwill at March 31, 2014 and December 31, 2013 was $57,781, of which $38,026 is attributable to the Companys Rail Products segment, $16,544 to the Tubular Products segment, and $3,211 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 three months ended March 31, 2014. The Company performs its annual evaluation of the carrying value of its
goodwill during the fourth quarter.
As of March 31, 2014 and December 31, 2013, gross identified intangible assets of $44,455 are attributable
to the Companys Rail Products segment, $14,682 are attributable to the Tubular Products segment, and $1,830 are attributable to the Construction Products segment. The components of the Companys intangible assets are as follows:
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March 31, 2014
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Weighted Average
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Gross
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Net
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Amortization Period
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Carrying
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Accumulated
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Carrying
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In Years
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Value
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Amortization
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Amount
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Non-compete agreements
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5
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$
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2,860
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$
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(260
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)
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$
|
2,600
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Patents
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10
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|
|
639
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(213
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)
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426
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Customer relationships
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23
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19,960
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(3,846
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)
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16,114
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Supplier relationships
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5
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350
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(231
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)
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|
119
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Trademarks and trade names
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16
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7,003
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(1,460
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)
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5,543
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Technology
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15
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30,155
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(4,252
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)
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25,903
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$
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60,967
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|
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$
|
(10,262
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)
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$
|
50,705
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|
|
10
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December 31, 2013
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Weighted Average
|
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Gross
|
|
|
|
|
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Net
|
|
|
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Amortization Period
|
|
Carrying
|
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Accumulated
|
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Carrying
|
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In Years
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Value
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Amortization
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|
Amount
|
|
Non-compete agreements
|
|
5
|
|
$
|
2,860
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|
|
$
|
(117
|
)
|
|
$
|
2,743
|
|
Patents
|
|
10
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|
|
639
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|
|
|
(201
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)
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|
|
438
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|
Customer relationships
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|
23
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|
|
19,960
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|
|
|
(3,575
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)
|
|
|
16,385
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Supplier relationships
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|
5
|
|
|
350
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|
|
|
(213
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)
|
|
|
137
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|
Trademarks and trade names
|
|
16
|
|
|
7,003
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|
|
|
(1,334
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)
|
|
|
5,669
|
|
Technology
|
|
15
|
|
|
30,155
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|
|
|
(3,681
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)
|
|
|
26,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
$
|
60,967
|
|
|
$
|
(9,121
|
)
|
|
$
|
51,846
|
|
|
|
|
|
|
|
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|
|
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|
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|
Intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization
period of approximately 17 years. Amortization expense from continuing operations for the three-month periods ended March 31, 2014 and 2013 was $1,141 and $701, respectively.
Estimated amortization expense from continuing operations for the remainder of 2014 and the years 2015 and thereafter is as follows:
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Amortization Expense
|
|
2014
|
|
$
|
3,402
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|
2015
|
|
|
4,265
|
|
2016
|
|
|
4,107
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|
2017
|
|
|
4,107
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|
2018
|
|
|
4,003
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|
2019 and thereafter
|
|
|
30,821
|
|
|
|
|
|
|
|
|
$
|
50,705
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|
|
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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 March 31, 2014 and December 31, 2013 have been reduced by an allowance for doubtful
accounts of $1,144 and $1,099, respectively.
6.
INVENTORIES
Inventories of continuing operations of the Company at March 31, 2014 and December 31, 2013 are summarized in the following table:
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March 31,
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|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Finished goods
|
|
$
|
61,853
|
|
|
$
|
55,166
|
|
Work-in-process
|
|
|
7,520
|
|
|
|
11,332
|
|
Raw materials
|
|
|
17,302
|
|
|
|
19,485
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current costs
|
|
|
86,675
|
|
|
|
85,983
|
|
Less: LIFO reserve
|
|
|
(9,031
|
)
|
|
|
(9,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,644
|
|
|
$
|
76,956
|
|
|
|
|
|
|
|
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|
|
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.
11
7.
INVESTMENTS
The Company is a member of a joint venture, LB Pipe & Coupling Products, LLC (JV), in which it maintains a 45% ownership interest. The JV
manufactures, markets, and sells various precision coupling products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019.
Under applicable guidance for variable interest entities in ASC 810, Consolidation, the Company determined that the 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 March 31,
2014 and December 31, 2013, the Company had a nonconsolidated equity method investment of $5,204 and $5,090, respectively.
The Company recorded
equity in the income of the JV of approximately $204 and $176 for the three months ended March 31, 2014 and 2013, respectively. During the periods ending March 31, 2014 and 2013 the Company received cash distributions of $90 and $378,
respectively. There were no changes to the Companys 45% ownership interest as a result of the proportional 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 covering the facility used by the JV for its operations. The carrying
amounts with the maximum exposure to loss of the Company at March 31, 2014 and December 31, 2013, respectively, are as follows:
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|
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|
|
|
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|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Equity method investment
|
|
$
|
5,204
|
|
|
$
|
5,090
|
|
Net investment in direct financing lease
|
|
|
1,197
|
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,401
|
|
|
$
|
6,314
|
|
|
|
|
|
|
|
|
|
|
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 is now leased to the JV. As a result of the amendment, monthly rent over
the term of the lease increased by approximately $7. 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 Company maintained a net investment in this direct financing lease of
approximately $1,197 and $1,224 at March 31, 2014 and December 31, 2013, respectively.
The following is a schedule of the direct financing
minimum lease payments for the remainder of 2014 and the years 2015 and thereafter:
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|
|
|
|
|
|
Minimum Lease Payments
|
|
2014
|
|
$
|
87
|
|
2015
|
|
|
122
|
|
2016
|
|
|
131
|
|
2017
|
|
|
140
|
|
2018
|
|
|
150
|
|
2019 and thereafter
|
|
|
567
|
|
|
|
|
|
|
|
|
$
|
1,197
|
|
|
|
|
|
|
12
8.
DEFERRED REVENUE
Deferred revenue of $7,130 and $5,715 as of March 31, 2014 and December 31, 2013, respectively, consists of customer payments received for which the
revenue recognition criteria have not yet been met. The Company has significantly fulfilled its obligations under the contracts and the customers have paid, 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, 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 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 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, guarantees, and liens.
As of March 31, 2014, the Company was in
compliance with the Credit Agreements covenants.
The Company had no outstanding borrowings under the revolving credit facility at March 31,
2014 or December 31, 2013 and had available borrowing capacity of $124,186 at March 31, 2014.
Letters of Credit
At March 31, 2014, the Company had outstanding letters of credit of approximately $814.
13
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 $2,500 at March 31, 2014). 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 March 31, 2014. There was approximately $31 and $60 in outstanding guarantees (as defined in the underlying agreement) at March 31, 2014 and December 31, 2013, respectively. This credit facility was renewed during the
third quarter of 2013 with no significant changes to the underlying terms or conditions in the facility. The expiration date of this credit facility is July 31, 2014. It is the Companys intention to renew this credit facility with NatWest
Bank during the annual review of the credit facility in 2014.
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 March 31, 2014. The subsidiary had available borrowing capacity of $2,469 at March 31, 2014.
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 approximately $3,508.
On August 30, 2012, the Company sold substantially all of the assets and liabilities of its precise structural products business, Precise, for $2,643,
resulting in a pre-tax loss of approximately $315.
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 are classified as discontinued for all periods presented. Future expenses of discontinued operations are not expected to be material.
The Company maintained current assets from discontinued operations of $88 and $149 and current liabilities of $26 for both March 31, 2014 and
December 31, 2013. Sales from the discontinued businesses were not material to the three months ended March 31, 2014 and 2013.
14
11.
EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Numerator for basic and diluted earnings per common share -
|
|
|
|
|
|
|
|
|
Income available to common stockholders:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
3,649
|
|
|
$
|
4,951
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,649
|
|
|
$
|
4,927
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
10,197
|
|
|
|
10,158
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
10,197
|
|
|
|
10,158
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
10
|
|
|
|
12
|
|
Other stock compensation plans
|
|
|
85
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
95
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions
|
|
|
10,292
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.36
|
|
|
$
|
0.49
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.36
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.35
|
|
|
$
|
0.48
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.35
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
There have been no changes to the February 2013 Board of Directors authorization of the $0.03 per common share regular
quarterly dividend.
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 $575 and $631 for the three-month period ended March 31, 2014 and 2013, respectively, related to restricted stock awards and performance unit awards. As of March 31, 2014, unrecognized compensation expense for awards the Company expects
to vest approximated $4,702. The Company will recognize this expense over the upcoming 4 year period through February 2018.
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 income tax benefit realized for the tax deduction from stock-based compensation approximated $85 and $189 for the three months ended March 31,
2014 and 2013, respectively. This excess income 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 March 31, 2014 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, 2014
|
|
|
18,750
|
|
|
$
|
10.64
|
|
|
|
1.3
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at March 31, 2014
|
|
|
18,750
|
|
|
$
|
10.64
|
|
|
|
1.0
|
|
|
$
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2014, 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 March 31, 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 $10.41 per share.
The total intrinsic value of stock options outstanding and exercisable at March 31, 2013
was $762.
The weighted average remaining contractual life of the stock options outstanding at March 31, 2014 and 2013 was 1.0 and 2.0 years,
respectively.
There were no stock options exercised during the three-month periods ending March 31, 2014 and 2013.
16
Restricted Stock Awards and Performance Unit Awards
Under the amended and restated 2006 Omnibus plan, the Company grants eligible employees restricted stock and performance unit awards. The forfeitable
Restricted Stock Awards generally time-vest after a four year holding period, unless indicated otherwise by the underlying Restricted Stock Agreement. Performance Unit Awards are offered annually under separate three-year long-term incentive plans.
Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Companys performance relative to performance measures and conversion multiples as defined in the underlying plan. If the
Companys estimate of the number of performance stock awards expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the
vested shares and would change future expense over the remaining vesting period.
The following table summarizes the Restricted Stock Award and
Performance Unit Award activity for the period ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Performance
|
|
|
Grant
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Date
|
|
|
|
Units
|
|
|
Units
|
|
|
Fair Value
|
|
Outstanding at January 1, 2014
|
|
|
129,726
|
|
|
|
61,651
|
|
|
$
|
34.00
|
|
Granted
|
|
|
19,051
|
|
|
|
34,652
|
|
|
|
44.07
|
|
Vested
|
|
|
(25,968
|
)
|
|
|
(13,588
|
)
|
|
|
33.92
|
|
Adjustment for incentive awards expected to vest
|
|
|
|
|
|
|
(9,923
|
)
|
|
|
43.83
|
|
Canceled
|
|
|
(960
|
)
|
|
|
(2,880
|
)
|
|
|
44.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
121,849
|
|
|
|
69,912
|
|
|
$
|
36.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
United States Defined Benefit Plans
Net
periodic pension costs for the United States defined benefit pension plans for the three-month periods ended March 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Service cost
|
|
$
|
6
|
|
|
$
|
8
|
|
Interest cost
|
|
|
193
|
|
|
|
177
|
|
Expected return on plan assets
|
|
|
(242
|
)
|
|
|
(214
|
)
|
Recognized net actuarial loss
|
|
|
16
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (income) cost
|
|
$
|
(27
|
)
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute approximately $448 to its United States defined benefit plans in 2014. No contributions were
made during the three months ended March 31, 2014.
United Kingdom Defined Benefit Plans
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three-month periods ended March 31, 2014 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Interest cost
|
|
$
|
99
|
|
|
$
|
80
|
|
Expected return on plan assets
|
|
|
(94
|
)
|
|
|
(68
|
)
|
Amortization of transition amount
|
|
|
(7
|
)
|
|
|
(11
|
)
|
Recognized net actuarial loss
|
|
|
50
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
48
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit
pension plans. Employer contributions of $298 are anticipated to the United Kingdom L.B. Foster Rail Technologies, Inc. pension plan during 2014. For the three months ended March 31, 2014, the Company contributed approximately $75 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 at its Burnaby, British Columbia, Canada location (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
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Salaried Plan
|
|
$
|
556
|
|
|
$
|
449
|
|
Union Plan
|
|
|
17
|
|
|
|
16
|
|
Montreal Plan
|
|
|
25
|
|
|
|
35
|
|
U.K. Plan
|
|
|
38
|
|
|
|
33
|
|
Burnaby Plan
|
|
|
39
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
675
|
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
|
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 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 March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
Reporting Date Using
|
|
|
|
March 31,
2014
|
|
|
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
|
|
$
|
39,852
|
|
|
$
|
39,852
|
|
|
$
|
|
|
|
$
|
|
|
Non domestic bank term deposits
|
|
|
31,828
|
|
|
|
31,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents at fair value
|
|
|
71,680
|
|
|
|
71,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
71,680
|
|
|
$
|
71,680
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
|
|
Reporting Date Using
|
|
|
|
December 31,
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
|
|
$
|
18,276
|
|
|
$
|
18,276
|
|
|
$
|
|
|
|
$
|
|
|
Non domestic bank term deposits
|
|
|
32,947
|
|
|
|
32,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents at fair value
|
|
|
51,223
|
|
|
|
51,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
51,223
|
|
|
$
|
51,223
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 Companys continuing operations product warranty accrual:
|
|
|
|
|
|
|
Warranty Liability
|
|
Balance at December 31, 2013
|
|
$
|
7,483
|
|
Additions to warranty liability
|
|
|
207
|
|
Warranty liability utilized
|
|
|
(680
|
)
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
7,010
|
|
|
|
|
|
|
Included within the above table are concrete tie warranty reserves of approximately $6,050 and $6,462 as of March 31,
2014 and December 31, 2013, respectively. The reduction in the reserve balance relates to warranty claims satisfied through the replacement of concrete ties during the three month period ended March 31, 2014.
In July 2012, the Union Pacific Railroad (UPRR) notified the Company and its subsidiary, CXT Incorporated (CXT), of a warranty claim under CXTs 2005
supply contract relating to the sale of pre-stressed concrete railroad ties to the UPRR. The UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at CXTs former Grand Island, NE facility failed to meet
contract specifications, had workmanship defects, and were cracking and failing prematurely. Of the 3.0 million ties manufactured between 1999 and 2011 from the Grand Island, NE facility, approximately 1.6 million relate to concrete ties
sold to the UPRR during the period of their claim.
During 2012, as a result of testing the Company conducted on concrete ties manufactured at its former
Grand Island, NE facility, the Company recorded pre-tax warranty charges of $22,000 in Cost of Goods Sold within its Rail Products segment. The accrual was based on the Companys estimate of the number of defective concrete ties
that will ultimately require replacement during the applicable warranty periods at an average cost of fifty dollars per concrete tie.
The Company
continues to work with the UPRR to identify, replace, and reconcile defective ties related to the warranty claim asserted under CXTs 2005 supply contract. The concrete tie warranty reserve is the best estimate of the expected value of
defective ties that will be replaced as a result of our observation and analysis of ties in track. While the Company believes this is a reasonable estimate of these potential warranty claims, these estimates could change due to the receipt of new
information and future events.
As of March 31, 2014, the Company and the UPRR have not been able to reconcile the disagreement related to the 2013
warranty replacement activity. The disagreement includes approximately 170,000 ties. The Company provided detailed documentation supporting its position including reasons that detail why these ties were not eligible for a warranty claim. In the
event the UPRR continues to replace ties and assert warranty claims on an ongoing basis in the same manner as 2013, the Company is likely to have a disagreement relating to the number of ties eligible for warranty claim in future periods as well. In
the event the Company is not able to resolve these claims to the Companys satisfaction, these past and future claims may have a material impact on the Companys financial condition and results of operations.
Additionally, the UPRR has claimed that the Company is in breach of the 2012 amended supply agreement for various reasons. The Company has denied the
UPRRs claim that it is in material breach of the 2012 amended supply agreement and intends to continue discussions with the UPRR in an effort to resolve these claims, including reconciling previously replaced ties as well as addressing the
future warranty tie replacement process. In the event that the Company is found to be in material breach of the 2012 amended supply agreement, the UPRR may seek damages from the Company and/or terminate the agreement.
The Company will continue to assess the adequacy of its product warranty reserve as additional information becomes available. 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 financial condition or results of operations.
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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 March 31, 2014 and December 31, 2013, the Company maintained environmental and litigation reserves approximating $2,173 and $2,190,
respectively.
16.
INCOME TAXES
The Companys
effective income tax rate from continuing operations for the quarter ended March 31, 2014 was 31.4%, compared to 33.5% for the quarter ended March 31, 2013. The Companys effective tax rate for the quarter ended March 31, 2014
differed from the federal statutory rate of 35% primarily due to the recognition of $167 in previously unrecognized state tax benefits.
17.
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.
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