NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
1.
FINANCIAL STATEMENTS
Basis of
Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. However, actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results that may be
expected for the year ending December 31, 2017. The
year-end
Condensed Consolidated Balance Sheet as of December 31, 2016 was derived from audited financial statements. This Quarterly Report on Form
10-Q
should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form
10-K
for the year
ended December 31, 2016. In this Quarterly Report on
Form 10-Q,
references to we, us, our, and the Company refer collectively to L.B. Foster Company
and its consolidated subsidiaries.
Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts
with Customers (Topic 606) (ASU
2014-09),
which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition (ASC
605). ASU
2014-09
is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in
judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU
2014-09
is effective for fiscal years beginning after December 15, 2017, including interim periods within that
reporting period. The Company continues to evaluate our contracts with customers and assess the impact that this standard will have on the Companys results of operations, cash flows, and financial position. The Company anticipates using the
modified retrospective approach at adoption as it relates to ASU
2014-09.
In February 2016, the FASB
issued ASU
2016-02,
Leases (Topic 842) (ASU
2016-02).
The new accounting requirements include the accounting for, presentation of, and
classification of leases. The guidance will result in most leases being capitalized as a right of use asset with a related liability on our balance sheets. The requirements of the new standard are effective for annual reporting periods beginning
after December 15, 2018, and interim periods within those annual periods. The Company is in the process of analyzing the impact of ASU
2016-02
on our financial position and results of operations. The
Company has a significant number of leases, and, as a result, expects this guidance to have a material impact on its consolidated balance sheet.
In October 2016, the FASB issued ASU
2016-16,
Income Taxes Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), (ASU
2016-16)
which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The ASU is effective on January 1,
2018 with early adoption permitted. The Company continues to evaluate the impact this standard will have on the Companys financial statements.
In March 2017, the FASB issued ASU
2017-07,
Compensation Retirement Benefits (Topic 715), (ASU
2017-07)
which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires that the entity report the service cost component in the same
line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and report the other components of net periodic pension cost and net periodic postretirement benefit cost in the income
statement separately from the service cost component and outside a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization.
8
The new standard will be effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company is evaluating its implementation
approach and assessing the impact of ASU
2017-07
on our results of operations, cash flows, and financial position.
Recently adopted accounting guidance
In July 2015, the FASB issued ASU
2015-11,
Inventory (Topic 330) (ASU
2015-11).
The pronouncement was issued to simplify the measurement of inventory and changes the measurement from
lower of cost or market to lower of cost and net realizable value. The standard defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. This standard requires prospective application and is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this guidance by the Company did not have a
material impact on its Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU
No. 2016-09,
CompensationStock Compensation (Topic 718) (ASU
2016-09),
which simplifies the accounting for share-based compensation.
Among other things, ASU
2016-09
provides for (i) the simplification of accounting presentation of excess tax benefits and tax deficiencies, (ii) an accounting policy election regarding forfeitures to
use an estimate or account for when incurred, and (iii) simplification of cash flow presentation for excess tax benefits. The standard is effective for the annual reporting periods beginning after December 15, 2016, and the transition
method required by ASU
2016-09
varies by amendment. The provisions of ASU
2016-09
related to the recognition of excess tax benefits in the income statement and
classification in the statement of cash flows were adopted prospectively and prior periods were not retrospectively adjusted. ASU
2016-09
permits companies to make an accounting policy election to recognize
forfeitures of stock-based awards as they occur or make an estimate by applying a forfeiture rate each quarter. The Company previously estimated forfeitures and will continue to apply this accounting policy.
In January 2017, the FASB issued ASU
2017-04,
Intangibles Goodwill and Other (Topic 350),
(ASU
2017-04)
which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, an entity will recognize an impairment charge
for the amount by which the carrying value exceeds the fair value. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance by the Company did not to have a material impact on its Condensed Consolidated Financial Statements or interim goodwill testing.
9
2.
BUSINESS SEGMENTS
The Company is a leading manufacturer and distributor of products and services for transportation and energy infrastructure. The Company is organized and evaluated by product group, which is the basis for
identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is produced internally that is subject to evaluation by the Companys chief operating decision maker
in deciding how to allocate resources. Each segment is evaluated based upon its segment profit contribution to the Companys consolidated results.
The following table illustrates revenues and profits (losses) from operations of the Company by segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
|
|
Three Months Ended
March 31, 2016
|
|
|
|
Net Sales
|
|
|
Segment
Profit (loss)
|
|
|
Net Sales
|
|
|
Segment
Profit (loss)
|
|
Rail Products and Services
|
|
$
|
56,480
|
|
|
$
|
1,489
|
|
|
$
|
64,292
|
|
|
$
|
741
|
|
Construction Products
|
|
|
37,322
|
|
|
|
1,219
|
|
|
|
31,880
|
|
|
|
448
|
|
Tubular and Energy Services
|
|
|
24,900
|
|
|
|
(508
|
)
|
|
|
30,138
|
|
|
|
(1,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,702
|
|
|
$
|
2,200
|
|
|
$
|
126,310
|
|
|
$
|
(738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profits (losses) from operations, as shown above, include internal cost of capital charges for assets used in the
segment at a rate of generally 1% per month. There has been no change in the measurement of segment profit (loss) from operations from December 31, 2016. The internal cost of capital charges are eliminated during the consolidation process.
The following table provides a reconciliation of reportable segment net profit (loss) from operations to the Companys consolidated
total:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Profit (loss) for reportable segments
|
|
$
|
2,200
|
|
|
$
|
(738
|
)
|
Interest expense
|
|
|
(2,108
|
)
|
|
|
(1,170
|
)
|
Interest income
|
|
|
56
|
|
|
|
55
|
|
Other expense
|
|
|
(5
|
)
|
|
|
(715
|
)
|
LIFO income
|
|
|
11
|
|
|
|
73
|
|
Equity in loss of nonconsolidated investments
|
|
|
(200
|
)
|
|
|
(196
|
)
|
Corporate expense, cost of capital elimination, and other unallocated charges
|
|
|
(1,945
|
)
|
|
|
(1,458
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(1,991
|
)
|
|
$
|
(4,149
|
)
|
|
|
|
|
|
|
|
|
|
The following table illustrates assets of the Company by segment:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Rail Products and Services
|
|
$
|
176,227
|
|
|
$
|
174,049
|
|
Construction Products
|
|
|
83,175
|
|
|
|
81,074
|
|
Tubular and Energy Services
|
|
|
101,292
|
|
|
|
100,006
|
|
Unallocated corporate assets
|
|
|
41,546
|
|
|
|
37,894
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
402,240
|
|
|
$
|
393,023
|
|
|
|
|
|
|
|
|
|
|
10
3.
GOODWILL AND OTHER INTANGIBLE ASSETS
The following table represents the goodwill balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail Products and
Services
|
|
|
Construction
Products
|
|
|
Tubular and Energy
Services
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
13,785
|
|
|
$
|
5,147
|
|
|
$
|
|
|
|
$
|
18,932
|
|
Foreign currency translation impact
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
13,924
|
|
|
$
|
5,147
|
|
|
$
|
|
|
|
$
|
19,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill
impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a
reporting unit is less than the carrying amount. No goodwill impairment test was required in connection with these evaluations for the three months ended March 31, 2017. The Company continues to monitor the recoverability of the long-lived
assets associated with certain reporting units of the Company and the long-term financial projections of the businesses. Sustained declines in the markets we serve may result in future long-lived asset impairment.
The following table represents the gross other intangible assets balance by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Rail Products and Services
|
|
$
|
56,648
|
|
|
$
|
56,476
|
|
Construction Products
|
|
|
1,348
|
|
|
|
1,348
|
|
Tubular and Energy Services
|
|
|
29,179
|
|
|
|
29,179
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,175
|
|
|
$
|
87,003
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Weighted Average
Amortization
In
Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete
agreements
|
|
|
5
|
|
|
$
|
4,193
|
|
|
$
|
(2,406
|
)
|
|
$
|
1,787
|
|
Patents
|
|
|
10
|
|
|
|
376
|
|
|
|
(148
|
)
|
|
|
228
|
|
Customer relationships
|
|
|
18
|
|
|
|
36,988
|
|
|
|
(7,200
|
)
|
|
|
29,788
|
|
Trademarks and trade names
|
|
|
14
|
|
|
|
10,029
|
|
|
|
(3,449
|
)
|
|
|
6,580
|
|
Technology
|
|
|
14
|
|
|
|
35,589
|
|
|
|
(12,049
|
)
|
|
|
23,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,175
|
|
|
$
|
(25,252
|
)
|
|
$
|
61,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Weighted Average
Amortization
In
Years
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Non-compete
agreements
|
|
|
5
|
|
|
$
|
4,219
|
|
|
$
|
(2,217
|
)
|
|
$
|
2,002
|
|
Patents
|
|
|
10
|
|
|
|
373
|
|
|
|
(143
|
)
|
|
|
230
|
|
Customer relationships
|
|
|
18
|
|
|
|
36,843
|
|
|
|
(6,582
|
)
|
|
|
30,261
|
|
Trademarks and trade names
|
|
|
14
|
|
|
|
10,018
|
|
|
|
(3,238
|
)
|
|
|
6,780
|
|
Technology
|
|
|
14
|
|
|
|
35,550
|
|
|
|
(11,304
|
)
|
|
|
24,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,003
|
|
|
$
|
(23,484
|
)
|
|
$
|
63,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over their useful lives ranging from 4 to 25 years, with a total weighted average
amortization period of approximately 15 years at March 31, 2017. Amortization expense for the three-month periods ended March 31, 2017 and 2016 was $1,759 and $3,266, respectively.
11
Estimated amortization expense for the remainder of 2017 and thereafter is as follows:
|
|
|
|
|
|
|
Amortization Expense
|
|
2017
|
|
$
|
5,298
|
|
2018
|
|
|
6,959
|
|
2019
|
|
|
6,220
|
|
2020
|
|
|
5,865
|
|
2021
|
|
|
5,834
|
|
2022 and thereafter
|
|
|
31,747
|
|
|
|
|
|
|
|
|
$
|
61,923
|
|
|
|
|
|
|
4.
ACCOUNTS RECEIVABLE
Credit is extended based upon an evaluation of the customers financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit
terms are consistent with industry standards and practices. The amounts of trade accounts receivable at March 31, 2017 and December 31, 2016 have been reduced by an allowance for doubtful accounts of $1,888 and $1,417, respectively.
5.
INVENTORIES
Inventories
at March 31, 2017 and December 31, 2016 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Finished goods
|
|
$
|
44,970
|
|
|
$
|
46,673
|
|
Work-in-process
|
|
|
22,449
|
|
|
|
21,716
|
|
Raw materials
|
|
|
18,299
|
|
|
|
18,032
|
|
|
|
|
|
|
|
|
|
|
Total inventories at current costs
|
|
|
85,718
|
|
|
|
86,421
|
|
Less: LIFO reserve
|
|
|
(3,167
|
)
|
|
|
(3,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,551
|
|
|
$
|
83,243
|
|
|
|
|
|
|
|
|
|
|
Inventory is generally valued at the lower of
last-in,
first-out
(LIFO) cost or market. Other inventories of the Company are valued at average cost or net realizable value, whichever is lower. An actual valuation of inventory under the LIFO method is made at
the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on managements estimates of expected
year-end
levels and costs.
12
6.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at Mach 31, 2017 and December 31, 2016 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
14,834
|
|
|
$
|
14,826
|
|
Improvements to land and leaseholds
|
|
|
17,404
|
|
|
|
17,408
|
|
Buildings
|
|
|
33,986
|
|
|
|
33,910
|
|
Machinery and equipment, including equipment under capitalized leases
|
|
|
119,582
|
|
|
|
118,060
|
|
Construction in progress
|
|
|
2,055
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,861
|
|
|
|
185,495
|
|
Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases
|
|
|
84,353
|
|
|
|
81,522
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,508
|
|
|
$
|
103,973
|
|
|
|
|
|
|
|
|
|
|
We review our property, plant, and equipment for recoverability whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. We recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. There were no asset impairments of property, plant, and equipment during the three
months ended March 31, 2017 and 2016.
Depreciation expense for the three-month periods ended March 31, 2017 and 2016 was $3,282 and
$3,727, respectively.
7.
INVESTMENTS
The Company is a member of a joint venture, LB Pipe & Coupling Products, LLC (LB Pipe JV), in which it maintains a 45% ownership interest. The LB Pipe JV manufactures, markets, and
sells various precision coupling products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019.
Under applicable guidance for variable interest entities in ASC 810, Consolidation, the Company determined that the LB Pipe JV is a variable interest entity. The Company concluded that it is
not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly impact the economic performance of the LB Pipe
JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.
At March 31, 2017 and December 31,
2016, the Company had a nonconsolidated equity method investment of $3,704 and $3,902, respectively, in the LB Pipe JV and other equity investments totaling $127 and $129, respectively.
The Company recorded equity in the loss of the LB Pipe JV of $198 and $250 for the three months ended March 31, 2017 and 2016, respectively. During 2016, the Company and the other 45% member each
executed a revolving line of credit with LB Pipe JV with an available limit of $1,350. The Company and the other 45% member each loaned $1,235 to LB Pipe JV in an effort to maintain compliance with LB Pipe JVs debt covenants with an
unaffiliated bank. The Companys loan with LB Pipe JV matures on December 15, 2017.
The Companys exposure to loss results
from its capital contributions and loans, net of the Companys share of the LB Pipe JVs income or loss, and its net investment in the direct financing lease covering the facility used by the LB Pipe JV for its operations, which is
described below. The carrying amounts with the Companys maximum exposure to loss at March 31, 2017 and December 31, 2016, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
LB Pipe JV equity method investment
|
|
$
|
3,704
|
|
|
$
|
3,902
|
|
Revolving line of credit
|
|
|
1,235
|
|
|
|
1,235
|
|
Net investment in direct financing lease
|
|
|
841
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,780
|
|
|
$
|
6,008
|
|
|
|
|
|
|
|
|
|
|
13
The Company is leasing five acres of land and two facilities to the LB Pipe JV through June 30, 2019,
with a 5.5 year renewal period. The current monthly lease payments approximate $17, with a balloon payment of approximately $488, which is required to be paid either at the termination of the lease, allocated over the renewal period, or during the
initial term of the lease. This lease qualifies as a direct financing lease under the applicable guidance in ASC
840-30,
Leases.
The following is a schedule of the direct financing minimum lease payments for the remainder of 2017 and the years 2018 and thereafter:
|
|
|
|
|
|
|
Minimum Lease Payments
|
|
2017
|
|
$
|
106
|
|
2018
|
|
|
150
|
|
2019
|
|
|
585
|
|
|
|
|
|
|
|
|
$
|
841
|
|
|
|
|
|
|
8.
LONG-TERM DEBT
United States
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Revolving credit facility
|
|
$
|
125,367
|
|
|
$
|
127,073
|
|
Term loan
|
|
|
27,692
|
|
|
|
30,000
|
|
Capital leases and financing agreements
|
|
|
2,206
|
|
|
|
2,492
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
155,265
|
|
|
|
159,565
|
|
Less current maturities
|
|
|
10,214
|
|
|
|
10,386
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
145,051
|
|
|
$
|
149,179
|
|
|
|
|
|
|
|
|
|
|
On November 7, 2016, the Company, its domestic subsidiaries, and certain of its Canadian subsidiaries entered into
the Second Amendment (the Second Amendment) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as amended by the First Amendment dated June 29, 2016 (the Amended and Restated Credit
Agreement), with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This Second Amendment modifies the Amended and Restated Credit Agreement, which had a maximum
revolving credit line of $275,000. The Second Amendment reduces the permitted revolving credit borrowings to $195,000 and provides for additional term loan borrowing of $30,000 (the Term Loan). The Term Loan will be subject to quarterly
straight line amortization until fully paid off upon the final payment on January 1, 2020. Furthermore, certain matters, including excess cash flow, asset sales, and equity issuances, trigger mandatory prepayments to the Term Loan. Term Loan
borrowings will not be available to draw upon once they have been repaid. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Second Amendment or Amended and Restated Credit Agreement, as applicable.
The Second Amendment further provides for modifications to the financial covenants as defined in the Amended and Restated Credit Agreement.
The Second Amendment calls for the elimination of the Maximum Leverage Ratio covenant through the quarter ended June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25
Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ended September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility. The Second Amendment also includes a Minimum Last Twelve
Months EBITDA covenant (Minimum EBITDA). For the quarter ending December 31, 2016 through the quarter ending June 30, 2017, the Minimum EBITDA must be at least $18,500. For each quarter thereafter, through the quarter ended
June 30, 2018, the Minimum EBITDA requirement will increase by various increments. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ended June 30, 2018, the Minimum EBITDA covenant will be eliminated
through the maturity of the credit agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Companys fixed charges to the last twelve months of EBITDA, and is
required to be a minimum of 1.00 to 1.00 through the quarter ended December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit facility. The final financial covenant included in the Second Amendment is a
Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ended June 30, 2018.
14
The Second Amendment includes several changes to certain
non-financial
covenants as defined in the Credit Agreement. Through the maturity date of the loan, the Company is now prohibited from making any future acquisitions. The limitation on permitted annual
distributions of dividends or redemptions of the Companys stock has been decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in
non-loan
parties was decreased from
$10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000 from the prior year to $25,000 in the aggregate through the maturity date of the credit facility.
At March 31, 2017, L.B. Foster was in compliance with the Second Amendments covenants.
The Second Amendment provides for the elimination of the three lowest tiers of the pricing grid that had previously been defined in the First Amendment.
Upon execution of the Second Amendment through the quarter ended March 31, 2018, the Company will be locked into the highest tier of the pricing grid, which provides for pricing of the prime rate plus 225 basis points on base rate loans and the
applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of the credit facility, the Companys position on the pricing grid will be governed by a Minimum Net
Leverage ratio, which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018, the Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing grid, pricing
will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans.
At
March 31, 2017, L.B. Foster had outstanding letters of credit of approximately $425 and had net available borrowing capacity of $44,208. The maturity date of the facility is March 13, 2020.
United Kingdom
A subsidiary of the
Company has a credit facility with NatWest Bank for its United Kingdom operations, which includes an overdraft availability of £1,500 pounds sterling (approximately $1,882 at March 31, 2017). 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 2.50%. Outstanding
performance bonds reduce availability under this credit facility. The subsidiary of the Company had no outstanding borrowings under this credit facility at March 31, 2017. There was approximately $21 in outstanding guarantees (as defined in the
underlying agreement) at March 31, 2017. This credit facility was renewed and amended during the fourth quarter of 2016 with all underlying terms and conditions remaining unchanged as a result of the renewal. It is the Companys intention
to renew this credit facility with NatWest Bank during the annual review in 2017.
The United Kingdom credit facility contains certain
financial covenants that require that the subsidiary maintain senior interest and cash flow coverage ratios. The subsidiary was in compliance with these financial covenants at March 31, 2017. The subsidiary had available borrowing capacity of
$1,861 at March 31, 2017.
9.
FAIR VALUE MEASUREMENTS
The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk
and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the 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 classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash equivalents -
Included within Cash and cash equivalents are investments in
non-domestic
term deposits. The carrying amounts approximate fair value because of the short maturity of the instruments.
15
LIBOR-based interest rate swaps
- To reduce the impact of interest rate changes on outstanding
variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The fair value of the interest rate swaps is based on market-observable forward interest rates and represents the
estimated amount that the Company would pay to terminate the agreements. As such, the swap agreements are classified as Level 2 within the fair value hierarchy. At March 31, 2017, the interest rate swaps were recorded within other accrued
liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date and Using
|
|
|
Fair Value Measurements at Reporting Date and Using
|
|
|
|
March 31,
2017
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31,
2016
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Term deposits
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
205
|
|
|
$
|
|
|
|
$
|
205
|
|
|
$
|
|
|
|
$
|
334
|
|
|
$
|
|
|
|
$
|
334
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
205
|
|
|
$
|
|
|
|
$
|
205
|
|
|
$
|
|
|
|
$
|
334
|
|
|
$
|
|
|
|
$
|
334
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the
hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest income or expense, in our Condensed
Consolidated Statements of Operations. For the three months ended March 31, 2017, interest expense from interest rate swaps was $90.
10.
EARNINGS PER COMMON SHARE
(Share
amounts in thousands)
The following table sets forth the computation of basic and diluted loss per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator for basic and diluted loss per common share - Loss available to common stockholders:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,422
|
)
|
|
$
|
(2,832
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
10,319
|
|
|
|
10,232
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
|
|
|
10,319
|
|
|
|
10,232
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Other stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share - adjusted weighted average shares outstanding and assumed
conversions
|
|
|
10,319
|
|
|
|
10,232
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.23
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.23
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
There were approximately 177 and 47 anti-dilutive shares during the three-month periods ended March 31, 2017 and
2016, respectively, excluded from the above calculation.
16
11.
STOCK-BASED COMPENSATION
The Company applies the provisions of FASB ASC 718, Compensation Stock Compensation, to account for the Companys stock-based compensation. Stock-based compensation cost is
measured at the grant date based on the calculated fair value of the award and is recognized over the employees requisite service period. The Company recorded stock compensation expense of $167 and ($252) for the three-month periods ended
March 31, 2017 and 2016, respectively, related to fully-vested stock awards, restricted stock awards, and performance unit awards. At March 31, 2017, unrecognized compensation expense for awards that the Company expects to vest
approximated $4,485. The Company will recognize this expense over the upcoming 4 years through March 2021.
Shares issued as a result of
vested stock-based compensation generally will be from previously issued shares that have been reacquired by the Company and held as Treasury stock or authorized and previously unissued common stock.
During the three-month period ended March 31, 2017, the Company recognized a tax deficiency of $116 related to stock-based compensation, which was
fully offset by a valuation allowance, and $76 for the three-month period ended March 31, 2016. Applying the prospective approach to ASU
2016-09,
the change in excess income tax deficiency has been
included in cash flows from operating activities for the three months ended March 31, 2017 in the Condensed Consolidated Statements of Cash Flows.
Restricted Stock Awards and Performance Unit Awards
Under the 2006 Omnibus Plan, the
Company grants eligible employees restricted stock and performance unit awards. The forfeitable restricted stock awards granted prior to March 2015 generally time-vest after a four-year period, and those granted subsequent to March 2015 generally
time-vest ratably over a three-year period, unless indicated otherwise by the underlying restricted stock agreement. Performance unit awards are offered annually under separate three-year long-term incentive programs. Performance units are subject
to forfeiture and will be converted into common stock of the Company based upon the Companys performance relative to performance measures and conversion multiples as defined in the underlying program. If the Companys estimate of the
number of performance stock awards expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change
future expense over the remaining vesting period.
During the quarter ended March 31, 2017, the Compensation Committee approved the 2017
Performance Share Unit Program and the Executive Annual Incentive Compensation Plan (consisting of cash and equity components). The Compensation Committee also certified the actual performance achievement of participants in the 2014 Performance
Share Unit Program. Actual performance resulted in no payout relative to the 2014 Performance Share Unit Program target performance metrics.
The following table summarizes the restricted stock award and performance unit award activity for the period ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
|
|
|
Performance
Stock Units
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Outstanding at December 31, 2016
|
|
|
79,272
|
|
|
|
63,690
|
|
|
$
|
21.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
167,404
|
|
|
|
112,208
|
|
|
|
13.82
|
|
Vested
|
|
|
(21,808
|
)
|
|
|
|
|
|
|
28.08
|
|
Adjustment for incentive awards expected to vest
|
|
|
|
|
|
|
3,871
|
|
|
|
29.69
|
|
Cancelled
|
|
|
(31,066
|
)
|
|
|
(35,274
|
)
|
|
|
14.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
193,802
|
|
|
|
144,495
|
|
|
$
|
16.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
RETIREMENT PLANS
Retirement Plans
The Company has seven retirement plans that cover its hourly and salaried
employees in the United States: three defined benefit plans (one active / two frozen) and four defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Companys
contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA) and the Companys policy and investment guidelines of the applicable plan. The
Companys policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
17
The Companys subsidiary, L.B. Foster Rail Technologies, Inc. (Rail Technologies),
maintains two defined contribution plans for its employees in Canada, as well as a post-retirement benefit plan. In the United Kingdom, Rail Technologies maintains two defined contribution plans and a defined benefit plan.
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, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
|
|
|
$
|
9
|
|
Interest cost
|
|
|
171
|
|
|
|
186
|
|
Expected return on plan assets
|
|
|
(178
|
)
|
|
|
(179
|
)
|
Recognized net actuarial loss
|
|
|
33
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
26
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
The Company does not expect to contribute to its United States defined benefit plans in 2017.
United Kingdom Defined Benefit Plans
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three-month periods ended March 31, 2017 and 2016 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest cost
|
|
$
|
55
|
|
|
$
|
75
|
|
Expected return on plan assets
|
|
|
(65
|
)
|
|
|
(84
|
)
|
Amortization of prior service costs and transition amount
|
|
|
4
|
|
|
|
5
|
|
Recognized net actuarial loss
|
|
|
69
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
63
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined
benefit pension plans. Employer contributions of approximately $235 are anticipated to the United Kingdom Rail Technologies pension plan during 2017. For the three months ended March 31, 2017, the Company contributed approximately $59 to the
plan.
Defined Contribution Plans
The Company sponsors eight defined contribution plans for hourly and salaried employees across our domestic and international facilities. The following table summarizes the expense associated with the
contributions made to these plans.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
451
|
|
|
$
|
691
|
|
Canada
|
|
|
59
|
|
|
|
50
|
|
United Kingdom
|
|
|
115
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
625
|
|
|
$
|
799
|
|
|
|
|
|
|
|
|
|
|
18
13.
COMMITMENTS AND CONTINGENT LIABILITIES
Product Liability Claims
The Company is subject to product warranty claims that arise in
the ordinary course of its business. For certain manufactured products, the Company maintains a product warranty accrual which is adjusted on a monthly basis as a percentage of cost of sales. The product warranty accrual is periodically adjusted
based on the identification or resolution of known individual product warranty claims. The following table sets forth the Companys product warranty accrual:
|
|
|
|
|
|
|
Warranty Liability
|
|
Balance at December 31, 2016
|
|
$
|
10,154
|
|
Additions to warranty liability
|
|
|
198
|
|
Warranty liability utilized
|
|
|
(148
|
)
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
10,204
|
|
|
|
|
|
|
Included within the above table are concrete tie warranty reserves of approximately $7,578 and $7,574 at March 31,
2017 and December 31, 2016, respectively.
Union Pacific Railroad (UPRR) Concrete Tie Matter
On July 12, 2011, UPRR notified (the UPRR Notice) the Company and its subsidiary, CXT Incorporated (CXT), of a warranty claim
under CXTs 2005 supply contract relating to the sale of
pre-stressed
concrete railroad ties to UPRR. UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at
CXTs Grand Island, NE facility failed to meet contract specifications, had workmanship defects and were cracking and failing prematurely. Of the 3.0 million ties manufactured between 1998 and 2011 from the Grand Island, NE facility,
approximately 1.6 million ties were sold during the period UPRR had claimed nonconformance. The 2005 contract called for each concrete tie which failed to conform to the specifications or had a material defect in workmanship to be replaced with
1.5 new concrete ties, provided, that, within five years of the sale of a concrete tie, UPRR notified CXT of such failure to conform or such defect in workmanship. The UPRR Notice did not specify how many ties manufactured during this period were
defective nor the exact nature of the alleged workmanship defect.
Following the UPRR Notice, the Company worked with material scientists and
pre-stressed
concrete experts to test a representative sample of Grand Island, NE concrete ties and assess warranty claims for certain concrete ties made in its Grand Island, NE facility between 1998 and 2011. The
Company discontinued manufacturing operations in Grand Island, NE in early 2011.
2012
During 2012, the Company completed sufficient testing and analysis to further understand this matter. Based upon testing results and expert analysis, the
Company believed it discovered conditions, which largely related to the 2006 to 2007 manufacturing period, that can shorten the life of the concrete ties produced during this period. During the fourth quarter of 2012 and first quarter of 2013, the
Company reached agreement with UPRR on several matters including a tie rating process for the Company and UPRR to work together to identify, prioritize, and replace defective ties that meet the criteria for replacement. This process applies to the
ties the Company shipped to UPRR from its Grand Island, NE facility from 1998 to 2011. During most of this period, the Companys warranty policy for UPRR carried a
5-year
warranty with a 1.5:1 replacement
ratio for any defective ties. In order to accommodate UPRR and other customer concerns, the Company also reverted to a previously used warranty policy providing a
15-year
warranty with a 1:1 replacement ratio.
This change provided an additional 10 years of warranty protection. In the amended 2005 supply agreement, the Company and UPRR also extended the supply of Tucson ties by five years and agreed on a cash payment of $12,000 to UPRR as compensation for
concrete ties already replaced by UPRR during the investigation period.
During 2012, as a result of the testing that the Company conducted on
concrete ties manufactured at its former Grand Island, NE facility and the developments related to UPRR and other customer matters, the Company recorded
pre-tax
warranty charges of $22,000 in Cost of
Goods Sold within its Rail Products and Services segment based on the Companys estimate of the number of defective concrete ties that will ultimately require replacement during the applicable warranty periods.
19
2013
Throughout 2013, at UPRRs request and under the terms of the amended 2005 supply agreement, the Company provided warranty replacement concrete ties for use across certain UPRR subdivisions. The
Company attempted to reconcile the quantity of warranty claims for ties replaced and obtain supporting detail for the ties removed. The Company believes that UPRR did not replace concrete ties in accordance with the amended agreement and has not
furnished adequate documentation throughout the replacement process in these subdivisions to support its full warranty claim. Based on the information received by the Company to date, the Company believes that a significant number of ties which UPRR
replaced in these subdivisions did not meet the criteria to be covered as warranty replacement ties under the amended 2005 supply agreement. The disagreement related to the 2013 warranty replacement activity includes approximately 170,000 ties where
the Company provided detailed documentation supporting our position with reason codes that detail why these ties are not eligible for a warranty claim.
In late November 2013, the Company received notice from UPRR asserting a material breach of the amended 2005 supply agreement. UPRRs notice asserted that the failure to honor its claims for warranty
ties in these subdivisions was a material breach. Following receipt of this notice, the Company provided information to UPRR to refute UPRRs claim of breach and included the reconciliation of warranty claims supported by substantial findings
from the Companys track observation team, all within the
90-day
cure period. The Company also proposed further discussions to reach agreement on reconciliation for 2013 replacement activities and future
replacement activities and a recommended process that will ensure future replacement activities are done with appropriate documentation and per the terms of the amended 2005 supply agreement.
2014
During the first quarter of 2014, the Company further responded within the
90-day
cure period to UPRRs claim and presented a reconciliation for the subdivisions at issue. This proposed reconciliation was based on empirical data and visual observation from Company employees that were
present during the replacement process for a substantial majority of the concrete ties replaced. The Company spent considerable time documenting facts related to concrete tie condition and track condition to assess whether the ties replaced met the
criteria to be eligible for replacement under the terms of the amended 2005 supply agreement.
During 2014, the Company increased its accrual
by an additional $8,766 based on revised estimates of ties to be replaced based upon scientific testing and other analysis, adjusted for ties already provided to UPRR. The Company continued to work with UPRR to identify, replace, and reconcile
defective ties related to the warranty claim in accordance with the amended 2005 supply agreement. The Company and UPRR met during the third quarter of 2014 to evaluate each others position in an effort to work towards agreement on the
unreconciled 2013 and 2014 replacement activity as well as the standards and practices to be implemented for future replacement activity and warranty tie replacement.
In November and December of 2014, the Company received additional notices from UPRR asserting that ties manufactured in 2000 were defective and again asserting material breaches of the amended 2005 supply
agreement relating to warranty tie replacements as well as certain new ties provided to UPRR being out of specification.
At December 31,
2014, the Company and UPRR had not been able to reconcile the disagreement related to the 2013 and 2014 warranty replacement activity. The disagreement relating to the 2014 warranty replacement activity includes approximately 90,100 ties that the
Company believes are not warranty-eligible.
2015
On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE (Complaint) against the Company and its subsidiary, CXT, asserting,
among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRRs exclusive and limited remedy provisions in
the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining
rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various
incidental and consequential damages. The amended 2005 supply agreement provides that UPRRs exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or
otherwise contained a material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Companys warranty does not apply
to ties that (a) have been repaired or altered without the Companys written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been
improperly maintained or used contrary to the specifications for which such ties were produced.
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The amended 2005 supply agreement also continues to provide that the Companys warranty is in lieu of all other express or implied warranties and that neither party shall be subject to or
liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are inaccurately under concrete tie rating
guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement rated and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRRs
assertion, which the Company vigorously disputes, that UPRR in future years will be entitled to warranty replacement ties for virtually all of the Grand Island ties. Many thousands of Grand Island ties have been performing in track for over ten
years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system.
In
June 2015, UPRR delivered an additional notice alleging deficiencies in certain ties produced in the Companys Tucson and Spokane locations and other claimed material breaches which the Company contends are unfounded. The Company again
responded to UPRR that it was not in material breach of the amended 2005 supply agreement relating to warranty tie replacements and that the ties in question complied with the specifications provided by UPRR.
On June 16 and 17, 2015, UPRR issued formal notice of the termination of the concrete tie supply agreement as well as the termination of the lease
agreement at the Tucson, AZ production facility and rejection and revocation of its prior acceptance of certain ties manufactured at the Companys Spokane, WA production facility. Since that time, UPRR has discontinued submitting purchase
orders to the Company for shipment of warranty replacement ties.
On May 29, 2015, the Company and CXT filed an Answer, Affirmative
Defenses and Counterclaims in response to the Complaint, denying liability to UPRR. As a result of UPRRs subsequent June
16-17,
2015 actions and certain related conduct, the Company on October 5,
2015 amended the pending Answer, Affirmative Defenses and Counterclaims to add, among other things, assertions that UPRRs conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to
UPRRs claims and also for the Companys counterclaims.
2016
By Scheduling Order dated June 29, 2016, an August 31, 2017 deadline for the completion of fact discovery was established with trial to proceed at some future date after October 30, 2017,
and UPRR filed an amended notice of trial to commence on October 30, 2017.
2017
By Second Amended Scheduling Order dated February 22, 2017, a March 31, 2018 deadline for completion of discovery has been established with
trial to proceed at some future date after June 1, 2018. During the first three months of 2017, the parties continued to conduct discovery. The Company intends to continue to engage in discussions in an effort to resolve the UPRR matter.
However, we cannot predict that such discussions will be successful, or that the results of the litigation with UPRR, or any settlement or judgment amounts, will reasonably approximate our estimated accruals for loss contingencies. Future potential
costs pertaining to UPRRs claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows.
As a result of the preliminary status of the litigation and the uncertainty of any potential judgment, an estimate of any additional loss, or a range of loss, associated with this litigation cannot be
made based upon currently available information.
Environmental and Legal Proceedings
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.
21
At March 31, 2017 and December 31, 2016, the Company maintained environmental reserves
approximating $6,251 and $6,270, respectively. The following table sets forth the Companys environmental obligation:
|
|
|
|
|
|
|
Environmental liability
|
|
Balance at December 31, 2016
|
|
$
|
6,270
|
|
Additions to environmental obligations
|
|
|
2
|
|
Environmental obligations utilized
|
|
|
(21
|
)
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
6,251
|
|
|
|
|
|
|
The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. 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.
14.
INCOME TAXES
For the three months ended March 31, 2017 and 2016, the Company
recorded a tax provision of $431 on pretax losses of $1,991 and a tax benefit of $1,317 on pretax losses of $4,149, respectively, for an effective income tax rate of (21.6%) and 31.7%, respectively. Due to the full valuation allowance on our
domestic deferred tax assets, the Companys tax provision for the three months ended March 31, 2017 does not reflect any tax benefit for domestic pretax losses, and is primarily comprised of taxes on our Canadian and United Kingdom
operations. The Companys full valuation allowance position in its U.S. jurisdiction is likely to result in significant variability of the effective tax rate throughout the course of the year. Changes in pretax income projections and the mix of
income across jurisdictions could also impact the effective income tax rate each quarter.
15.
SUBSEQUENT EVENTS
Management evaluated all of the activity of the Company and concluded that no subsequent events have occurred that would require recognition in the
Condensed Consolidated Financial Statements or disclosure in the Notes to Condensed Consolidated Financial Statements.
22