(a) The following table displays a reconciliation of
tubularthis non-GAAP financial measure for the three-year periods ended December 31, 2017, 2016, and 2015. Adjusted EBITDA adjusts EBITDA for the 2016 and 2015 asset impairments. EBITDA and Adjusted EBITDA are financial metrics utilized by management
services with operations in every significant oil and gas producing region in the continental United States. See Part 1, Item 8, Note 4 with respect to an impairment of the goodwill related to this acquisition.The IOS acquisition provides the Company with a comprehensive footprint that we believe will generate significant long-term benefit to the Company. Over the course of the current year, the IOS business has been negatively impacted by a significant decline in oil prices and related drop in active rigs. Management has implemented and continues to evaluate the necessary cost reductions to weather the current downturn, however, we continue to believe that the business will generate substantial profits once the global oil and gas market stabilizes and begins to recover.
2015 Developments and 2016 Outlook
During 2015, we:
Generated adjusted EBITDA of $60,606 (a)
Sold our Tucson, AZ concrete tie manufacturing assets for $2,750
Reduced borrowings on our outstanding revolving debt facility by $51,261 from March 31, 2015
Amended our credit agreement from a maximum credit line of $200,000 with a $100,000 accordion feature to a maximum credit line of $335,000 with a $100,000 accordion feature
Repurchased $1,587 of common shares under the share repurchase authorization
Continued application development workCompany’s performance on a new Company-wide enterprise resource planning system
comparable basis. Management believes that disclosure of these non-GAAP financial measures is useful to investors as an additional way to evaluate the Company’s performance.(a) | The following table displays a reconciliation of this non-GAAP measure for the three-year periods ended December 31, 2015, 2014 and 2013. EBITDA adjusted for the current year goodwill impairment is a financial metric utilized by management to evaluate the Company’s performance on a comparable basis after excluding the non-cash impact of the 2015 impairment of goodwill. |
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Adjusted EBITDA Reconciliation | | | | | | | | | | | | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | |
Interest expense (income), net | | | 4,172 | | | | (18 | ) | | | (174 | ) |
Income tax (benefit) expense | | | (6,132 | ) | | | 13,404 | | | | 14,848 | |
Depreciation | | | 14,429 | | | | 7,882 | | | | 6,890 | |
Amortization | | | 12,245 | | | | 4,695 | | | | 3,112 | |
| | | | | | | | | | | | |
Total EBITDA | | $ | (19,731 | ) | | $ | 51,619 | | | $ | 53,966 | |
Impairment of goodwill | | | 80,337 | | | | — | | | | — | |
| | | | | | | | | | | | |
EBITDA adjusted for impairment of goodwill | | $ | 60,606 | | | $ | 51,619 | | | $ | 53,966 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, |
| | | 2017 | | 2016 | | 2015 |
| Adjusted EBITDA Reconciliation | | | | | | |
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) |
| Interest expense, net | | 8,070 |
| | 6,323 |
| | 4,172 |
|
| Income tax expense (benefit) | | 3,929 |
| | (5,509 | ) | | (6,132 | ) |
| Depreciation | | 12,849 |
| | 13,917 |
| | 14,429 |
|
| Amortization | | 6,992 |
| | 9,575 |
| | 12,245 |
|
| Total EBITDA | | 35,953 |
| | (117,354 | ) | | (19,731 | ) |
| Asset impairments | | — |
| | 135,884 |
| | 80,337 |
|
| Adjusted EBITDA | | $ | 35,953 |
| | $ | 18,530 |
| | $ | 60,606 |
|
Throughout 2017, the Company saw strengthening results compared to our prior year, as many of the markets we serve continued their recovery, which ultimately led to several of our businesses outperforming against projections. During
2015, market conditions deteriorated as the year progressed. Our largest business segment that serves transportation infrastructure markets experienced weakness that began in the second quarter. The2017 our Rail Products and Services segment was
largely impacted by reduced spending that persisted through the year inencouraged as the North American freight rail
market.market began increasing spending related to the Company’s product and service offerings. As
Class I rail carriers reported steady, and in some instances, lower capital spending compared to the
overall commoditiesprior year, we believe this spending has been directed toward the need for maintenance and other track infrastructure programs compared to rolling stock and locomotives, which drove our sales growth. The first half of 2017 had strengthening commodity markets
experienced significant weakness, thiswhich translated into
decliningincreased commodity carloads for rail carriers
and pressure on pricing.compared to the prior year period. Rail carloads
are being adversely affectedwere up throughout 2017 primarily driven by
intermodal activity. However, carloads do remain suppressed compared to historical levels due to the continuing
energy industry shift away from coal to natural gas
as well as declining
crude by rail shipments
of crude oil and
reductions in most other metals, ores, and agriculture products.
Bright spots exist in intermodal freightOur Rail Distribution business has been particularly impacted as this division serves Class II railroads and
shipments of passenger vehicles.the North American
freightindustrial rail
companies began curtailing spendingmarket, which have experienced reduced project activity and pricing declines to remain competitive. Freight rail in North America also experienced moderate increases in coal carloads, however, coal shipments are not expected to return to peak levels in the
second half of 2015 which impacted most of our rail divisions.near future. Spending in
20162018 by the
large freight rail operators in North America is
anticipated to increase from 2017 levels as the market is expected to
continue that trend accordingexperience continued growth, particularly within intermodal, as the trucking market tightens and operators look to
further efficiencies within their
announcements. The European market was also weak in 2015 as a result of reduced spending by Network Rail, our primary customer in the United Kingdom. However, the outlook in the U.K. is more favorable for 2016. In the United States, passage of a new six year transportation bill “Fixing America’s Surface Transportation (FAST) Act” will provide additional funds for U.S. transit agencies to maintain and grow their systems.As rail market conditions declined during 2015, and we experienced the loss of sales to UPRR, the management team acted to maximize profit margins. In addition to the weakening freight rail market, we lost approximately $26,000 in sales from UPRR versus the prior year (from $41,000 to $15,000). Management took several actions to cut costs and delay capital to help offset the pressure from declining volume.
The spending that is getting priority among the freightinfrastructures.
Freight rail operators
is directed atare prioritizing spending against safety improvement, operating efficiency, and other cost
reductions.reduction activities. The Company continues to target products and solutions
thatto help improve safety and operating efficiency as well as introduce services that
help operators performcontribute to extending the useful life of certain rail equipment and lowering maintenance
at lower costs. We believe that the freight rail operators will continue to harden their network infrastructure to handle the demanding loads and traffic expected in the coming decades. When imports and exports grow with the global economy, freightcosts for operators. Freight rail operators are expected to benefit from the need for intermodal networks to efficiently ship goods.
Funding for transit rail projects in North America continued at a steady pace in 2015. The Company’sto improve through 2017. While our revenues from this market isare always affected by swings in large projects from one year to the next. Our results in 2015 were relatively strong, andnext, we continue to believe the transit market will grow over the long run, although yearwhich was indicative by significant increases in new orders positioning us with a very strong backlog as we enter 2018. During 2017, we capitalized on opportunities with transit agencies who continue to year sequential growth may not be consistent.expand to serve further geographic areas and passenger traffic. Management believes that the global transit market represents a goodan attractive opportunity for future growth. Our recent investments in the Company. By focusing on products that can improve safety and efficiency, as wellU.K. continue to provide growth as passenger comfort,networks are extended, especially in the most congested areas. Substantial job wins continued throughout 2017 as investments in London and inter-city networks within the U.K. remain solid.
While certain key steel price indices have shown recent increases, pricing in the markets we serve has continued to lag. Management enacted multiple strategies in an effort to maximize profit margins throughout the prolonged downturn in the North American freight rail market. As we exit this downturn, we believe our current cost structure in place reflected positive returns in 2017 and positions us to meet our increased 2018 projections. Should business activity be weaker than projected, we are attemptingbetter positioned to partner with key end users and OEM’s to serve this market. In addition,handle these changes.
As we
have launched a broader set of automation solutions for passenger transit systems through our Tew business acquired in 2015. Innovative solutions from our team of engineers will be focused on helping transit system operations improve infrastructure and lower cost.Within our Construction Products segment, heavy civil construction projects remained steady through 2015. The Company performed well in our core product areas of (a) bridge decking that provides new decking surfaces intended largely for bridge rehabilitation projects, (b) sheet piling for railway, highway, bridges, and port projects, and (c) precast concrete buildings. The Company did not perform well in other piling products targeted at (or utilized in) heavy civil projects that became very price competitive due to declining steel prices. Throughoutexited 2016, the year, lower scrap input prices and very low factory utilization rates kept steel prices very competitive. As a result, the Company did not participate in some of the typical projects we serve with pipe pile and H-pile, resulting in lower annual volumes and sales.
Factory utilization in the steel industry is expected to remain at depressed levels into 2016. There is capacity in many world areas to provide supply for projects at very competitive prices. This industry is also being affected by the significant weakness in oil and gas exploration and development as well as other industrial markets where the commodity cycle has led to pressure on costs and lower capital spending.
The precast concrete buildings business was a bright spot in 2015. The introduction of new products provided support for growth, particularly in the Southwest region of the U.S. The market for buildings typically grows at a low pace, and we expect 2016 to mirror that trend.
The energy markets where our Tubular and Energy Services segment began to see recovery from the struggling energy market it serves. Throughout 2017, we experienced increases in both our upstream and midstream order activity. We saw rig counts increase during the year, driving our growth in our upstream services. As a result, upstream sales have increased sequentially each quarter during the year, ending the year at almost double the prior year sales total. Although overall rig counts began to moderate towards the end of the year, the Company is focused, faced rapidly changing spending patterns in 2015. This volatility could exist throughout 2016. Asencouraged by the impact of productivity that is driving well count per rig at a higher rate along with increased depths and lateral lengths of wells. The midstream market recovery, which tends to lag the upstream market, strengthened considerably throughout the year as orders in our Protective Coatings and to a lesser extent, midstream operators are adjusting capital spending plans, our orders have been difficult to forecast. Market conditions deteriorated throughout 2015 as end users adjusted to fluctuating oil prices and reacted to a changing climate around liquidity needs. The majority of our business is tied to investment in midstream pipeline infrastructure. However,Precision Measurement Systems businesses increased over 50% from the Company has exposure to investment in drilling, including the need for tubulars in hydraulic fracturing applications. Energy market weakness caused us to take restructuring actions mainly in the upstream test and inspection services business. These actions included consolidation of facilities and closures in markets that did not have sustainable demand.
prior year.
It is our continued belief that there are widespread needs across the USU.S. for pipeline infrastructure in the long term, and new demand will be driven by already developed wells, future exportingexport potential, and transition from coal to natural gas plants. AsWith 2018 projections showing U.S. rig counts continuing to grow, production increases to over ten million barrels per day, and futures trading at prices not seen since 2015, the Company anticipates the Tubular and Energy Services segment’s solid performance to continue as we move into 2018.
Within our Construction Products segment, heavy civil construction projects as well as bridge spending experienced marginal decreases in 2017 as compared to the prior year levels. This decline was particularly felt in the second half of 2017. We entered 2018 with an improved backlog across all businesses within the segment, with the exception of Fabricated Bridge Products. Although our bridge division has not booked a result of reduced forecasted capital spending across the energy industry, U.S. crude oil production is expected to decline in 2016, setting up the potential for a market rebalance later in 2016. Therefore,mega project during 2017, it is not clear asindicative of any weakness in our capabilities to whether 2016 will besecure grid decking business. Neither the dynamics of this market nor the number of structurally deficient, obsolete bridges have changed in a meaningful way.
While Piling sales increased compared to the prior year, that any measureable rebound will take place. We finished 2015 with a solid backlog forprimarily from our commoditized piling products, the coated pipe business and precision measurement systems, both aimed at pipeline applications. The upstream test and inspection business exited the yearoverall profit was reduced. This was due to managements strategic initiative to aggressively pursue targeted opportunities at a recent low pointreduced margin level, impacting the short-term results but is anticipated to develop favorable long-term market share in sales,a highly competitive segment. We are encouraged by our strong backlog as we enter 2018 with several new winnable projects in front of us along with the current administration’s emphasis on infrastructure, a healthier overall economy, and has yeta rising price environment.
The Precast Concrete Products business continued to
experienceshow moderate growth during 2017. Along with the successful investment made at our West Virginia facility to improve capacity and efficiency, we have added revenue from reaching new markets and customers throughout the northeast U.S. as well as increased product offerings. We anticipate this market to grow at a
quarterly sequential increase in sales.slower pace, but we enter 2018 with increased backlog and improved order entry.
Management intends to stay focused on
cost reduction actionsprudent working capital management and
waysoperating cash flow to
streamline productscontinue to pay down our outstanding debt. With the prior year restructuring activities being fully realized during 2017, we believe that the Company’s expenses and
plant efficiency. We will launch a new ERP systemoperating leverage now provide the agility to succeed in
Q2 of 2016 that will start with operations from two Rail Products and Services divisions.the cyclical markets in which we participate. Our
long termlong-term objective is to
bringcontinue the modernization
needed toof the entire Company
and develop a platformwith the ongoing integration of our ERP system from which we can grow and leverage best in class business processes.
UPRR Product Warranty Claim
In 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT Incorporated, asserting among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The complaint seeks to cancel all duties of UPRR under the contracts, 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 dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are not the responsibility of the Company and claims that do not meet the criteria of a
warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that in future years UPRR will be entitled to warranty replacement ties for virtually all of the ties manufactured at the Company’s former Grand Island, NE tie facility. 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. The Company believes UPRR’s claims are without merit and intends to vigorously defend itself.
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 that the Company had with UPRR for the Tucson, AZ production facility and rejection and revocation of its prior acceptance of certain ties manufactured at the Company’s Spokane, WA production facility.
On May 29, 2015, the Company and CXT filed an Answer, Affirmative Defenses and Counterclaims in response to the Complaint, denying liability to UPRR. As a result of UPRR’s subsequent June 16-17, 2015 actions and certain related conduct, the Company on October 5, 2015 amended the pending Answer, Affirmative Defenses and Counterclaims to add, among other things, assertions that UPRR’s conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to UPRR’s claims and also for the Company’s counterclaims. By Scheduling Order dated September 3, 2015, a December 30, 2016 deadline for the completion of fact discovery has been established and trial may proceed at some future date after March 3, 2017, although no trial date has been set. The parties are currently conducting discovery.
The Company continues to engage in discussions in an effort to resolve this 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 relating to this matter will be within the range of our estimated accruals for loss contingencies. Future potential costs pertaining to UPRR’s claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows. See Part II, Item 8, Note 19, included herein, for information regarding the Company’s commitments and contingent liabilities which is incorporated by reference into this Item 7.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | | Percent of Total
Net Sales
Twelve Months
Ended
December 31, | | | Percent
Increase/(Decrease) | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | | | 2015 vs.
2014 | | | 2014 vs.
2013 | |
Net Sales: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rail Products and Services | | $ | 328,982 | | | $ | 374,615 | | | $ | 363,667 | | | | 52.7 | % | | | 61.7 | % | | | 60.8 | % | | | (12.2 | )% | | | 3.0 | % |
Construction Products | | | 176,394 | | | | 178,847 | | | | 191,751 | | | | 28.2 | | | | 29.5 | | | | 32.1 | | | | (1.4 | ) | | | (6.7 | ) |
Tubular and Energy Services | | | 119,147 | | | | 53,730 | | | | 42,545 | | | | 19.1 | | | | 8.8 | | | | 7.1 | | | | 121.8 | | | | 26.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net sales | | $ | 624,523 | | | $ | 607,192 | | | $ | 597,963 | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 2.9 | % | | | 1.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | Twelve Months Ended
December 31, | | | Gross Profit
Percentage
Twelve Months
Ended
December 31, | | | Percent
Increase/(Decrease) | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | | | 2015 vs.
2014 | | | 2014 vs.
2013 | |
Gross Profit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rail Products and Services | | $ | 75,276 | | | $ | 77,235 | | | $ | 74,986 | | | | 22.9 | % | | | 20.6 | % | | | 20.6 | % | | | (2.5 | )% | | | 3.0 | % |
Construction Products | | | 34,169 | | | | 32,391 | | | | 29,224 | | | | 19.4 | | | | 18.1 | | | | 15.2 | | | | 5.5 | | | | 10.8 | |
Tubular and Energy Services | | | 22,481 | | | | 11,722 | | | | 12,278 | | | | 18.9 | | | | 21.8 | | | | 28.9 | | | | 91.8 | | | | (4.5 | ) |
LIFO income | | | 2,468 | | | | 738 | | | | 37 | | | | 0.4 | | | | 0.1 | | | | — | | | | ** | | | | ** | |
Other | | | (741 | ) | | | (495 | ) | | | (586 | ) | | | (0.1 | ) | | | (0.1 | ) | | | (0.1 | ) | | | 49.7 | | | | (15.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gross profit | | $ | 133,653 | | | $ | 121,591 | | | $ | 115,939 | | | | 21.4 | % | | | 20.0 | % | | | 19.4 | % | | | 9.9 | % | | | 4.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | Twelve Months Ended
December 31, | | | Percent of Total
Net Sales
Twelve Months
Ended
December 31, | | | Percent
Increase/(Decrease) | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | | | 2015 vs.
2014 | | | 2014 vs.
2013 | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling and administrative expenses | | $ | 92,648 | | | $ | 79,814 | | | $ | 71,256 | | | | 14.8 | % | | | 13.1 | % | | | 11.9 | % | | | 16.1 | % | | | 12.0 | % |
Amortization expense | | | 12,245 | | | | 4,695 | | | | 3,112 | | | | 2.0 | | | | 0.8 | | | | 0.5 | | | | 160.8 | | | | 50.9 | |
Impairment of goodwill | | | 80,337 | | | | — | | | | — | | | | 12.9 | | | | — | | | | — | | | | 100.0 | | | | — | |
Interest expense | | | 4,378 | | | | 512 | | | | 485 | | | | 0.7 | | | | 0.1 | | | | 0.1 | | | | ** | | | | 5.6 | |
Interest income | | | (206 | ) | | | (530 | ) | | | (659 | ) | | | — | | | | (0.1 | ) | | | (0.1 | ) | | | (61.1 | ) | | | (19.6 | ) |
Equity in loss (income) of nonconsolidated investments | | | 413 | | | | (1,282 | ) | | | (1,316 | ) | | | 0.1 | | | | (0.2 | ) | | | (0.2 | ) | | | (132.2 | ) | | | (2.6) | |
Other income | | | (5,585 | ) | | | (678 | ) | | | (1,077 | ) | | | (0.9 | ) | | | (0.1 | ) | | | (0.2 | ) | | | ** | | | | (37.0) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total expenses | | $ | 184,230 | | | $ | 82,531 | | | $ | 71,801 | | | | 29.5 | % | | | 13.6 | % | | | 12.0 | % | | | 123.2 | % | | | 14.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) Income before income taxes | | $ | (50,577 | ) | | $ | 39,060 | | | $ | 44,138 | | | | (8.1 | )% | | | 6.4 | % | | | 7.4 | % | | | (229.5 | )% | | | (11.5 | )% |
Income tax (benefit) expense | | | (6,132 | ) | | | 13,404 | | | | 14,848 | | | | (1.0 | ) | | | 2.2 | | | | 2.5 | | | | (145.7 | ) | | | (9.7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | | | | (7.1 | )% | | | 4.2 | % | | | 4.9 | % | | | (273.2 | )% | | | (12.4 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
** Results of calculation are not considered meaningful for presentation purposes.
Fiscal 2015 Compared to Fiscal 2014 — Company Analysis
Net sales of $624,523 for the year ended December 31, 2015 increased by $17,331 or 2.9% compared to the prior year period. Included within the 2015 sales are acquisition-related revenues of $93,411, which generated 20.9% margins. The sales increase was attributable to increases of 121.8% in Tubular and Energy Services, which were partially offset by decreases of 12.2% and 1.4% in Rail Products and Services and Construction Products segment sales, respectively.
Gross profit margin for 2015 was 21.4%, or 138 basis points higher than the prior year. The Rail Products and Services segment recognized warranty-related charges of $1,092 and $9,374 in 2015 and 2014, respectively. Excluding the impact of the charges1, the current year gross profit margin was consistent with the prior year at 21.6%. Included in the 2015 gross profit was $2,468 related to the LIFO income compared to $738 in the prior year. The favorable change in LIFO primarily resulted from decreasing prices across our segments, as inventory levels in the aggregate were down slightly.
Selling and administrative expenses increased by $12,834, or 16.1%, over the prior year period. The cost increases for 2015 were attributable to costs from acquired businesses. Significant components of the acquired costs are personnel-related costs and to a much lesser extent insurance and travel costs.
During the third quarter of 2015, the Company recorded a non-cash goodwill impairment charge of $80,337 ($63,887 net of taxes) related to the IOS and Chemtec reporting units within the Tubular and Energy Services segment. The charge was primarily due to the impact of the depressed energy markets on both reporting units as well as the reduction in the active U.S. land oil rig count which specifically impacted the IOS reporting unit. These businesses are being adversely affected by reduced capital spending and cost reduction priorities that oil and gas developers and pipeline companies have implemented. These factors led to a reduction in demand causing the near term financial projections of the IOS and Chemtec reporting units to deteriorate. The Company performed an interim test for impairment of goodwill, and the long-term forecast did not indicate a timely recovery to support the carrying values of the goodwill, as further described in Part II, Item 8, Note 4 of this Annual Report on Form 10-K.
Other income during the current year was favorably impacted by the sale of assets at our Tucson, AZ facility resulting in a gain of $2,279 ($1,424 net of tax), realized and unrealized foreign exchange gains totaling $1,616, and other less significant income items.
The Company’s effective income tax rate for 2015 was 12.1%, compared to 34.3% in the prior year period. The Company’s effective income tax rate for 2015 differed from the federal statutory rate of 35% primarily due to the discrete impact of the $80,337 goodwill impairment in the third quarter. The impairment related to both tax deductible and nondeductible goodwill, and resulted in an income tax benefit of $16,450 during the current year period.
Net loss for the year ended December 31, 2015 was $44,445, or $4.33 per diluted share, which compares to net income for the 2014 period of $25,656, or $2.48 per diluted share. Excluding the current year impairment charge of $63,887, net of income tax benefit, net income would have been $19,442 or $1.88 per diluted share. This non-GAAP net income measure is inclusive of approximately 75,000 shares that were anti-dilutive on a GAAP basis.
Fiscal 2014 Compared to Fiscal 2013 — Company Analysis
Net sales for the year ended December 31, 2014 increased by $9,229, or 1.5%, which was attributable to a 26.3% and 3.0% improvement in Tubular and Energy Services and Rail Products and Services segment sales, respectively, partially offset by 6.7% reduction in Construction Products sales. Approximately 1.8%, 0.8% and 0.1% of the sales related to revenues from acquired businesses within the Tubular and Energy Services, Construction and Rail Products and Services segments, respectively.
1 | -All results in this Form 10-K that exclude warranty charges and/or goodwill impairment are non-GAAP measures used for management reporting purposes. Management believes that these measures provide useful information to investors because it is a profitability measure used to evaluate earnings performance on a comparable year-over-year basis.
|
The gross profit margin for 2014 was 20.0% compared to 19.4% in 2013. Excluding the 2014 warranty charges of $9,374, the Company would have generated a gross profit margin of 21.6%.
Selling and administrative costs increased $8,558, or 12.0%, compared to fiscal 2013. Increases in 2014 were due to a variety of business developments including a sizeable increase in employee headcount. Excluding 2014 acquisitions, the Company headcount increased by approximately 6.3% over the prior year. The increase impacted personnel-related costs associated with salaried headcount and travel. Additionally, the Company incurred costs in 2014 related to the preparation for and identification of a new enterprise resource planning system. Lastly, acquisition related cost increases of $2,058 as well as recurring selling and administrative costs related to businesses acquired in 2014 led to the increase.
Other income for the year ended December 31, 2014 decreased to $678 compared to $1,077 during 2013. The decrease was principally due to a recovery of escrowed funds during 2013 which related to a 2005 real estate transaction that had previously been written off as uncollectible.
The Company’s effective income tax rate for 2014 was 34.3%, compared to 33.6% in 2013. The increase in the Company’s effective tax rate was due to increased nondeductible acquisition-related expenses in 2014 and the recognition of uncertain state tax positions during fiscal 2013, offset by greater U.S. domestic production activities deductions and a more favorable global mix of income.
Net income for 2014 was $25,656, or $2.48 per diluted share, which compares to net income for 2013 of $29,290, or $2.85 per diluted share. Included in our 2014 results was $9,374 in pre-tax charges related to concrete ties manufactured at our former Grand Island, NE facility which was closed in January 2011.
Results of Operations — Segment Analysis
Rail Products and Services
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | | (Decrease)
Increase | | | Increase | | | Percent
(Decrease)/
Increase | | | Percent
Increase | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Net Sales | | $ | 328,982 | | | $ | 374,615 | | | $ | 363,667 | | | $ | (45,633 | ) | | $ | 10,948 | | | | (12.2 | )% | | | 3.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | $ | 75,276 | | | $ | 77,235 | | | $ | 74,986 | | | $ | (1,959 | ) | | $ | 2,249 | | | | (2.5 | )% | | | 3.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit Percentage | | | 22.9 | % | | | 20.6 | % | | | 20.6 | % | | | 2.3 | % | | | — | % | | | 11.2 | % | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2015 Compared to Fiscal 2014
Rail Products and Services segment sales decreased $45,633, or 12.2%, compared to the prior year period. Included within the 2015 sales were revenues from acquired businesses of $16,715. During fiscal 2015, excluding an increase within the Transit Products business, all rail divisions experienced reductions in sales over the prior year period. The sales decline was attributable to the loss of sales to UPRR, lower volumes from Rail Distribution and various track component businesses, international declines in the Rail Technologies division, and, to a lesser extent, reductions in the price of steel.
During the year ended December 31, 2015, the Rail Products and Services segment had a reduction in new orders of 16.5% compared to the prior year period. Contributing to the decline was the loss of business with UPRR, which represented 55.2% of the reduction in new orders, as well as overall reductions in freight rail spending.
The Rail Products and Services segment increased its 2015 gross profit margin by 226 basis points compared to fiscal 2014. Gross profit was impacted by warranty-related charges of $1,092, and $9,374 in 2015 and 2014, respectively. Excluding the impact of the charges in 2015 and 2014, the gross profit margin was 23.2%, or 9 basis points higher than the prior year.
Fiscal 2014 Compared to Fiscal 2013
Rail Products and Services sales increased $10,948, or 3.0%, compared to fiscal 2013. The 2014 performance was highlighted by significant sales growth within the Rail Technologies business and to a lesser extent increases within the Allegheny Rail Products and CXT Concrete Tie businesses. Partially offsetting these improvements were declines in the Rail Distribution and Transit Products businesses.
Compared to 2013, the Rail Products and Services segment generated a 7.1% increase in new orders.
During 2014, the Rail segment incurred $9,374 in warranty charges related to our former Grand Island, NE concrete tie facility. The charge adversely impacted our Rail Products and Services segment’s gross profit. Without the charge, Rail Products and Services’ gross profit margins would have been 23.1% for the period ended December 31, 2014. The gross profit margin increase largely relates to favorable sales mix.
Construction Products
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | | (Decrease)
Increase | | | (Decrease)
Increase | | | Percent
(Decrease)/
Increase | | | Percent
(Decrease)/
Increase | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Net Sales | | $ | 176,394 | | | $ | 178,847 | | | $ | 191,751 | | | $ | (2,453 | ) | | $ | (12,904 | ) | | | (1.4 | )% | | | (6.7 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | $ | 34,169 | | | $ | 32,391 | | | $ | 29,224 | | | $ | 1,778 | | | $ | 3,167 | | | | 5.5 | % | | | 10.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit Percentage | | | 19.4 | % | | | 18.1 | % | | | 15.2 | % | | | 1.3 | % | | | 2.9 | % | | | 7.2 | % | | | 19.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2015 Compared to Fiscal 2014
Construction Products segment sales decreased $2,453, or 1.4%, compared to the 2014 period. The decline was primarily related to a 14.7% reduction in sales of piling products, which was partially offset by a 43.0% increase in sales of precast construction products. The precast construction products business is experiencing very strong state sales for buildings, which has helped the Construction Products segment offset the increased competition and steel pricing pressures impacting the Piling Products business.
New orders booked during 2015 were down 19.0% over the prior year period. The decline related primarily to the Piling Products business where heavy competition has led to a reduction in market share for pipe piling and H-piling.
The gross profit percentage increased by 126 basis points due to gross margin improvements in piling and fabricated bridge products divisions. The improvement was primarily driven by the sales mix caused by an increase in sheet piling sales within the piling products business.
Fiscal 2014 Compared to Fiscal 2013
Construction Products segment sales declined by $12,904, or 6.7%, compared to fiscal 2013. The reduction was driven by a 20.8% reduction in sales of piling products, which was partially offset by significant growth in the Fabricated Bridge Products business as well as revenues from the July 2014 acquisition of Carr Concrete. The piling shortfall was partially attributable to insufficient product supply, which caused the segment to be unable to meet demand levels during much of 2014. During 2014, the Fabricated Bridge business experienced a record year and generated $8,800 in revenues related to the Newburgh-Beacon bridge project compared to $4,360 during 2013. The project was completed during 2015.
Including orders from Carr Concrete, the Construction Products segment generated an increase in new orders of 3.5% during 2014.
Leverage from engineered product sales created a favorable sales mix within the segment leading to a 287 basis point improvement over 2013.
Tubular and Energy Services
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | | Increase
(Decrease) | | | Increase
(Decrease) | | | Percent
Increase/
(Decrease) | | | Percent
Increase/
(Decrease) | |
| | | 2015 | | | 2014 | | | 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Net Sales | | $ | 119,147 | | | $ | 53,730 | | | $ | 42,545 | | | $ | 65,417 | | | $ | 11,185 | | | | 121.8 | % | | | 26.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | $ | 22,481 | | | $ | 11,722 | | | $ | 12,278 | | | $ | 10,759 | | | $ | (556 | ) | | | 91.8 | % | | | (4.5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit Percentage | | | 18.9 | % | | | 21.8 | % | | | 28.9 | % | | | (2.9 | )% | | | (7.1 | )% | | | (13.3 | )% | | | (24.6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2015 Compared to Fiscal 2014
Tubular and Energy Services segment sales increased $65,417, or 121.8%, compared to the prior year period. The increase relates to revenues from acquired businesses of $71,954, which were partially offset by reductions of $6,537 in coated and threaded product sales. The 294 basis point decline in Tubular and Energy Services gross margins was largely due to acquired businesses and the related impact on sales mix. In addition to the new product mix, the divisions serving the upstream energy market are competing in the depressed oil and gas market which is experiencing less demand leading to a more challenging pricing environment.
The Tubular and Energy Services segment generated an increase in new orders of 160.7% compared to the prior year period principally due to orders from the acquisitions of Chemtec and IOS.
Fiscal 2014 Compared to Fiscal 2013
Tubular and Energy Services segment sales increased $11,185, or 26.3% compared to fiscal 2013. The increase was principally due to a full year of sales from Ball Winch which was acquired in November 2013. Adding to the improvement was a 6.2% increase in sales from the Birmingham, AL coated products business.
Compared to 2013, the Tubular and Energy Services segment generated an increase in new orders of 31.2%. New orders from the 2013 acquisition of Ball Winch represented 23.7% of 2014 orders.
Gross profit declines of 705 basis points were attributable to cost overruns on a coated products project completed during the 2014 third quarter as well as the impact of a three-week plant shutdown in Birmingham, AL. The shutdown was completed in January 2015.
Liquidity and Capital Resources
Total debt at December 31, 2015 and 2014 was $168,754 and $26,428, respectively, and was comprised of borrowings from the revolving credit facility to fund acquisitions as well as assets funded through financing agreements.
Our need for liquidity relates primarily to working capital requirements for operating activities, debt service payments, capital expenditures, JV capital obligations, share repurchases, and dividends.
The change in cash and cash equivalents for the three-year periods ended December 31 are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Net cash provided by operating activities | | $ | 56,172 | | | $ | 66,739 | | | $ | 14,155 | |
Net cash used by investing activities | | | (205,575 | ) | | | (97,751 | ) | | | (47,174 | ) |
Net cash provided (used) by financing activities | | | 134,289 | | | | 22,055 | | | | (1,716 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | (3,598 | ) | | | (3,642 | ) | | | (2,106 | ) |
| | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | | (18,712 | ) | | | (12,599 | ) | | | (36,841 | ) |
| | | | | | | | | | | | |
Cash Flow from Operating Activities
During the current 2015 period, cash flows from operating activities provided $56,172, a decrease of $10,567, compared to the 2014 period. For the year ended December 31, 2015, income, adjustments to income from operating activities, and dividends from the LB Pipe joint venture provided $47,061 compared to $37,359 in the 2014 period. Working capital and other assets and liabilities provided $9,111 in the current period compared to providing $29,380 in the prior year period. The reduction in cash flows from operations was largely impacted by working capital movement.
During 2014, cash provided by operating activities was $66,739 compared to $14,155 in 2013. During 2014, income, adjustments to income from operating activities, and dividends from the joint venture provided $37,359 compared to providing $43,858 in 2013. Working capital and other assets and liabilities provided $29,380 in 2014 compared to working capital and other assets and liabilities use of $29,703 in 2013. The significant increase in cash flows primarily relates to additional emphasis on working capital management throughout 2014.
The Company’s calculation for days sales outstanding at December 31, 2015 was 56 days compared to 50 days at December 31, 2014. We believe our receivable portfolio continues to be of good quality.
Cash Flow from Investing Activities
Investing activities during the year ended December 31, 2015 related primarily to the acquisitions of Tew Plus, Tew, and IOS. The total purchase price, net of cash acquired and working capital adjustments, was $196,001. Other investing activities included capital expenditures of $14,913 during 2015. Current year expenditures related primarily to the Birmingham, AL coated products facility upgrades, application development of a new enterprise resource planning system, and general plant and yard improvements across each segment. We anticipate 2016 capital expenditures to be in the $6,000—$8,000 range. Other investing activities related to cash proceeds of $5,339 from the sale of assets. The sale of the Tucson, AZ concrete tie facility contributed $2,750 of the total proceeds.
The primary investing activity in 2014 related to a cash use of $80,302 for the acquisitions of Chemtec, Carr Concrete, and FWO as well a $495 working capital distribution related to the 2013 acquisition of Ball Winch. Capital expenditures of $17,056 related to improvements to our machinery and equipment across each segment, strategic land acquisitions to increase production capacity, leasehold improvements, and plant upgrades at our Birmingham, AL facility.
Investing activities during 2013 related to the $37,500 acquisition of Ball Winch as well as capital expenditures of $9,674 related to improvements to our machinery and equipment across each segment, leasehold improvements, and plant upgrades at our Birmingham, AL facility.
Cash Flow from Financing Activities
During the year ended December 31, 2015, the Company had an increase in outstanding debt of $142,326 primarily related to drawings against the revolving credit facility to fund domestic acquisition activity. During 2015, the Company purchased 80,512 shares of common stock for $1,587 under our existing share repurchase authorization. Additionally, the Company withheld 25,340 shares for approximately $1,114 during 2015. These shares were withheld from employees to pay their withholding taxes in connection with the exercise and/or vesting of options and restricted stock awards. Cash outflows related to dividends during 2015 were $1,656.
The primary financing activity during 2014 related to the receipt of proceeds from our revolving credit facility of $24,200. Additionally, we paid dividends of $0.04 per share during the fourth quarter of 2014 and $0.03 per share during each of the prior three quarters of 2014. During 2013, we paid quarterly dividends of $0.03 per share. We did not purchase any common shares of the Company under the share repurchase authorization in 2014 or 2013, however, the Company withheld 21,676 and 16,166 shares to pay employee withholding taxes in connection with the vesting of restricted stock awards for approximately $985 and $708, respectively.
Financial Condition
The Company generated $56,172 from cash flows from operations during 2015 that was utilized to fund capital expenditures and make payments against our revolving credit facility. At December 31, 2015, we had $33,312 in cash and cash equivalents and credit facilities with $171,668 of availability. We believe this liquidity will provide the flexibility to operate the business in a prudent manner and weather a continued downturn in our markets.
Approximately $29,700 of our cash and cash equivalents was held in non-domestic bank accounts, and is not available to fund domestic operations unless repatriated. It is management’s intent to indefinitely reinvest such funds outside of the United States. During 2015, the Company utilized non-domestic funds totaling $28,597 for the acquisitions of Tew and Tew Plus.
Borrowings under the March 13, 2015 Amended Credit Agreement will bear interest at rates based upon either the base rate or Euro-rate plus applicable margins. Applicable margins are dictated by the ratio of the Company’s indebtedness less consolidated cash on hand to the Company’s consolidated EBITDA, as defined in the underlying Amended Credit Agreement. The base rate is the highest of (a) PNC Bank’s prime rate, (b) the Federal Funds Rate plus 0.50% or (c) the daily Euro-rate (as defined in the Amended Credit Agreement) plus 1.00%. The base rate and Euro-rate spreads range from 0.00% to 1.50% and 1.00% to 2.50%, respectively.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps will become effective in February 2017 at which point it will effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract.
The Amended Credit Agreement includes two financial covenants: (a) Leverage Ratio, defined as the Company’s Indebtedness less cash on hand, in excess of $15,000, divided by the Company’s consolidated EBITDA, which must not exceed 3.25 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.
As of December 31, 2015, the Company was in compliance with the Amended Credit Agreement’s covenants. The agreement matures on March 13, 2020.
The Amended Credit Agreement permits the Company to pay dividends, distributions, and make redemptions with respect to its stock provided no event of default or potential default (as defined in the Amended Credit Agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $25,000 per year when funds are drawn on the facility. If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $25,000 per year are subjected to a limitation of $75,000 in the aggregate over the life of the facility. The $75,000 aggregate limitation also permits certain loans, investments, and acquisitions.
Other restrictions exist at all times including, but not limited to, limitation of the Company’s sale of assets, other indebtedness incurred by either the borrowers or the non-borrower subsidiaries of the Company, guarantees, and liens.
Tabular Disclosure of Contractual Obligations
A summary of the Company’s required payments under financial instruments and other commitments at December 31, 2015 are presented in the following table:
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | | Less than
1 year | | | 1-3
years | | | 4-5
years | | | More than
5 years | |
Contractual Cash Obligations | | | | | | | | | | | | | | | | | | | | |
Revolving credit facility (1) | | $ | 165,000 | | | $ | — | | | $ | — | | | $ | 165,000 | | | $ | — | |
Interest | | | 15,477 | | | | 3,593 | | | | 7,616 | | | | 4,268 | | | | — | |
Other debt | | | 3,754 | | | | 1,335 | | | | 1,679 | | | | 740 | | | | — | |
Pension plan contributions | | | 271 | | | | 271 | | | | — | | | | — | | | | — | |
Operating leases | | | 20,128 | | | | 4,310 | | | | 6,109 | | | | 3,109 | | | | 6,600 | |
Purchase obligations not reflected in the financial statements | | | 40,698 | | | | 40,698 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual cash obligations | | $ | 245,328 | | | $ | 50,207 | | | $ | 15,404 | | | $ | 173,117 | | | $ | 6,600 | |
| | | | | | | | | | | | | | | | | | | | |
Other Financial Commitments | | | | | | | | | | | | | | | | | | | | |
Standby letters of credit | | $ | 526 | | | $ | 526 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Repayments of outstanding loan balances are disclosed in Note 10 of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report. |
Other long-term liabilities include items such as income taxes which are not contractual obligations by nature. The Company cannot estimate the settlement years for these items and has excluded them from the above table.
Management believes its internal and external sources of funds are adequate to meet anticipated needs, including those disclosed above, for the foreseeable future.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating leases, purchase obligations, and standby letters of credit disclosed within the contractual obligations table above in the “Liquidity and Capital Resources” section. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.
Backlog
Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:
| | | | | | | | | | | | |
| | | Backlog | |
| | | December 31,
2015 | | | December 31,
2014 | | | December 31,
2013 | |
Rail Products and Services | | $ | 85,199 | | | $ | 104,821 | | | $ | 121,853 | |
Construction Products | | | 45,371 | | | | 65,843 | | | | 53,483 | |
Tubular and Energy Services | | | 34,137 | | | | 13,686 | | | | 7,775 | |
| | | | | | | | | | | | |
Total Backlog | | $ | 164,707 | | | $ | 184,350 | | | $ | 183,111 | |
| | | | | | | | | | | | |
Backlog from acquired businesses represents approximately 8% of the Company’s total unfilled customer orders at December 31, 2015. While a considerable portion of our business is backlog driven, certain businesses, including the IOS acquisition in March 2015 and the Rail Technologies business, are not driven by backlog and therefore have insignificant levels throughout the year.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstance. Application of these accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies relate to the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements. There can be no assurance that actual results will not differ from those estimates. For a summary of our significant accounting policies, including those discussed below, see Part II, Item 8, Note 1 to the Consolidated Financial Statements.
Revenue Recognition — The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied; persuasive evidence of a sales arrangement exists, product delivery and transfer of title to the customer has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
Revenues for products under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products, the percentage-of-completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations.
Revenue recognition involves judgments, including assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. In determining when to recognize revenue, we analyze various factors, including the specifics of the transaction, historical experience, creditworthiness of the customer, and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income.
Business Combinations, Goodwill, and Intangible Assets — We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a business is allocated to the underlying net assets of the acquired business based on estimates of their respective fair values. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected cash flows from customer relationships, the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio, future expected cash flows from developed technology and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
Intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected
cash flows. Because this process involves management making estimates with respect to future revenues and market conditions and because these estimates also form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates.
Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. This step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss equal to the excess is recorded as a component of operations. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volume and pricing, costs to produce, and working capital changes. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
The Company considers historical experience and available information at the time the fair values of its business are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, the Company may be exposed to impairment losses that could be material to our results of operations.
The Company recorded impairment charges of $80,337 ($63,887 net of taxes) during 2015 related to the acquisitions of IOS in March 2015 and Chemtec in December 2014. There were no goodwill impairments recorded during December 31, 2014 and 2013. Additional information concerning the impairments is set forth in Part II, Item 8, Note 4 to the financial statements included herein, which is incorporated by reference into this Item 7.
Intangible Assets, Long-Lived Assets, and Investments — The Company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The applicable guidance for assets held for uses requires that, if the sum of the future expected cash flows associated with an asset, undiscounted and without interest charges, is less than the carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. The accounting estimate related to asset impairment is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the Consolidated Statements of Operations.
The fair value of the Company’s equity investments is dependent on the performance of the investee companies as well as volatility inherent in the external markets for these investments. In assessing potential impairment of these investments, we consider these factors as well as the forecasted financial performance of the investees. If these forecasts are not met and indicate an other-than-temporary decline in value, impairment charges may be required.
There were no material impairments of intangible assets, long-lived assets, or investments for the years ended December 31, 2015, 2014, or 2013.
Product Warranty — The Company maintains a current warranty for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales. For long-term construction projects, a product warranty accrual is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or reso-
lution of known individual product warranty claims. The underlying assumptions used to calculate the product warranty accrual can change from period to period and are dependent upon estimates of the amount and cost of future product repairs or replacements.
At December 31, 2015 and 2014, the product warranty reserve was $8,755 and $11,500, respectively. During the years ended December 31, 2015, 2014, and 2013, the Company recorded product warranty expense of $972, $10,957, and $1,695, respectively. For additional information regarding the Company’s product warranty, refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Commitments and Contingent Liabilities” included herein.
Contingencies and Litigation — The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period.
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. When a probable, estimable exposure exists, the Company accrues an estimate of the probable costs for the resolution of these matters. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Future results of operations could be materially affected by changes in our assumptions or the outcome of these proceedings.
The Company’s operations are subject to national, state, foreign, and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, regulated materials and waste. These regulations impose liability for the costs of investigation, remediation, and damages resulting from, present and past spills, disposals, or other releases of hazardous substances or materials. Liabilities are recorded when remediation efforts are probable and the costs can be reasonably estimated. Estimates are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Established reserves are periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Commitments and Contingent Liabilities,” for additional information regarding the Company’s commitments and contingent liabilities.
Pension Plans —The calculation of the Company’s net periodic benefit cost (pension expense) and benefit obligation (pension liability) associated with its defined benefit pension plans (pension plans) requires the use of a number of assumptions that the Company deems to be critical accounting estimates. Changes in these assumptions can result in a different pension expense and liability amounts, and future actual experience can differ significantly from the assumptions. In 2015, the Company adjusted its mortality assumption to the Society of Actuaries RP-2015 mortality tables.
Two critical assumptions impacting the Company’s pension obligation are the expected long-term rate of return on plan assets and the assumed discount rate. The expected long-term rate of return reflects the average rate of earnings expected on funds invested or to be invested in the pension plans to provide for the benefits included in the pension liability. The Company establishes the expected long-term rate of return at the beginning of each fiscal year based upon information available to the Company at that time, including the plan’s investment mix and the forecasted rates of return on these types of securities. Any differences between actual experience and assumed experience are deferred as an unrecognized actuarial gain or loss. The unrecognized actuarial gains or losses are amortized in accordance with applicable accounting guidance.
The weighted average expected long-term rate of return determined by the Company for its 2015 domestic pension was 5.50% and the expected long-term rate of return for 2016 will be 5.20%. The weighted average expected long-term rate of return determined by the Company for its 2015 U.K. pension was 5.00% and the expected long-term rate of return for 2016 will be 5.21%. Pension expense increases as the expected long-term rate of return decreases. The long-term rates of return are reflective of the investment strategies of the underlying pension plan.
The assumed discount rate reflects the current rate at which the pension benefits could effectively be settled. In estimating that rate, applicable guidance requires the Company to utilize rates of return on high quality, fixed
income investments. The Company’s pension liability increases as the discount rate is reduced. Therefore, a decline in the assumed discount rate has the effect of increasing the Company’s pension obligation and future pension expense. The weighted average assumed discount rate used by the Company was 4.30% and 4.00%, respectively, as of December 31, 2015 and 2014 for its domestic pension plans. The weighted average assumed discount rate used by the Company was 4.00% and 3.60%, as of December 31, 2015 and 2014 for its U.K. pension plan. For additional information regarding the Company’s pension obligations, refer to Part II, Item 8, Note 16 to the Consolidated Financial Statements, “Retirement Plans,” included herein.
Income Taxes — The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by FASB ASC 740, “Income Taxes,” valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. This guidance requires management to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. Determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires management to make estimates and judgments of future financial results.
The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters.
The Company’s income tax rate is significantly affected by the tax rate on global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. At this time, we do not intend to repatriate any foreign earnings to fund U.S. operations. Should we decide to repatriate the foreign earnings, the Company would have to accrue income and withholding taxes in the period in which it is determined that the earnings will no longer be indefinitely invested outside the United States.
Refer to Part II, Item 8, Note 14, “Income Taxes,” included herein for additional information regarding the Company’s deferred tax assets. The Company’s ability to realize these tax benefits may affect the Company’s reported income tax expense and net income.
New Accounting Pronouncements — See Part II, Item 8, Note 1 to the Consolidated Financial Statements for information regarding new accounting pronouncements.
ITEM 7A. QUANTITATIVE | AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
(Dollars in thousands)
Interest Rate Risk
In the ordinary course of business, the Company is exposed to interest rate risks that may adversely affect funding costs associated with its variable-rate debt. The Company does not purchase or hold any derivative financial instruments for trading purposes. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.
During the year ended December 31, 2015, the Company entered into three forward starting LIBOR-based interest rate swap agreements with notional values totaling $50,000. At December 31, 2015, the Company recorded a long-term liability of $196 related to the swap agreements. The Company did not have any interest rate derivatives at December 31, 2014 or 2013.
Foreign Currency Exchange Rate Risk
The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-year period ended December 31, 2015.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of L.B. Foster Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of L.B. Foster Company and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of L.B. Foster Company and Subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), L.B. Foster Company and Subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2016, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 1, 2016
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except share data)
| | | | | | | | |
| | | 2015 | | | 2014 | |
ASSETS | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 33,312 | | | $ | 52,024 | |
Accounts receivable — net | | | 78,487 | | | | 90,178 | |
Inventories — net | | | 96,396 | | | | 95,089 | |
Prepaid income tax | | | 1,131 | | | | 2,790 | |
Other current assets | | | 5,148 | | | | 4,101 | |
| | | | | | | | |
Total current assets | | | 214,474 | | | | 244,182 | |
Property, plant, and equipment — net | | | 126,745 | | | | 74,802 | |
Other assets: | | | | | | | | |
Goodwill | | | 81,752 | | | | 82,949 | |
Other intangibles — net | | | 134,927 | | | | 82,134 | |
Deferred tax assets | | | 226 | | | | 93 | |
Investments | | | 5,321 | | | | 5,824 | |
Other assets | | | 3,215 | | | | 1,733 | |
| | | | | | | | |
Total assets | | $ | 566,660 | | | $ | 491,717 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 55,804 | | | $ | 67,166 | |
Deferred revenue | | | 6,934 | | | | 8,034 | |
Accrued payroll and employee benefits | | | 10,255 | | | | 13,419 | |
Accrued warranty | | | 8,755 | | | | 11,500 | |
Current maturities of long-term debt | | | 1,335 | | | | 676 | |
Other accrued liabilities | | | 8,563 | | | | 7,899 | |
| | | | | | | | |
Total current liabilities | | | 91,646 | | | | 108,694 | |
Long-term debt | | | 167,419 | | | | 25,752 | |
Deferred tax liabilities | | | 8,926 | | | | 7,618 | |
Other long-term liabilities | | | 15,837 | | | | 13,765 | |
Stockholders’ equity: | | | | | | | | |
Common stock, par value $.01, authorized 20,000,000 shares; shares issued at December 31, 2015 and December 31, 2014, 11,115,779; shares outstanding at December 31, 2015 and December 31, 2014, 10,221,006 and 10,242,405, respectively | | | 111 | | | | 111 | |
Paid-in capital | | | 46,681 | | | | 48,115 | |
Retained earnings | | | 276,571 | | | | 322,672 | |
Treasury stock — at cost, common stock, shares at December 31, 2015 and December 31, 2014, 894,773 and 873,374, respectively | | | (22,591 | ) | | | (23,118 | ) |
Accumulated other comprehensive loss | | | (17,940 | ) | | | (11,892 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 282,832 | | | | 335,888 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 566,660 | | | $ | 491,717 | |
| | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THE THREE YEARS ENDED DECEMBER 31,
(In thousands, except share data)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Sales of goods | | $ | 537,214 | | | $ | 561,899 | | | $ | 559,846 | |
Sales of services | | | 87,309 | | | | 45,293 | | | | 38,117 | |
| | | | | | | | | | | | |
Total sales | | | 624,523 | | | | 607,192 | | | | 597,963 | |
Cost of goods sold | | | 420,169 | | | | 449,964 | | | | 458,043 | |
Cost of services sold | | | 70,701 | | | | 35,637 | | | | 23,981 | |
| | | | | | | | | | | | |
Total cost of sales | | | 490,870 | | | | 485,601 | | | | 482,024 | |
| | | | | | | | | | | | |
Gross profit | | | 133,653 | | | | 121,591 | | | | 115,939 | |
| | | | | | | | | | | | |
Selling and administrative expenses | | | 92,648 | | | | 79,814 | | | | 71,256 | |
Amortization expense | | | 12,245 | | | | 4,695 | | | | 3,112 | |
Impairment of goodwill | | | 80,337 | | | | — | | | | — | |
Interest expense | | | 4,378 | | | | 512 | | | | 485 | |
Interest income | | | (206 | ) | | | (530 | ) | | | (659 | ) |
Equity in loss (income) of nonconsolidated investments | | | 413 | | | | (1,282 | ) | | | (1,316 | ) |
Other income | | | (5,585 | ) | | | (678 | ) | | | (1,077 | ) |
| | | | | | | | | | | | |
| | | 184,230 | | | | 82,531 | | | | 71,801 | |
| | | | | | | | | | | | |
(Loss) Income before income taxes | | | (50,577 | ) | | | 39,060 | | | | 44,138 | |
Income tax (benefit) expense | | | (6,132 | ) | | | 13,404 | | | | 14,848 | |
| | | | | | | | | | | | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | |
| | | | | | | | | | | | |
Basic (loss) earnings per common share | | $ | (4.33 | ) | | $ | 2.51 | | | $ | 2.88 | |
| | | | | | | | | | | | |
Diluted (loss) earnings per common share | | $ | (4.33 | ) | | $ | 2.48 | | | $ | 2.85 | |
| | | | | | | | | | | | |
Dividends paid per common share | | $ | 0.16 | | | $ | 0.13 | | | $ | 0.12 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
THE THREE YEARS ENDED DECEMBER 31,
(In thousands)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | |
| | | | | | | | | | | | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustment | | | (6,947 | ) | | | (4,863 | ) | | | (3,475 | ) |
Unrealized loss on cash flow hedges, net of tax benefit of $76 | | | (121 | ) | | | — | | | | — | |
Pension and post-retirement benefit plans, net of tax expense (benefit): $208, ($1,383), and $1,199 | | | 631 | | | | (2,631 | ) | | | 2,258 | |
Reclassification of pension liability adjustments to earnings, net of tax expense of $160, $63 and $134 * | | | 389 | | | | 185 | | | | 303 | |
| | | | | | | | | | | | |
Other comprehensive loss, net of tax | | | (6,048 | ) | | | (7,309 | ) | | | (914 | ) |
| | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (50,493 | ) | | $ | 18,347 | | | $ | 28,376 | |
| | | | | | | | | | | | |
* | Reclassifications out of accumulated other comprehensive income for pension obligations are charged to selling and administrative expense. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE THREE YEARS ENDED DECEMBER 31,
(In thousands)
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | |
Adjustments to reconcile net (loss) income to cash provided by operating activities: | | | | | | | | | | | | |
Deferred income taxes | | | (14,582 | ) | | | (2,914 | ) | | | 3,244 | |
Depreciation | | | 14,429 | | | | 7,882 | | | | 6,890 | |
Amortization | | | 12,245 | | | | 4,695 | | | | 3,112 | |
Impairment of goodwill | | | 80,337 | | | | — | | | | — | |
Equity loss (income) and remeasurement gain | | | (167 | ) | | | (1,282 | ) | | | (1,316 | ) |
(Gain) loss on sales and disposals of property, plant, and equipment | | | (2,064 | ) | | | 21 | | | | 127 | |
Share-based compensation | | | 1,471 | | | | 3,007 | | | | 2,156 | |
Excess income tax benefit from share-based compensation | | | (253 | ) | | | (336 | ) | | | (203 | ) |
Change in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
Accounts receivable | | | 31,223 | | | | 15,311 | | | | (36,782 | ) |
Inventories | | | 4,331 | | | | (9,872 | ) | | | 29,919 | |
Other current assets | | | 3,248 | | | | (1,004 | ) | | | (310 | ) |
Prepaid income tax | | | 1,134 | | | | 2,530 | | | | (6,882 | ) |
Other noncurrent assets | | | (909 | ) | | | (386 | ) | | | 264 | |
Dividends from LB Pipe & Coupling Products, LLC | | | 90 | | | | 630 | | | | 558 | |
Accounts payable | | | (17,204 | ) | | | 16,285 | | | | (5,206 | ) |
Deferred revenue | | | (2,279 | ) | | | 591 | | | | (1,805 | ) |
Accrued payroll and employee benefits | | | (5,136 | ) | | | 2,542 | | | | (608 | ) |
Other current liabilities | | | (4,189 | ) | | | 2,732 | | | | (7,561 | ) |
Other liabilities | | | (1,108 | ) | | | 651 | | | | (732 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 56,172 | | | | 66,739 | | | | 14,155 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from the sale of property, plant, and equipment | | | 5,339 | | | | 184 | | | | — | |
Capital expenditures on property, plant, and equipment | | | (14,913 | ) | | | (17,056 | ) | | | (9,674 | ) |
Acquisitions, net of cash acquired | | | (196,001 | ) | | | (80,797 | ) | | | (37,500 | ) |
Capital contributions to equity method investments | | | — | | | | (82 | ) | | | — | |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (205,575 | ) | | | (97,751 | ) | | | (47,174 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Repayments of debt | | | (161,068 | ) | | | (125 | ) | | | (6 | ) |
Proceeds from debt | | | 301,063 | | | | 24,516 | | | | — | |
Proceeds from exercise of stock options and stock awards | | | 68 | | | | 131 | | | | 35 | |
Financing fees | | | (1,670 | ) | | | (473 | ) | | | — | |
Treasury stock acquisitions | | | (2,701 | ) | | | (985 | ) | | | (708 | ) |
Cash dividends on common stock paid to shareholders | | | (1,656 | ) | | | (1,345 | ) | | | (1,240 | ) |
Excess income tax benefit from share-based compensation | | | 253 | | | | 336 | | | | 203 | |
| | | | | | | | | | | | |
Net cash provided (used) by financing activities | | | 134,289 | | | | 22,055 | | | | (1,716 | ) |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (3,598 | ) | | | (3,642 | ) | | | (2,106 | ) |
Net decrease in cash and cash equivalents | | | (18,712 | ) | | | (12,599 | ) | | | (36,841 | ) |
Cash and cash equivalents at beginning of period | | | 52,024 | | | | 64,623 | | | | 101,464 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 33,312 | | | $ | 52,024 | | | $ | 64,623 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Interest paid | | $ | 3,674 | | | $ | 362 | | | $ | 330 | |
| | | | | | | | | | | | |
Income taxes paid | | $ | 7,835 | | | $ | 14,617 | | | $ | 18,697 | |
| | | | | | | | | | | | |
Capital expenditures funded through financing agreements | | $ | 288 | | | $ | 1,981 | | | $ | — | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2015
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
Stock | | | Paid-in
Capital | | | Retained
Earnings | | | Treasury
Stock | | | Accumulated
Other
Comprehensive
(Loss) Income | | | Total | |
| | | (In thousands, except share data) | |
Balance, January 1, 2013 | | $ | 111 | | | $ | 46,290 | | | $ | 270,311 | | | $ | (25,468 | ) | | $ | (3,669 | ) | | $ | 287,575 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 29,290 | | | | | | | | | | | | 29,290 | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Pension liability adjustment | | | | | | | | | | | | | | | | | | | 2,561 | | | | 2,561 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (3,475 | ) | | | (3,475 | ) |
Issuance of 39,123 common shares,net of shares withheld for taxes | | | | | | | (1,410 | ) | | | | | | | 737 | | | | | | | | (673 | ) |
Stock based compensation and related excess tax benefit | | | | | | | 2,359 | | | | | | | | | | | | | | | | 2,359 | |
Cash dividends on common stock paid to shareholders | | | | | | | | | | | (1,240 | ) | | | | | | | | | | | (1,240 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2013 | | | 111 | | | | 47,239 | | | | 298,361 | | | | (24,731 | ) | | | (4,583 | ) | | | 316,397 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 25,656 | | | | | | | | | | | | 25,656 | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Pension liability adjustment | | | | | | | | | | | | | | | | | | | (2,446 | ) | | | (2,446 | ) |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (4,863 | ) | | | (4,863 | ) |
Issuance of 53,884 common shares, net of shares withheld for taxes | | | | | | | (2,467 | ) | | | | | | | 1,613 | | | | | | | | (854 | ) |
Stock based compensation and related excess tax benefit | | | | | | | 3,343 | | | | | | | | | | | | | | | | 3,343 | |
Cash dividends on common stock paid to shareholders | | | | | | | | | | | (1,345 | ) | | | | | | | | | | | (1,345 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2014 | | | 111 | | | | 48,115 | | | | 322,672 | | | | (23,118 | ) | | | (11,892 | ) | | | 335,888 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | (44,445 | ) | | | | | | | | | | | (44,445 | ) |
Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Pension liability adjustment | | | | | | | | | | | | | | | | | | | 1,020 | | | | 1,020 | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (6,947 | ) | | | (6,947 | ) |
Unrealized derivative loss on cash flow hedges | | | | | | | | | | | | | | | | | | | (121 | ) | | | (121 | ) |
Purchase of 80,512 common shares for treasury | | | | | | | | | | | | | | | (1,587 | ) | | | | | | | (1,587 | ) |
Issuance of 59,113 common shares, net of shares withheld for taxes | | | | | | | (3,158 | ) | | | | | | | 2,114 | | | | | | | | (1,044 | ) |
Stock based compensation and related excess tax benefit | | | | | | | 1,724 | | | | | | | | | | | | | | | | 1,724 | |
Cash dividends on common stock paid to shareholders | | | | | | | | | | | (1,656 | ) | | | | | | | | | | | (1,656 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2015 | | $ | 111 | | | $ | 46,681 | | | $ | 276,571 | | | $ | (22,591 | ) | | $ | (17,940 | ) | | $ | 282,832 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data unless otherwise noted)
Note 1.
Summary of Significant Accounting Policies
Basis of financial statement presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ventures, and partnerships in which a controlling interest is held. Inter-company transactions and accounts have been eliminated. The Company utilizes the equity method of accounting for companies where its ownership is less than or equal to 50% and significant influence exists.
Cash and cash equivalents
The Company considers cash and other instruments with maturities of three months or less, when purchased, to be cash and cash equivalents. The Company invests available funds in a manner to maximize returns, preserve investment principal, and maintain liquidity while seeking the highest yield available.
Cash and cash equivalents held in non-domestic accounts was approximately $29,700 and $49,233 at December 31, 2015 and 2014, respectively. Included in non-domestic cash equivalents are investments in bank term deposits of approximately $1,939 and $25 at December 31, 2015 and 2014, respectively. The carrying amounts approximated fair value because of the short maturity of the instruments.
Inventories
Certain inventories are valued at the lower of the last-in, first-out (“LIFO”) cost or market. Approximately 43% in 2015 and 44% in 2014, of the Company’s inventory is valued at average cost or market, whichever is lower. Slow-moving inventory is reviewed and adjusted regularly, based upon product knowledge, physical inventory observation, and the age of the inventory.
Property, plant, and equipment
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of 5 to 40 years for buildings and 2 to 10 years for machinery and equipment. Leasehold improvements are amortized over 3 to 13 years, which represent the lives of the respective leases or the lives of the improvements, whichever is shorter. Depreciation expense is recorded within “cost of sales” and “selling and administrative” expenses based upon the particular asset’s use. The Company reviews a long-lived asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. There were no material asset impairments recorded for the years ended December 31, 2015, 2014, or 2013.
Maintenance, repairs, and minor renewals are charged to operations as incurred. Major renewals and betterments that substantially extend the useful life of the property are capitalized at cost. Upon sale or other disposition of assets, the costs and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in income.
Allowance for doubtful accounts
The allowance for doubtful accounts is recorded to reflect the ultimate realization of the Company’s accounts receivable and includes assessment of the probability of collection and the credit-worthiness of certain customers. Reserves for uncollectible accounts are recorded as part of selling and administrative expenses on the Consolidated Statements of Operations. The Company records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, the Company reviews its accounts receivable aging and calculates an allowance through application of historic reserve factors to overdue receivables. This calculation is supplemented by specific account reviews performed by the Company’s
credit department. As necessary, the application of the Company’s allowance rates to specific customers is reviewed and adjusted to more accurately reflect the credit risk inherent within that customer relationship.
Investments
Investments in companies in which the Company has the ability to exert significant influence, but not control, over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method. Under the equity method, investments are initially recorded at cost and adjusted for dividends and undistributed earnings and losses. The equity method of accounting requires a company to recognize a loss in the value of an equity method investment that is other than a temporary decline.
Goodwill and other intangible assets
Goodwill is tested annually for impairment or more often if there are indicators of impairment. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. This step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss equal to the excess is recorded as a component of operations. The Company performs its annual impairment tests as of October 1st.
During 2015, the Company identified certain triggering events that indicated an interim impairment test was required. As a result of the interim assessment as of September 1, 2015, the Company recorded impairment charges of $80,337 ($63,887 net of taxes) during 2015 related to the acquisitions of IOS and Chemtec. The measurement of goodwill impairment is a Level 3 fair value measurement, as the primary assumptions, including estimates of future revenue growth, gross margin, and EBITDA margin, are not market observable and require management to make judgements regarding future outcomes. Additional information concerning the impairments is set forth in Note 4 to the financial statements. No additional charges were recorded as a result of the 2015 annual impairment test. No goodwill impairment was recognized during 2014 or 2013.
The Company has no indefinite-lived intangible assets. The Company reviews a long-lived intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. All intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization period of approximately 14 years, at December 31, 2015. See Note 4 for additional information including regarding the Company’s other intangible assets.
Environmental remediation and compliance
Environmental remediation costs are accrued when the liability is probable and costs are estimable. Environmental compliance costs, which principally include the disposal of waste generated by routine operations, are expensed as incurred. Capitalized environmental costs, when appropriate, are depreciated over their useful life. Reserves are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Reserves are periodically reviewed throughout the year and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. See Note 19, “Commitments and Contingent Liabilities,” for additional information regarding the Company’s outstanding environmental and litigation reserves.
Earnings per share
Basic earnings per share is calculated by dividing net income by the weighted average of common shares outstanding during the year. Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and restricted stock utilizing the treasury stock method.
Revenue recognition
The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied; persuasive evidence of a sales arrangement exists, product delivery and transfer of title to the customer has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
Revenues for products and services under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products and services, the percentage of completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations.
Revenue recognition involves judgments, including assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. In determining when to recognize revenue, we analyze various factors, including the specifics of the transaction, historical experience, creditworthiness of the customer, and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income.
Costs in excess of billings are classified as work-in-process inventory. Projects with billings in excess of costs are recorded within deferred revenue.
Deferred revenue
Deferred revenue consists of customer payments received for which the revenue recognition criteria have not yet been met as well as billings in excess of costs on percentage of completion projects. Advanced payments from customers typically relate to contracts with respect to which the Company has significantly fulfilled its obligations, but due to the Company’s continuing involvement with the project, revenue is precluded from being recognized until title, ownership, and risk of loss have passed to the customer.
Fair value of financial instruments
The Company’s financial instruments consist of cash equivalents, accounts receivable, accounts payable, interest rate swap agreements, and debt.
The carrying amounts of the Company’s financial instruments at December 31, 2015 and 2014 approximate fair value. See Note 18, “Fair Value Measurements,” for additional information.
Stock-based compensation
The Company applies the provisions of FASB ASC 718, “Compensation — Stock Compensation,” to account for the Company’s share-based compensation. Under the guidance, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. See Note 15, “Stare-based Compensation,” for additional information.
Product warranty
The Company maintains a current warranty liability for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales based upon
historical experience. For long-lived construction products, a warranty is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims or due to changes in the Company’s historical warranty experience. At December 31, 2015 and 2014, the product warranty reserve was $8,755 and $11,500, respectively. See Note 19, “Commitments and Contingencies” for additional information regarding the product warranty.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax laws and rates expected to be in effect when such differences are recovered or settled. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date of the change.
The Company makes judgments regarding the recognition of deferred tax assets and the future realization of these assets. As prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Taxes” and applicable guidance, valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood more than 50%) that some portion or all of the deferred tax assets will not be realized. The guidance requires the Company to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. Determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires the Company to make estimates and judgments of future financial results.
The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.
Foreign currency translation
The assets and liabilities of our foreign subsidiaries are measured using the local currency as the functional currency and are translated into U.S. dollars at exchange rates as of the balance sheet date. Income statement amounts are translated at the weighted-average rates of exchange during the year. The translation adjustment is accumulated as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in determining net income. Included in net income for the years ended December 31, 2015, 2014, and 2013 were foreign currency transaction gains of approximately $1,616, $422, and $433, respectively.
Research and development
The Company expenses research and development costs as costs are incurred. For the years ended December 31, 2015, 2014, and 2013, research and development expenses were $3,937, $3,096, and $3,154, respectively, and were principally related to the Company’s friction management and railroad monitoring system products.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes principally to conform to the presentation in the current year period. These reclassifications include separately presenting sales of services and cost of services sold to reflect the Company’s increased service offerings attributable to the recent acquisitions disclosed in Note 3 and a change in GAAP, as further described below.
Recently issued accounting guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating its implementation approach and assessing the impact of ASU 2014-09 on our financial position and results of operations.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” 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. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on our financial position or results of operations.
Recently adopted accounting guidance
In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt issuance costs related to line of credit arrangements may continue to be reflected as an asset. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. The standard is effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods. The Company early adopted the new guidance in the fourth quarter of 2015 and there was no impact to the consolidated financial statements from the adoption of this guidance.
In September 2015, the FASB issued ASU No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard, entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1, 2016. The Company early adopted the new guidance in the fourth quarter of 2015 and there was no impact to the consolidated financial statements from the adoption of this guidance.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). This new guidance requires businesses to classify deferred tax liabilities and assets on their balance sheets as noncurrent. Under existing accounting, a business must separate deferred income tax liabilities and assets into current and noncurrent. ASU 2015-17 was issued as a way to simplify the way businesses classify deferred tax liabilities and assets on their balance sheets. Public companies must apply ASU 2015-17 to fiscal years beginning after December 15, 2016. Companies must follow the requirements for interim periods within those fiscal years, but early adoption at the beginning of an interim or annual period is allowed for all entities. The Company adopted this guidance during the fourth quarter of 2015 on a retrospective
basis, which resulted in the reclassification of $3,497 current deferred tax assets and $77 current deferred tax liabilities to non-current as of December 31, 2014.
Note 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 that is subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon their segment profit contribution to the Company’s consolidated results.
As a result of recently completed acquisitions, during the first quarter of 2015, the Company renamed the Rail Products and Tubular Products business segments to be Rail Products and Services and Tubular and Energy Services, respectively. The name changes principally reflect the additional businesses conducted by those segments as a result of acquisitions that have enhanced our product and service offerings within the rail and energy markets. Excluding the addition of current year acquisitions, there were no changes to the divisions that have been aggregated within the segments nor were there changes to the historical reportable segment results.
The Company markets its products directly in all major industrial areas of the United States, Canada, and Europe, primarily through an internal sales force.
The Company’s Rail Products and Services segment provides a full line of new and used rail, trackwork, and accessories to railroads, mines, and other customers in the rail industry. The Rail segment also designs and produces insulated rail joints, power rail, track fasteners, concrete railroad ties, coverboards, and special accessories for mass transit and other rail systems. In addition, the Rail Products and Services segment engineers, manufactures, and assembles friction management products and railway wayside data collection and management systems.
The Company’s Construction Products segment sells and rents steel sheet piling, H-bearing pile, and other piling products for foundation and earth retention requirements. The Company’s Fabricated Products division sells bridge decking, bridge railing, structural steel fabrications, expansion joints, bridge forms, and other products for highway construction and repair. The concrete products businesses produce precast concrete buildings and a variety of specialty precast concrete products.
The Company’s Tubular and Energy Services segment provides pipe coatings for natural gas pipelines and utilities, upstream test and inspection services, precision measurement systems for the oil and gas market, and produces threaded pipe products for the oil and gas markets as well as industrial water well and irrigation markets.
The following table illustrates net sales, profit (loss), assets, depreciation/amortization, and expenditures for long-lived assets of the Company by segment for the years ended or at December 31, 2015, 2014, and 2013. Segment profit is the earnings from operations before income taxes and includes internal cost of capital charges for net assets used in the segment at a rate of generally 1% per month excluding recently acquired businesses. The internal cost of capital charges are eliminated during the consolidation process. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the Company accounts for inventory on a First-In, First-Out (“FIFO”) basis at the segment level compared to a Last-In, First-Out (“LIFO”) basis at the consolidated level.
| | | | | | | | | | | | | | | | | | | | |
| | | 2015 | |
| | | Net Sales | | | Segment
Profit (Loss) | | | Segment
Assets | | | Depreciation/
Amortization | | | Expenditures for
Long-Lived
Assets | |
Rail Products and Services | | $ | 328,982 | | | $ | 27,037 | | | $ | 241,222 | | | $ | 8,098 | | | $ | 4,273 | |
Construction Products | | | 176,394 | | | | 12,958 | | | | 86,335 | | | | 2,720 | | | | 1,260 | |
Tubular and Energy Services | | | 119,147 | | | | (81,344 | )* | | | 216,715 | | | | 14,857 | | | | 4,303 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 624,523 | | | $ | (41,349 | ) | | $ | 544,272 | | | $ | 25,675 | | | $ | 9,836 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2014 | |
| | | Net Sales | | | Segment
Profit | | | Segment
Assets | | | Depreciation/
Amortization | | | Expenditures for
Long-Lived
Assets | |
Rail Products and Services | | $ | 374,615 | | | $ | 30,093 | | | $ | 239,951 | | | $ | 6,153 | | | $ | 5,115 | |
Construction Products | | | 178,847 | | | | 13,106 | | | | 102,978 | | | | 2,232 | | | | 3,343 | |
Tubular and Energy Services | | | 53,730 | | | | 5,350 | | | | 130,289 | | | | 3,208 | | | | 6,988 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 607,192 | | | $ | 48,549 | | | $ | 473,218 | | | $ | 11,593 | | | $ | 15,446 | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | | 2013 | |
| | | Net Sales | | | Segment
Profit | | | Segment
Assets | | | Depreciation/
Amortization | | | Expenditures for
Long-Lived
Assets | |
Rail Products and Services | | $ | 363,667 | | | $ | 28,692 | | | $ | 252,049 | | | $ | 6,505 | | | $ | 3,383 | |
Construction Products | | | 191,751 | | | | 10,206 | | | | 77,900 | | | | 1,758 | | | | 1,805 | |
Tubular and Energy Services | | | 42,545 | | | | 9,208 | | | | 51,497 | | | | 1,054 | | | | 2,460 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 597,963 | | | $ | 48,106 | | | $ | 381,446 | | | $ | 9,317 | | | $ | 7,648 | |
| | | | | | | | | | | | | | | | | | | | |
* | - Segment loss includes impairment of goodwill as further described in Note 4. |
During 2015, 2014, and 2013, no single customer accounted for more than 10% of the Company’s consolidated net sales. Sales between segments are immaterial.
Reconciliations of reportable segment net sales, profits, assets, depreciation/amortization, and expenditures for long-lived assets to the Company’s consolidated totals are illustrated as follows for the years ended and as of December 31:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
(Loss) income from Operations: | | | | | | | | | | | | |
Total for reportable segments | | $ | (41,349 | ) | | $ | 48,549 | | | $ | 48,106 | |
Adjustment of inventory to LIFO | | | 2,468 | | | | 738 | | | | 37 | |
Unallocated interest income | | | 206 | | | | 530 | | | | 659 | |
Unallocated equity in (loss) income of nonconsolidated investments | | | (413 | ) | | | 1,282 | | | | 1,316 | |
Unallocated corporate amounts | | | (11,489 | ) | | | (12,039 | ) | | | (5,980 | ) |
| | | | | | | | | | | | |
(Loss) income from operations, before income taxes | | $ | (50,577 | ) | | $ | 39,060 | | | $ | 44,138 | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Total for reportable segments | | $ | 544,272 | | | $ | 473,218 | | | $ | 381,446 | |
Unallocated corporate assets | | | 28,209 | | | | 26,788 | | | | 40,774 | |
LIFO | | | (5,821 | ) | | | (8,289 | ) | | | (9,027 | ) |
| | | | | | | | | | | | |
Total assets | | $ | 566,660 | | | $ | 491,717 | | | $ | 413,193 | |
| | | | | | | | | | | | |
Depreciation/Amortization: | | | | | | | | | | | | |
Total for reportable segments | | $ | 25,675 | | | $ | 11,593 | | | $ | 9,317 | |
Other | | | 999 | | | | 984 | | | | 685 | |
| | | | | | | | | | | | |
Total | | $ | 26,674 | | | $ | 12,577 | | | $ | 10,002 | |
| | | | | | | | | | | | |
Expenditures for Long-Lived Assets: | | | | | | | | | | | | |
Total for reportable segments | | $ | 9,836 | | | $ | 15,446 | | | $ | 7,648 | |
Expenditures funded through financing agreements | | | 288 | | | | 1,981 | | | | — | |
Other expenditures | | | 5,077 | | | | 1,610 | | | | 2,026 | |
| | | | | | | | | | | | |
Total | | $ | 15,201 | | | $ | 19,037 | | | $ | 9,674 | |
| | | | | | | | | | | | |
The following table summarizes the Company’s sales by major geographic region in which the Company has operations for the years ended December 31:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
United States | | $ | 522,404 | | | $ | 498,025 | | | $ | 495,710 | |
Canada | | | 40,545 | | | | 39,375 | | | | 37,290 | |
United Kingdom | | | 26,817 | | | | 22,625 | | | | 16,548 | |
Other | | | 34,757 | | | | 47,167 | | | | 48,415 | |
| | | | | | | | | | | | |
| | $ | 624,523 | | | $ | 607,192 | | | $ | 597,963 | |
| | | | | | | | | | | | |
The following table summarizes the Company’s long-lived assets by geographic region at December 31:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
United States | | $ | 118,053 | | | $ | 66,905 | | | $ | 40,717 | |
Canada | | | 6,186 | | | | 7,440 | | | | 8,833 | |
Other | | | 2,506 | | | | 457 | | | | 559 | |
| | | | | | | | | | | | |
| | $ | 126,745 | | | $ | 74,802 | | | $ | 50,109 | |
| | | | | | | | | | | | |
The following table summarizes the Company’s sales by major product line:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Rail distribution products | | $ | 126,277 | | | $ | 139,529 | | | $ | 144,911 | |
Rail Technologies products | | | 98,237 | | | | 109,053 | | | | 88,670 | |
Piling products | | | 94,853 | | | | 111,182 | | | | 140,302 | |
Concrete products | | | 52,044 | | | | 36,396 | | | | 32,969 | |
Test and inspection services | | | 35,906 | | | | — | | | | — | |
CXT concrete tie products | | | 35,740 | | | | 52,562 | | | | 44,108 | |
Allegheny Rail Products | | | 35,155 | | | | 45,008 | | | | 36,666 | |
Other products | | | 146,311 | | | | 113,462 | | | | 110,337 | |
| | | | | | | | | | | | |
| | $ | 624,523 | | | $ | 607,192 | | | $ | 597,963 | |
| | | | | | | | | | | | |
Note 3.
Acquisitions
TEW Plus, LTD
On November 23, 2015, the Company acquired the 75% balance of the remaining shares of TEW Plus, LTD (“Tew Plus”) for $2,130, net of cash acquired. Headquartered in Nottingham, UK, Tew Plus provides telecommunications and security systems to the railway and commercial markets. Their offerings include full installation services including: design, project management, survey, and commissioning along with future maintenance. The results of Tew Plus’ operations are included within the Rail Products and Services segment from the date of acquisition.
Inspection Oilfield Services
On March 13, 2015, the Company acquired IOS Holdings, Inc. (“IOS”) for $167,404, net of cash acquired and a net working capital receivable adjustment of $2,363. The purchase agreement includes an earn-out provision for the seller to generate an additional $60,000 of proceeds upon achieving certain levels of EBITDA during the three year period beginning on January 1, 2015. The Company has not accrued an estimated earn-out obligation based upon a probability weighted valuation model of the projected EBITDA results, which indicates that the minimum target will not be achieved. Approximately $7,600 of the purchase price relates to amounts held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Houston, TX,
IOS is a leading independent provider of tubular management services with operations in every significant oil and gas producing region in the continental United States. The acquisition is included within our Tubular and Energy Services segment from the date of acquisition. See Note 4 with respect to an impairment of the goodwill related to this acquisition.
TEW Holdings, LTD
On January 13, 2015, the Company acquired TEW Holdings, LTD (“Tew”) for $26,467, net of cash acquired, working capital, and net debt adjustments totaling $4,200. The purchase price includes approximately $600 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Nottingham, UK, Tew provides application engineering solutions primarily to the rail market and other major industries. The results of Tew’s operations are included within the Rail Products and Services segment from the date of acquisition.
Chemtec Energy Services, L.L.C.
On December 30, 2014, the Company acquired Chemtec Energy Services, L.L.C. (“Chemtec”) for $66,719, net of cash received, which is inclusive of $1,867 related to working capital adjustments. The cash payment included $5,000 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Willis, TX, Chemtec is a domestic manufacturer and turnkey provider of blending, injection, and metering equipment for the oil and gas industry. The acquired business is included within our Tubular and Energy Services segment. See Note 4 with respect to an impairment of the goodwill related to this acquisition.
FWO
On October 29, 2014, the Company acquired FWO, a business of Balfour Beatty Rail GmbH for $1,103, inclusive of a $161 post-closing working capital receivable adjustment. Headquartered in Germany, FWO is engaged in the electronic track lubrication and maintenance business and has been included in our Rail Products and Services segment.
Carr Concrete
On July 7, 2014, the Company acquired Carr Concrete Corporation (“Carr”) for $12,480, inclusive of a $189 post-closing purchase price adjustment. Carr is a provider of pre-stressed and precast specialty concrete products located in Waverly, WV. Included within the purchase price is $1,000 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. The results of Carr’s operations are included in our Construction Products segment.
Acquisition Summary
Each transaction was accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles which requires an acquiring entity to recognize, with limited exceptions, all of the assets acquired and liabilities assumed in a transaction at fair value as of the acquisition date. Goodwill primarily represents the value paid for each acquisition’s enhancement to the Company’s product and service offerings and capabilities, as well as a premium payment related to the ability to control the acquired assets. The Company has concluded that intangible assets and goodwill values resulting from the Chemtec, FWO, and Carr transactions will be deductible for tax purposes.
The Company incurred $760 and $2,240 of acquisition-related costs which are included in the results of operations within selling and administrative costs for the years ended December 31, 2015 and 2014.
The following unaudited pro forma consolidated income statement presents the Company’s results as if the acquisitions of IOS, Tew, and Chemtec had occurred on January 1, 2014. The 2015 pro forma results include the impact of the current year impairment of goodwill as further described in Note 4.
| | | | | | | | |
| | | Twelve months ended
December, 31 | |
| | | 2015 | | | 2014 | |
Net sales | | $ | 640,596 | | | $ | 806,384 | |
Gross profit | | | 138,123 | | | | 183,163 | |
Net (loss) income | | | (44,399 | ) | | | 41,745 | |
Diluted (loss) earnings per share | | | | | | | | |
As Reported | | $ | (4.33 | ) | | $ | 2.48 | |
Pro forma | | $ | (4.32 | ) | | $ | 4.04 | |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:
| | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of Purchase Price | | November 23,
2015 - Tew Plus | | | March 13,
2015 - IOS | | | January 13,
2015 - Tew | | | December 30,
2014 - Chemtec | | | October 29,
2014 - FWO | | | July 7,
2014 - Carr | |
Current assets | | $ | 4,420 | | | $ | 19,877 | | | $ | 12,125 | | | $ | 15,528 | | | $ | 131 | | | $ | 3,180 | |
Other assets | | | — | | | | 708 | | | | — | | | | — | | | | — | | | | 45 | |
Property, plant, and equipment | | | 47 | | | | 51,453 | | | | 2,398 | | | | 4,705 | | | | — | | | | 7,648 | |
Goodwill | | | 822 | | | | 69,908 | * | | | 8,772 | | | | 22,302 | * | | | 971 | | | | 1,936 | |
Other intangibles | | | 1,074 | | | | 50,354 | | | | 14,048 | | | | 33,130 | | | | 419 | | | | 1,348 | |
Liabilities assumed | | | (3,597 | ) | | | (23,596 | ) | | | (6,465 | ) | | | (6,756 | ) | | | (418 | ) | | | (1,677 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,766 | | | $ | 168,704 | | | $ | 30,878 | | | $ | 68,909 | | | $ | 1,103 | | | $ | 12,480 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
* | - See Note 4 with respect to an impairment of the goodwill related to this acquisition. |
The following table summarizes the estimates of the fair values and amortizable lives of the identifiable intangible assets acquired:
| | | | | | | | | | | | | | | | | | | | | | | | |
Intangible Asset | | November 23,
2015 - Tew Plus | | | March 13,
2015 - IOS | | | January 13,
2015 - Tew | | | December 30,
2014 - Chemtec | | | October 29,
2014 - FWO | | | July 7,
2014 - Carr | |
Trade name | | $ | — | | | $ | 2,641 | | | $ | 870 | | | $ | 3,149 | | | $ | — | | | $ | 613 | |
Customer relationships | | | 817 | | | | 41,171 | | | | 10,035 | | | | 23,934 | | | | 34 | | | | 524 | |
Technology | | | 203 | | | | 4,364 | | | | 2,480 | | | | 4,930 | | | | 341 | | | | 87 | |
Non-competition agreements | | | 54 | | | | 2,178 | | | | 663 | | | | 1,117 | | | | 44 | | | | 124 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total identified intangible assets | | $ | 1,074 | | | $ | 50,354 | | | $ | 14,048 | | | $ | 33,130 | | | $ | 419 | | | $ | 1,348 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The purchase price allocation for Tew Plus is based on a preliminary valuation. If new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement recognized for assets or liabilities assumed, the Company will recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
Note 4.
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, 2014 | | $ | 38,956 | | | $ | 5,147 | | | $ | 38,846 | | | $ | 82,949 | |
Acquisitions | | | 9,594 | | | | — | | | | 69,908 | | | | 79,502 | |
Foreign currency translation impact | | | (362 | ) | | | — | | | | — | | | | (362 | ) |
Impairment charges | | | — | | | | — | | | | (80,337 | ) | | | (80,337 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2015 | | $ | 48,188 | | | $ | 5,147 | | | $ | 28,417 | | | $ | 81,752 | |
| | | | | | | | | | | | | | | | |
The Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. During the third quarter of 2015, the Company’s IOS and Chemtec reporting units underperformed against their projections and revised their forecasts downward. Additionally, in August 2015, the Company revised its full year outlook as a result of trends in the energy market as well as the loss of sales to Union Pacific Railroad (“UPRR”). The impact of these factors led to a decline in the Company’s market capitalization which fell below the shareholder’s equity value. The Company concluded that the aggregation of these events were indications of potential impairments.
Based upon these indicators, with the assistance of an independent valuation firm, the Company performed an interim test for impairment of goodwill as of September 1, 2015. The valuation included the use of both the income and market approach. The Company applied greater weighting to the income approach as the Company believes it is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate.
The results of the test indicated that the IOS and Chemtec reporting units’ respective fair values were less than their carrying values. The fair values of all other reporting units that maintain goodwill exceeded their respective carrying values and were not at risk of impairment. As a result of the impact of the downturn within the energy markets on both reporting units, the expectations of a prolonged period before recovery, and the reduction in active U.S. land oil rig count, which specifically impacted the IOS reporting unit, the near term projections of these reporting units have deteriorated and the expected future growth of each of these reporting units was insufficient to support the carrying values.
The Company compared the implied fair values of the IOS and Chemtec goodwill amounts to the carrying amounts of that goodwill. The fair values of the IOS and Chemtec reporting units were allocated to all of the assets and liabilities of the respective reporting unit as if IOS and Chemtec had been acquired in business combinations as of the test date and the fair value was the purchase price paid to acquire each reporting unit. As a result of this valuation, it was determined that the carrying amounts of IOS’s and Chemtec’s goodwill exceeded the implied fair values of that goodwill. The Company recognized a non-cash goodwill impairment charge of $80,337 ($63,887 net of taxes) to write down the carrying values to the implied fair values, of which $69,908 represents the full carrying value of goodwill related to the IOS acquisition and the remaining $10,429 relates to the Chemtec reporting unit. No additional impairments were triggered as a result of the Company’s 2015 annual impairment test.
The Company performed a recoverability test on the long-lived tangible and definite lived intangible assets related to the IOS and Chemtec acquisitions and concluded that no impairment existed. The Company will continue to monitor these assets, including their respectful useful lives, in future periods.
The following table represents the gross intangible assets balance by reportable segment at December 31:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Rail Products and Services | | $ | 59,226 | | | $ | 44,781 | |
Construction Products | | | 1,348 | | | | 3,178 | |
Tubular and Energy Services | | | 98,166 | | | | 47,812 | |
| | | | | | | | |
| | $ | 158,740 | | | $ | 95,771 | |
| | | | | | | | |
The components of the Company’s intangible assets are as follows at:
| | | | | | | | | | | | | | | | |
| | | December 31, 2015 | |
| | | Weighted Average
Amortization
In Years | | | Gross
Carrying
Value | | | Accumulated
Amortization | | | Net
Carrying
Amount | |
Non-compete agreements | | | 4 | | | $ | 6,984 | | | $ | (2,495 | ) | | $ | 4,489 | |
Patents | | | 10 | | | | 378 | | | | (124 | ) | | | 254 | |
Customer relationships | | | 16 | | | | 94,338 | | | | (8,441 | ) | | | 85,897 | |
Supplier relationships | | | 5 | | | | 350 | | | | (335 | ) | | | 15 | |
Trademarks and trade names | | | 13 | | | | 14,252 | | | | (3,025 | ) | | | 11,227 | |
Technology | | | 13 | | | | 42,438 | | | | (9,393 | ) | | | 33,045 | |
| | | | | | | | | | | | | | | | |
| | | | | | $ | 158,740 | | | $ | (23,813 | ) | | $ | 134,927 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | December 31, 2014 | |
| | | Weighted Average
Amortization
In Years | | | Gross
Carrying
Value | | | Accumulated
Amortization | | | Net
Carrying
Amount | |
Non-compete agreements | | | 5 | | | $ | 4,143 | | | $ | (705 | ) | | $ | 3,438 | |
Patents | | | 10 | | | | 564 | | | | (189 | ) | | | 375 | |
Customer relationships | | | 19 | | | | 44,450 | | | | (4,679 | ) | | | 39,771 | |
Supplier relationships | | | 5 | | | | 350 | | | | (268 | ) | | | 82 | |
Trademarks and trade names | | | 14 | | | | 10,765 | | | | (1,855 | ) | | | 8,910 | |
Technology | | | 14 | | | | 35,499 | | | | (5,941 | ) | | | 29,558 | |
| | | | | | | | | | | | | | | | |
| | | | | | $ | 95,771 | | | $ | (13,637 | ) | | $ | 82,134 | |
| | | | | | | | | | | | | | | | |
Intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization period of approximately 14 years. Amortization expense for the years ended December 31, 2015, 2014, and 2013 was $12,245, $4,695, and $3,112, respectively.
Estimated amortization expense for the years 2016 and thereafter is as follows:
| | | | |
| | | Amortization
Expense | |
2016 | | $ | 13,093 | |
2017 | | | 12,200 | |
2018 | | | 11,868 | |
2019 | | | 11,137 | |
2020 | | | 10,706 | |
2021 and thereafter | | | 75,923 | |
| | | | |
| | $ | 134,927 | |
| | | | |
Note 5.
Accounts Receivable
Accounts receivable at December 31, 2015 and 2014 are summarized as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Trade | | $ | 79,100 | | | $ | 90,494 | |
Allowance for doubtful accounts | | | (1,485 | ) | | | (1,036 | ) |
| | | | | | | | |
| | | 77,615 | | | | 89,458 | |
Other | | | 872 | | | | 720 | |
| | | | | | | | |
| | $ | 78,487 | | | $ | 90,178 | |
| | | | | | | | |
The Company’s customers are principally in the rail, construction, and energy sectors. At December 31, 2015 and 2014, trade receivables, net of allowance for doubtful accounts, from customers were as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Rail Products and Services | | $ | 43,155 | | | $ | 45,931 | |
Construction Products | | | 20,489 | | | | 33,760 | |
Tubular and Energy Services | | | 13,971 | | | | 9,767 | |
| | | | | | | | |
| | $ | 77,615 | | | $ | 89,458 | |
| | | | | | | | |
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices.
Note 6.
Inventory
Inventories at December 31, 2015 and 2014 are summarized in the following table:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Finished goods | | $ | 62,547 | | | $ | 65,335 | |
Work-in-process | | | 20,178 | | | | 16,188 | |
Raw materials | | | 19,492 | | | | 21,855 | |
| | | | | | | | |
Total inventories at current costs | | | 102,217 | | | | 103,378 | |
Less: LIFO reserve | | | (5,821 | ) | | | (8,289 | ) |
| | | | | | | | |
| | $ | 96,396 | | | $ | 95,089 | |
| | | | | | | | |
At December 31, 2015 and 2014, the LIFO carrying value of inventories for book purposes exceeded the LIFO value for tax purposes by approximately $5,046 and $11,697, respectively. At December 31, 2015, 2014, and 2013 liquidation of certain LIFO inventory layers carried at costs that were higher than the costs of current purchases resulted in increases in cost of goods sold of $115, $6 and $1,128, respectively.
Note 7.
Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2015 and 2014 consist of the following:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Land | | $ | 17,054 | | | $ | 9,102 | |
Improvements to land and leaseholds | | | 16,590 | | | | 29,016 | |
Buildings | | | 39,366 | | | | 22,807 | |
Machinery and equipment, including equipment under capitalized leases | | | 118,677 | | | | 95,547 | |
Construction in progress | | | 11,844 | | | | 12,033 | |
| | | | | | | | |
| | | 203,531 | | | | 168,505 | |
| | | | | | | | |
Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases | | | 76,786 | | | | 93,703 | |
| | | | | | | | |
| | $ | 126,745 | | | $ | 74,802 | |
| | | | | | | | |
Depreciation expense, including amortization of assets under capital leases, for the years ended December 31, 2015, 2014, and 2013 amounted to $14,429, $7,882 and $6,890, respectively.
Note 8.
Investments
The Company is a member of a joint venture, L B Pipe and 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.
During the years ended December 31, 2015 and 2014, each of the LB Pipe JV members received proportional distributions from the LB Pipe JV. The Company’s 45% ownership interest resulted in cash distributions of $90 and $630 as of December 31, 2015 and 2014, respectively. There were no changes to the members’ ownership interests as a result of the distribution.
The Company recorded equity in the (loss) income of the LB Pipe JV of approximately ($410), $1,286 and $1,316 for the years ended December 31, 2015, 2014, and 2013, respectively.
As of December 31, 2015 and 2014, the Company had a nonconsolidated equity method investment of $5,246 and $5,746, respectively, in the LB Pipe JV and other investments totaling $75 and $78 as of December 31, 2015 and 2014, respectively.
The Company’s exposure to loss results from its capital contributions, net of the Company’s share of the LB Pipe JV’s income or loss, and its net investment in the direct financing lease covering the facility used by the LB Pipe JV for its operations. The carrying amounts with the maximum exposure to loss of the Company at December 31, 2015 and 2014, respectively, are as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
LB Pipe JV equity method investment | | $ | 5,246 | | | $ | 5,746 | |
Net investment in direct financing lease | | | 995 | | | | 1,117 | |
| | | | | | | | |
| | $ | 6,241 | | | $ | 6,863 | |
| | | | | | | | |
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, including interest, approximate $17, with a balloon payment of approximately $488, which is required to be paid 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 years 2016 and thereafter
| | | | |
| | | Minimum Lease Payments | |
2016 | | $ | 131 | |
2017 | | | 140 | |
2018 | | | 150 | |
2019 | | | 574 | |
| | | | |
| | $ | 995 | |
| | | | |
As a result of the November 23, 2015 acquisition of Tew Plus, the Company remeasured its 25% equity investment in Tew Plus resulting in other income of $580 for the period ended December 31, 2015. Refer to Note 20, “Other Income,” for additional information on the gain.
Note 9.
Deferred Revenue
Deferred revenue of $6,934 and $8,034 at December 31, 2015 and 2014, respectively, consists of customer payments received for which the revenue recognition criteria have not yet been met as well as billings in excess of costs on percentage of completion projects. Advanced payments from customers typically relate to contracts with respect to which the Company has significantly fulfilled its obligations, but due to the Company’s continuing involvement with the project, revenue is precluded from being recognized until title, ownership, and risk of loss have passed to the customer.
Note 10.
Long-Term Debt and Related Matters
Long-term debt at December 31, 2015 and 2014 consists of the following:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Revolving credit facility | | $ | 165,000 | | | $ | 24,200 | |
Financing agreement payable in installments through July 1, 2017 with an interest rate of 3.00% at December 31, 2015 | | | 1,247 | | | | 1,781 | |
Lease obligations payable in installments through 2019 with a weighted average interest rate of 3.09% at December 31, 2015 and 3.50% December 31, 2014 | | | 2,507 | | | | 447 | |
| | | | | | | | |
Total | | | 168,754 | | | | 26,428 | |
Less current maturities | | | 1,335 | | | | 676 | |
| | | | | | | | |
Long-term portion | | $ | 167,419 | | | $ | 25,752 | |
| | | | | | | | |
The maturities of long-term debt are as follows:
| | | | |
| | | December 31, 2015 | |
2016 | | $ | 1,335 | |
2017 | | | 1,121 | |
2018 | | | 558 | |
2019 | | | 500 | |
2020 | | | 165,240 | |
2021 and thereafter | | | — | |
| | | | |
Total | | $ | 168,754 | |
| | | | |
Borrowings
United States
On March 13, 2015, L.B. Foster Company, its domestic subsidiaries, and certain of its Canadian subsidiaries (“L.B. Foster”) entered into an amended and restated $335,000 Revolving Credit Facility Credit Agreement (“Amended 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 Amended Credit Agreement modifies the prior revolving credit facility, which had a maximum credit line of $200,000. The Amended Credit Agreement provides for a five-year, unsecured revolving credit facility that permits borrowings of up to $335,000 for the U.S. borrowers and a sublimit of the equivalent of $25,000 U.S. dollars that is available to the Canadian borrowers. The Amended Credit Agreement’s accordion feature permits L.B. Foster to increase the available revolving borrowings under the facility by up to an additional $100,000 subject to L.B. Foster’s receipt of increased commitments from existing or new lenders and to certain conditions being satisfied.
Borrowings under the Amended Credit Agreement will bear interest at rates based upon either the base rate or Euro-rate plus applicable margins. Applicable margins are dictated by the ratio of L.B. Foster’s indebtedness less consolidated cash on hand to L.B. Foster’s consolidated EBITDA, as defined in the underlying Amended Credit Agreement. The base rate is the highest of (a) PNC Bank’s prime rate, (b) the Federal Funds Rate plus 0.50% or (c) the daily Euro-rate (as defined in the Amended Credit Agreement) plus 1.00%. The base rate and Euro-rate spreads range from 0.00% to 1.50% and 1.00% to 2.50%, respectively.
The Amended Credit Agreement includes two financial covenants: (a) Leverage Ratio, defined as L.B. Foster’s Indebtedness less consolidated cash on hand, in excess of $15,000, divided by L.B. Foster’s consolidated EBITDA, which must not exceed 3.25 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 Amended Credit Agreement permits L.B. Foster to pay dividends, distributions, and make redemptions with respect to its stock provided no event of default or potential default (as defined in the Amended Credit Agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $25,000 per year when funds are drawn on the facility. If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $25,000 per year are subjected to a limitation of $75,000 in the aggregate over the life of the facility. The $75,000 aggregate limitation also permits certain loans, investments, and acquisitions.
Other restrictions exist at all times including, but not limited to, limitation of L.B. Foster’s sale of assets, other indebtedness incurred by either the borrowers or the non-borrower subsidiaries of L.B. Foster, guarantees, and liens.
The Company had $165,000 outstanding borrowings under the Amended Credit Agreement at December 31, 2015 and had available borrowing capacity of $169,474 at December 31, 2015. As of December 31, 2014, the Company had $24,200 in outstanding borrowings and an available borrowing capacity of $175,375 under the previous revolving facility with a borrowing capacity of $200,000.
At December 31, 2015, the Company was in compliance with the Amended Credit Agreement’s covenants.
Letters of Credit
At December 31, 2015 and 2014, the Company had outstanding letters of credit of approximately $526 and $425, respectively.
United Kingdom
A subsidiary of the Company has a credit facility with NatWest Bank for its United Kingdom operations which includes an overdraft availability of £1,500 pounds sterling (approximately $2,210 at December 31, 2015). This credit facility supports the United Kingdom’s working capital requirements and is collateralized by substantially all of the assets of its United Kingdom operations. The interest rate on this facility is the financial institution’s base rate plus 1.50%. Outstanding performance bonds reduce availability under this credit facility. There were no outstanding borrowings under this credit facility at December 31, 2015, however, there were $16 in outstanding guarantees (as defined in the underlying agreement) at December 31, 2015. This credit facility was renewed and amended during the fourth quarter of 2015 to include Tew and Tew Plus as parties to the agreement. All other underlying terms and conditions remained unchanged as a result of the renewal. It is the Company’s intention to renew this credit facility with NatWest Bank during the annual review in 2016.
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 at December 31, 2015 and 2014. The subsidiary had available borrowing capacity of $2,194 and $2,337 at December 31, 2015 and 2014, respectively.
Note 11.
Stockholders’ Equity
The Company had authorized shares of 20,000,000 in common stock with 11,115,779 shares issued at December 31, 2015 and 2014. The common stock has a par value of $0.01 per share and the Company paid dividends of $0.04 per quarter during 2015.
At December 31, 2015 and 2014, the Company had authorized shares of 5,000,000 in preferred stock. No preferred stock has been issued. No par value has been assigned to the preferred stock.
On December 4, 2013, the Company’s Board of Directors authorized the purchase of up to $15,000 in shares of its common stock through a share repurchase program at prevailing market prices or privately negotiated transactions. The Company repurchased 80,512 shares, for an aggregate price of $1,587, during 2015 under the repurchase program. On December 9, 2015, the Board of Directors authorized the repurchase of up to $30,000 of the Company’s common shares until December 31, 2017. This authorization became effective January 1, 2016 and replaces the prior authorization.
At December 31, 2015 and 2014, the Company withheld 25,340 and 21,676 shares for approximately $1,114 and $985, respectively, from employees to pay their withholding taxes in connection with the exercise and/or vesting of stock options and restricted stock awards.
Cash dividends of $1,656, $1,345 and $1,240 were declared and paid in 2015, 2014, and 2013, respectively.
| | | | | | | | |
| | | Common Stock | |
Share Activity | | Treasury | | | Outstanding | |
| | | (Number of Shares) | |
Balance at end of 2012 | | | 966,381 | | | | 10,149,398 | |
Issued for share-based compensation plans | | | (39,123 | ) | | | 39,123 | |
| | | | | | | | |
Balance at end of 2013 | | | 927,258 | | | | 10,188,521 | |
Issued for share-based compensation plans | | | (53,884 | ) | | | 53,884 | |
| | | | | | | | |
Balance at end of 2014 | | | 873,374 | | | | 10,242,405 | |
Issued for share-based compensation plans | | | (59,113 | ) | | | 59,113 | |
Repurchased common shares | | | 80,512 | | | | (80,512 | ) |
| | | | | | | | |
Balance at end of 2015 | | | 894,773 | | | | 10,221,006 | |
| | | | | | | | |
Note 12.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, for the years ended December 31, 2015 and 2014, are as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Pension and post-retirement benefit plan adjustments | | $ | (3,069 | ) | | $ | (4,089 | ) |
Unrealized loss on interest rate swap contracts | | | (121 | ) | | | — | |
Foreign currency translation adjustments | | | (14,750 | ) | | | (7,803 | ) |
| | | | | | | | |
| | $ | (17,940 | ) | | $ | (11,892 | ) |
| | | | | | | | |
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non U.S. subsidiaries. See Note 15, “Income Taxes”.
Note 13.
Earnings Per Common Share
(Share amounts in thousands)
The following table sets forth the computation of basic and diluted earnings per common share for the three years ended December 31:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Numerator for basic and diluted earnings per common share — | | | | | | | | | | | | |
(Loss) income available to common stockholders: | | | | | | | | | | | | |
Net (loss) income | | $ | (44,445 | ) | | $ | 25,656 | | | $ | 29,290 | |
Denominator: | | | | | | | | | | | | |
Weighted average shares outstanding | | | 10,254 | | | | 10,225 | | | | 10,175 | |
| | | | | | | | | | | | |
Denominator for basic earnings per common share | | | 10,254 | | | | 10,225 | | | | 10,175 | |
Effect of dilutive securities: | | | | | | | | | | | | |
Employee stock options | | | — | | | | 6 | | | | 11 | |
Other stock compensation plans | | | — | | | | 101 | | | | 74 | |
| | | | | | | | | | | | |
Dilutive potential common shares | | | — | | | | 107 | | | | 85 | |
| | | | | | | | | | | | |
Denominator for diluted earnings per common share — adjusted weighted average shares outstanding and assumed conversions | | | 10,254 | | | | 10,332 | | | | 10,260 | |
| | | | | | | | | | | | |
Basic (loss) earnings per common share | | $ | (4.33 | ) | | $ | 2.51 | | | $ | 2.88 | |
| | | | | | | | | | | | |
Diluted (loss) earnings per common share | | $ | (4.33 | ) | | $ | 2.48 | | | $ | 2.85 | |
| | | | | | | | | | | | |
Dividends paid per common share | | $ | 0.16 | | | $ | 0.13 | | | $ | 0.12 | |
| | | | | | | | | | | | |
There were approximately 75 antidilutive shares in 2015 and no antidilutive shares in 2014 or 2013.
Note 14.
Income Taxes
Significant components of the Company’s deferred tax liabilities and assets at December 31, 2015 and 2014 are as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Deferred tax liabilities: | | | | | | | | |
Goodwill and other intangibles | | $ | (5,801 | ) | | $ | (10,800 | ) |
Depreciation | | | (14,134 | ) | | | (3,763 | ) |
Inventories | | | — | | | | (3,188 | ) |
Investment in LB Pipe joint venture | | | (572 | ) | | | (553 | ) |
Other | | | (741 | ) | | | (527 | ) |
| | | | | | | | |
Total deferred tax liabilities | | | (21,248 | ) | | | (18,831 | ) |
| | | | | | | | |
Deferred tax assets: | | | | | | | | |
Pension and post-retirement liability | | | 1,801 | | | | 2,147 | |
Warranty reserve | | | 3,153 | | | | 4,180 | |
Deferred compensation | | | 2,275 | | | | 1,755 | |
Accounts receivable | | | 622 | | | | 369 | |
Contingent liabilities | | | 2,087 | | | | 667 | |
Long-term insurance reserves | | | 655 | | | | 660 | |
Net operating loss / tax credit carryforwards | | | 1,006 | | | | 883 | |
Other | | | 949 | | | | 645 | |
| | | | | | | | |
Total deferred tax assets | | | 12,548 | | | | 11,306 | |
| | | | | | | | |
Net deferred tax liability | | $ | (8,700 | ) | | $ | (7,525 | ) |
| | | | | | | | |
Significant components of the provision for income taxes are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 5,571 | | | $ | 11,488 | | | $ | 8,785 | |
State | | | 1,540 | | | | 1,491 | | | | 837 | |
Foreign | | | 1,339 | | | | 3,339 | | | | 1,982 | |
| | | | | | | | | | | | |
Total current | | | 8,450 | | | | 16,318 | | | | 11,604 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | (12,016 | ) | | | (2,321 | ) | | | 3,200 | |
State | | | (2,014 | ) | | | (122 | ) | | | 273 | |
Foreign | | | (552 | ) | | | (471 | ) | | | (229 | ) |
| | | | | | | | | | | | |
Total deferred | | | (14,582 | ) | | | (2,914 | ) | | | 3,244 | |
| | | | | | | | | | | | |
Total income tax (benefit) expense | | $ | (6,132 | ) | | $ | 13,404 | | | $ | 14,848 | |
| | | | | | | | | �� | | | |
At December 31, 2015, the Company has not recorded deferred U.S. income taxes or foreign withholding taxes on $57,781 of undistributed earnings of its foreign subsidiaries. It is management’s intent and practice to indefinitely reinvest such earnings outside of the U.S. Determination of the amount of any unrecognized deferred income tax liability associated with these undistributed earnings is not practicable because of the complexities of the hypothetical calculation.
(Loss) income before income taxes, as shown in the accompanying consolidated statements of operations, includes the following components:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Domestic | | $ | (55,061 | ) | | $ | 30,766 | | | $ | 37,306 | |
Foreign | | | 4,484 | | | | 8,294 | | | | 6,832 | |
| | | | | | | | | | | | |
(Loss) income from operations, before income taxes | | $ | (50,577 | ) | | $ | 39,060 | | | $ | 44,138 | |
| | | | | | | | | | | | |
The reconciliation of income tax computed at statutory rates to income tax (benefit) expense is as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
Foreign tax rate differential | | | 0.8 | | | | (2.2 | ) | | | (1.7 | ) |
State income taxes, net of federal benefit | | | 0.3 | | | | 2.7 | | | | 2.6 | |
Non-deductible goodwill impairment | | | (25.2 | ) | | | — | | | | — | |
Non-deductible expenses | | | (0.9 | ) | | | 1.8 | | | | 0.6 | |
Change in liability for unrecognized tax benefits | | | 0.4 | | | | (0.8 | ) | | | (1.9 | ) |
Domestic production activities deduction | | | 1.0 | | | | (2.2 | ) | | | (1.2 | ) |
Other | | | 0.7 | | | | — | | | | 0.2 | |
| | | | | | | | | | | | |
| | | 12.1 | % | | | 34.3 | % | | | 33.6 | % |
| | | | | | | | | | | | |
At December 31, 2015 and 2014, the tax benefit of net operating loss carryforwards available for state income tax purposes was $324 and $74, respectively. The state net operating loss carryforwards will expire in various years from 2024 through 2035. At December 31, 2015, the Company has foreign net operating loss carryforwards of $1,320, which may be carried forward indefinitely. The Company has foreign tax credit carryforwards in the amount of $272 that will expire in 2024 through 2026. The Company anticipates utilizing these operating loss and credit carryforwards prior to their expiration and, therefore, has not provided a valuation allowance for these amounts.
The following table provides a reconciliation of unrecognized tax benefits at December 31, 2015 and 2014:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Unrecognized tax benefits at beginning of period: | | $ | 1,013 | | | $ | 1,509 | |
Increases based on tax positions for prior periods | | | 147 | | | | 18 | |
Decreases based on tax positions for prior periods | | | — | | | | (325 | ) |
Decreases related to settlements with taxing authorities | | | (578 | ) | | | (126 | ) |
Decreases as a result of a lapse of the applicable statute of limitations | | | — | | | | (63 | ) |
| | | | | | | | |
Balance at end of period | | $ | 582 | | | $ | 1,013 | |
| | | | | | | | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $582 at December 31, 2015. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. At December 31, 2015 and 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $443 and $335, respectively. At December 31, 2015, the Company does not expect any material increases or decreases to its unrecognized tax benefits within the next 12 months. Ultimate realization of this decrease is dependent upon the occurrence of certain events, including the completion of audits by tax authorities and expiration of statutes of limitations.
The Company files income tax returns in the United States and in various state, local and foreign jurisdictions. The Company is subject to federal income tax examinations for the period 2012 and forward. With respect to the state, local, and foreign filings, certain entities of the Company are subject to income tax examinations for the periods 2011 and forward.
Note 15.
Share-based Compensation
The Company applies the provisions of FASB ASC 718,Compensation — Stock Compensation, to account for the Company’s 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 share-based compensation expense of $1,471, $3,007 and $2,156 for the years ended December 31, 2015, 2014, and 2013, respectively, related to fully-vested stock awards, restricted stock awards, and performance unit awards. At December 31, 2015, unrecognized compensation expense for awards the Company expects to vest approximated $2,611. The Company will recognize this expense over the upcoming 3.5 year period through June 2019.
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 stock or authorized but previously unissued common stock.
The excess tax benefit realized for the tax deduction from share-based compensation approximated $253, $336, and $203 for the years ended December 31, 2015, 2014, and 2013, respectively. This excess tax benefit is included in cash flows from financing activities in the Consolidated Statements of Cash Flows.
At December 31, 2015, the Company had stock awards issued pursuant to the 2006 Omnibus Incentive Plan as amended and restated in October 2013 (“Omnibus Plan”). The Omnibus Plan allows for the issuance of 900,000 shares of common stock through the granting of stock options or stock awards (including performance units convertible into stock) to key employees and directors at no less than 100% of fair market value on the date of the grant. The Omnibus Plan provides for the granting of “nonqualified options” with a duration of not more than ten years from the date of grant. The Omnibus Plan also provides that, unless otherwise set forth in the option agreement, stock options are exercisable in installments of up to 25% annually beginning one year from the date of grant. No stock options have been granted under the Omnibus Plan and, as such, there was no share-based compensation expense related to stock options recorded in 2015, 2014, or 2013
The Company also had 7,500 outstanding stock option awards that were granted under the former 1998 Long-Term Incentive Plan for Officers and Directors, amended and restated in May 2006 (“1998 Plan”). During 2015, all 7,500 outstanding stock option awards were exercised prior to their expiration. No future grants are permitted under the expired 1998 Plan and the Company currently makes equity awards under the Omnibus Plan.
Stock Option Awards
Certain information for the three years ended December 31, 2015 relative to employee stock options is summarized as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Number of shares under the plans: | | | | | | | | | | | | |
Outstanding and exercisable at beginning of year | | | 7,500 | | | | 18,750 | | | | 22,500 | |
Granted | | | — | | | | — | | | | — | |
Canceled | | | — | | | | — | | | | — | |
Exercised | | | (7,500 | ) | | | (11,250 | ) | | | (3,750 | ) |
| | | | | | | | | | | | |
Outstanding and exercisable at end of year | | | — | | | | 7,500 | | | | 18,750 | |
| | | | | | | | | | | | |
The weighted average exercise price per share of the stock options exercised in 2015, 2014, and 2013 were $9.08, $11.67, and $9.30, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014, and 2013 was $253, $426, and $124, respectively.
Fully-Vested Stock Awards
Non-employee directors are automatically awarded fully vested shares of the Company’s common stock on each date the non-employee directors are elected at the annual shareholders’ meeting to serve as directors.
The non-employee directors were granted a total of 14,000, 10,182, and 9,960 fully-vested shares for the years ended December 31, 2015, 2014, and 2013, respectively. Compensation expense recorded by the Company related to fully-vested stock awards to non-employee directors was approximately $534, $488, and $450 for the years ended December 31, 2015, 2014, and 2013, respectively.
The weighted average fair value of all the fully-vested stock grants awarded was $38.15, $47.94, and $45.16 per share for 2015, 2014, and 2013, respectively.
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 granted prior to March 2015 generally time-vest after a four year holding period, and those granted in March 2015 generally time-vest ratably over a three-year period, unless indicated otherwise by the underlying restricted stock agreement. Performance unit awards are offered annually under separate three-year long-term incentive programs. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying program. If the Company’s estimate of the number of performance stock awards expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change future expense over the remaining vesting period.
The following table summarizes the restricted stock award and performance unit award activity for the three-year periods ended December 31, 2015, 2014, and 2013:
| | | | | | | | | | | | |
| | | Restricted
Stock
Units | | | Performance
Stock
Units | | | Weighted Average
Grant Date
Fair Value | |
Outstanding at January 1, 2013 | | | 176,646 | | | | 59,725 | | | $ | 31.65 | |
| | | | | | | | | | | | |
Granted | | | 12,973 | | | | 31,418 | | | | 42.49 | |
Vested | | | (41,579 | ) | | | — | | | | 29.18 | |
Adjustment for incentive awards not expected to vest | | | — | | | | (18,408 | ) | | | 35.84 | |
Canceled | | | (18,314 | ) | | | (11,084 | ) | | | 33.55 | |
| | | | | | | | | | | | |
Outstanding at December 31, 2013 | | | 129,726 | | | | 61,651 | | | $ | 34.00 | |
| | | | | | | | | | | | |
Granted | | | 19,051 | | | | 34,652 | | | | 44.07 | |
Vested | | | (40,540 | ) | | | (13,588 | ) | | | 34.59 | |
Adjustment for incentive awards not expected to vest | | | — | | | | (7,845 | ) | | | 43.59 | |
Canceled | | | — | | | | (2,880 | ) | | | 44.13 | |
| | | | | | | | | | | | |
Outstanding at December 31, 2014 | | | 108,237 | | | | 71,990 | | | $ | 36.25 | |
| | | | | | | | | | | | |
Granted | | | 29,656 | | | | 41,114 | | | | 44.93 | |
Vested | | | (39,076 | ) | | | (23,877 | ) | | | 32.35 | |
Adjustment for incentive awards not expected to vest | | | — | | | | (53,228 | ) | | | 43.26 | |
Canceled | | | (5,000 | ) | | | — | | | | 44.84 | |
| | | | | | | | | | | | |
Outstanding at December 31, 2015 | | | 93,817 | | | | 35,999 | | | $ | 39.66 | |
| | | | | | | | | | | | |
Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying plan. The aggregate fair value in the above table is based upon achieving 100% of the performance targets as defined in the underlying plan. During 2014, the Company reversed $702 of incentive compensation costs under its separate three-year long-term incentive plans caused by the impact of the product warranty charges on Company performance, as it related to the awards’ underlying performance conditions. More information on the product warranty charge can be found in Note 19, “Commitments and Contingent Liabilities”.
Excluding the fully-vested stock awards granted to non-employee directors, the Company recorded compensation expense of $937, $2,519, and $1,706, respectively, for the periods ended December 31, 2015, 2014, and 2013 related to restricted stock and performance unit awards.
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Number of shares available for future grant: | | | | | | | | | | | | |
Beginning of year | | | 469,840 | | | | 513,280 | | | | 517,280 | |
| | | | | | | | | | | | |
End of year | | | 407,307 | | | | 469,840 | | | | 513,280 | |
| | | | | | | | | | | | |
The Company issued, pursuant to the Omnibus Plan, approximately 14,000 fully-vested shares during 2014 which were earned under the 2011 — 2013 three-year long-term incentive plan. This non-cash transaction of $454 was reflected as a decrease to Treasury stock in the Consolidated Balance Sheet at December 31, 2014.
Note 16.
Retirement Plans
The Company has seven retirement plans which cover its hourly and salaried employees in the United States: three defined benefit plans (one active / two frozen) and four defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Company’s contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), policy and investment guidelines of the applicable plan. The Company’s policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
The Company’s subsidiary, L.B. Foster Rail Technologies (“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. These plans are discussed in further detail below.
United States Defined Benefit Plans
The following tables present a reconciliation of the changes in the benefit obligation, the fair market value of the assets, and the funded status of the plans, as of December 31, 2015 and 2014:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Changes in benefit obligation: | | | | | | | | |
Benefit obligation at beginning of year | | $ | 18,925 | | | $ | 16,112 | |
Service cost | | | 38 | | | | 23 | |
Interest cost | | | 742 | | | | 771 | |
Actuarial (gain) loss | | | (1,148 | ) | | | 2,753 | |
Benefits paid | | | (798 | ) | | | (734 | ) |
| | | | | | | | |
Benefit obligation at end of year | | $ | 17,759 | | | $ | 18,925 | |
| | | | | | | | |
Change to plan assets: | | | | | | | | |
Fair value of assets at beginning of year | | $ | 15,205 | | | $ | 15,039 | |
Actual (loss) gain on plan assets | | | (172 | ) | | | 601 | |
Employer contribution | | | — | | | | 299 | |
Benefits paid | | | (798 | ) | | | (734 | ) |
| | | | | | | | |
Fair value of assets at end of year | | | 14,235 | | | | 15,205 | |
| | | | | | | | |
Funded status at end of year | | $ | (3,524 | ) | | $ | (3,720 | ) |
| | | | | | | | |
Amounts recognized in the consolidated balance sheet consist of: | | | | | | | | |
Other long-term liabilities | | $ | (3,524 | ) | | $ | (3,720 | ) |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | | |
Net loss | | $ | 3,993 | | | $ | 4,429 | |
Prior service cost | | | — | | | | 3 | |
| | | | | | | | |
| | $ | 3,993 | | | $ | 4,432 | |
| | | | | | | | |
The actuarial loss included in accumulated other comprehensive loss that will be recognized in net periodic pension cost during 2016 is $276, before taxes.
Net periodic pension costs for the three years ended December 31, 2015 are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Components of net periodic benefit cost: | | | | |
Service cost | | $ | 38 | | | $ | 23 | | | $ | 33 | |
Interest cost | | | 742 | | | | 771 | | | | 707 | |
Expected return on plan assets | | | (816 | ) | | | (968 | ) | | | (856 | ) |
Amortization of prior service cost | | | 3 | | | | 1 | | | | 1 | |
Recognized net actuarial loss | | | 275 | | | | 65 | | | | 212 | |
| | | | | | | | | | | | |
Net periodic pension cost (income) | | $ | 242 | | | $ | (108 | ) | | $ | 97 | |
| | | | | | | | | | | | |
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Discount rate | | | 4.3 | % | | | 4.0 | % | | | 4.9 | % |
| | | | | | | | | | | | |
Expected rate of return on plan assets | | | 5.2 | % | | | 5.5 | % | | | 6.5 | % |
| | | | | | | | | | | | |
The expected long-term rate of return is based on numerous factors including the target asset allocation for plan assets, historical rate of return, long-term inflation assumptions, and current and projected market conditions. The decline in the expected rate of return on plan assets reflects a shift in the Plans’ investment strategy toward a higher focus on fixed income investments.
Amounts applicable to the Company’s pension plans with accumulated benefit obligations in excess of plan assets are as follows at December 31:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Projected benefit obligation | | $ | 17,759 | | | $ | 18,925 | |
Accumulated benefit obligation | | | 17,759 | | | | 18,925 | |
Fair value of plan assets | | $ | 14,235 | | | $ | 15,205 | |
| | | | | | | | |
Plan assets consist primarily of various fixed income and equity investments. The Company’s primary investment objective is to provide long-term growth of capital while accepting a moderate level of risk. The investments are limited to cash and cash equivalents, bonds, preferred stocks, and common stocks. The investment target ranges and actual allocation of pension plan assets by major category at December 31, 2015 and 2014 are as follows:
| | | | | | | | | | | | |
| | | Target | | | 2015 | | | 2014 | |
Asset Category | | | | | | | | | | | | |
Cash and cash equivalents | | | 0 - 10 | % | | | 9 | % | | | 2 | % |
Total fixed income funds | | | 25 - 50 | | | | 35 | | | | 34 | |
Total mutual funds and equities | | | 50 - 70 | | | | 56 | | | | 64 | |
| | | | | | | | | | | | |
Total | | | | | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
In accordance with the fair value disclosure requirements with FASB ASC 820, “Fair Value Measurements and Disclosures,” the following assets were measured at fair value on a recurring basis at December 31, 2015 and 2014. Additional information regarding FASB ASC 820 and the fair value hierarchy can be found in Note 18, Fair Value Measurements.
| | | | | | | | |
| | | 2015 | | | 2014 | |
Asset Category | | | | | | | | |
Cash and cash equivalents | | $ | 1,248 | | | $ | 347 | |
Fixed income funds | | | | | | | | |
Corporate bonds | | | 4,926 | | | | 5,194 | |
| | | | | | | | |
Total fixed income funds | | | 4,926 | | | | 5,194 | |
Equity funds and equities | | | | | | | | |
Mutual funds | | | 8,061 | | | | 3,566 | |
Common stock | | | — | | | | 6,098 | |
| | | | | | | | |
Total mutual funds and equities | | | 8,061 | | | | 9,664 | |
Total | | $ | 14,235 | | | $ | 15,205 | |
| | | | | | | | |
Cash equivalents. The Company uses quoted market prices to determine the fair value of these investments in interest-bearing cash accounts 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.
Fixed income funds. Investments within the fixed income funds category consist of fixed income corporate debt. The Company uses quoted market prices to determine the fair value of these fixed income funds. These instruments consist of exchange-traded government and corporate bonds and are classified in Level 1 of the fair value hierarchy.
Equity funds and equities. The valuation of investments in registered investment companies is based on the underlying investments in securities. Securities traded on security exchanges are valued at the latest quoted sales
price. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the average of the last reported bid and ask quotations. These investments are classified in Level 1 of the fair value hierarchy.
The Company currently does not anticipate contributions to its United States defined benefit plans in 2016.
The following benefit payments are expected to be paid:
| | | | |
| | | Pension
Benefits | |
2016 | | $ | 823 | |
2017 | | | 879 | |
2018 | | | 907 | |
2019 | | | 974 | |
2020 | | | 1,015 | |
Years 2021-2025 | | | 5,611 | |
United Kingdom Defined Benefit Plan
The Portec Rail Products (UK) Limited Pension Plan covers certain current employees, former employees, and retirees. The plan has been frozen to new entrants since April 1, 1997 and also covers the former employees of a merged plan after January 2002. Benefits under the plan were based on years of service and eligible compensation during defined periods of service. Our funding policy for the plan is to make minimum annual contributions required by applicable regulations.
The funded status of the United Kingdom defined benefit plan at December 31, 2015 and 2014 is as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Changes in benefit obligation: | | | | | | | | |
Benefit obligation at beginning of year | | $ | 8,797 | | | $ | 8,450 | |
Interest cost | | | 295 | | | | 360 | |
Actuarial (gain) loss | | | (416 | ) | | | 883 | |
Benefits paid | | | (339 | ) | | | (397 | ) |
Foreign currency exchange rate changes | | | (475 | ) | | | (499 | ) |
| | | | | | | | |
Benefit obligation at end of year | | $ | 7,862 | | | $ | 8,797 | |
| | | | | | | | |
Change to plan assets: | | | | | | | | |
Fair value of assets at beginning of year | | $ | 6,757 | | | $ | 6,769 | |
Actual gain on plan assets | | | 307 | | | | 502 | |
Employer contribution | | | 302 | | | | 284 | |
Benefits paid | | | (339 | ) | | | (397 | ) |
Foreign currency exchange rate changes | | | (366 | ) | | | (401 | ) |
| | | | | | | | |
Fair value of assets at end of year | | | 6,661 | | | | 6,757 | |
| | | | | | | | |
Funded status at end of year | | $ | (1,201 | ) | | $ | (2,040 | ) |
| | | | | | | | |
Amounts recognized in the consolidated balance sheet consist of: | | | | | | | | |
Other long-term liabilities | | $ | (1,201 | ) | | $ | (2,040 | ) |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | | |
Net loss | | $ | 706 | | | $ | 1,413 | |
Prior service cost | | | 85 | | | | 112 | |
| | | | | | | | |
| | $ | 791 | | | $ | 1,525 | |
| | | | | | | | |
Net periodic pension costs for the three years ended December 31, 2015, 2014, and 2013 are as follows:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Components of net periodic benefit cost: | | | | |
Interest cost | | $ | 295 | | | $ | 360 | | | $ | 348 | |
Expected return on plan assets | | | (324 | ) | | | (370 | ) | | | (321 | ) |
Amortization of transition obligation | | | — | | | | (50 | ) | | | (46 | ) |
Amortization of prior service cost | | | 27 | | | | 30 | | | | 22 | |
Recognized net actuarial loss | | | 225 | | | | 185 | | | | 229 | |
| | | | | | | | | | | | |
Net periodic pension cost | | $ | 223 | | | $ | 155 | | | $ | 232 | |
| | | | | | | | | | | | |
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Discount rate | | | 4.0 | % | | | 3.6 | % | | | 4.6 | % |
| | | | | | | | | | | | |
Expected rate of return on plan assets | | | 5.2 | % | | | 5.0 | % | | | 5.8 | % |
| | | | | | | | | | | | |
Amounts applicable to the Company’s pension plans with accumulated benefit obligations in excess of plan assets are as follows at December 31:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Projected benefit obligation | | $ | 7,862 | | | $ | 8,797 | |
Accumulated benefit obligation | | | 7,862 | | | | 8,797 | |
Fair value of plan assets | | | 6,661 | | | | 6,757 | |
| | | | | | | | |
The Company has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations, and recent changes in long-term interest rates based on publicly available information.
Plan assets are invested by the trustees in accordance with a written statement of investment principles. This statement permits investment in equities, corporate bonds, United Kingdom government securities, commercial property, and cash, based on certain target allocation percentages. Asset allocation is primarily based on a strategy to provide steady growth without undue fluctuations. The target asset allocation percentages for 2015 are as follows:
| | |
| | Portec Rail
Plan |
Equity securities
| | Up to 100% |
Commercial property
| | Not to exceed 50% |
U.K. Government securities
| | Not to exceed 50% |
Cash
| | Up to 100% |
Plan assets held within the Portec Rail Plan consist of cash and marketable securities that have been classified as Level 1 of the fair value hierarchy. All other plan assets have been classified as Level 2 of the fair value hierarchy.
The plan assets by category for the two years ended December 31, 2015 and 2014 are as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Asset Category | | | | |
Cash and cash equivalents | | $ | 242 | | | $ | 218 | |
Equity securities | | | 2,656 | | | | 2,156 | |
Bonds | | | 1,301 | | | | 1,899 | |
Commercial property | | | 2,462 | | | | 2,484 | |
| | | | | | | | |
Total | | $ | 6,661 | | | $ | 6,757 | |
| | | | | | | | |
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. The Company anticipates making contributions of $271 to the Portec Rail Plan during 2016.
The following estimated future benefits payments are expected to be paid under the Portec Rail Plan:
| | | | |
| | | Pension
Benefits | |
2016 | | $ | 247 | |
2017 | | | 268 | |
2018 | | | 286 | |
2019 | | | 303 | |
2020 | | | 321 | |
Years 2021-2025 | | | 1,939 | |
Other Post-Retirement Benefit Plan
Rail Technologies’ operation near Montreal, Quebec, Canada, maintains a post-retirement benefit plan, which provides retiree life insurance, health care benefits, and, for a closed group of employees, dental care. Retiring employees with a minimum of 10 years of service are eligible for the plan benefits. The plan is not funded. Cost of benefits earned by employees is charged to expense as services are rendered. The expense related to this plan was not material for 2015 and 2014. Rail Technologies’ accrued benefit obligation was $823 and $1,172 as of December 31, 2015 and 2014, respectively. This obligation is recognized within other long-term liabilities. Benefit payments anticipated for 2016 are not material.
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
| | | | | | | | |
| | | 2015 | | | 2014 | |
Discount rate | | | 4.2 | % | | | 4.0 | % |
| | | | | | | | |
Weighted average health care trend rate | | | 5.0 | % | | | 6.2 | % |
| | | | | | | | |
The weighted average health care rate trends downward to an ultimate rate of 4.4% in 2035.
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.
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2015 | | | 2014 | | | 2013 | |
United States | | $ | 2,434 | | | $ | 2,425 | | | $ | 2,151 | |
Canada | | | 226 | | | | 227 | | | | 266 | |
United Kingdom | | | 494 | | | | 158 | | | | 136 | |
| | | | | | | | �� | | | | |
| | $ | 3,154 | | | $ | 2,810 | | | $ | 2,553 | |
| | | | | | | | | | | | |
Note 17.
Rental and Lease Information
The Company has capital and operating leases for certain plant facilities, office facilities, and equipment. Rental expense for the years ended December 31, 2015, 2014, and 2013 amounted to $4,611, $3,062, and $3,333, respectively. Generally, land and building leases include escalation clauses.
The following is a schedule, by year, of the future minimum payments under capital and operating leases, together with the present value of the net minimum payments at December 31, 2015:
| | | | | | | | |
| Year ending December 31, | | Capital
Leases | | | Operating
Leases | |
2016 | | $ | 694 | | | $ | 4,310 | |
2017 | | | 636 | | | | 3,680 | |
2018 | | | 591 | | | | 2,429 | |
2019 | | | 517 | | | | 1,702 | |
2020 | | | 244 | | | | 1,407 | |
2021 and thereafter | | | — | | | | 6,600 | |
| | | | | | | | |
Total minimum lease payments | | | 2,682 | | | $ | 20,128 | |
| | | | | | | | |
Less amount representing interest | | | 175 | | | | | |
| | | | | | | | |
Total present value of minimum payments with interest rates ranging from 3.00% to 5.25% | | $ | 2,507 | | | | | |
| | | | | | | | |
Assets recorded under capital leases are as follows:
| | | | | | | | |
| | | 2015 | | | 2014 | |
Machinery and equipment at cost | | | 3,157 | | | | 638 | |
Less accumulated amortization | | | 450 | | | | 181 | |
| | | | | | | | |
Net capital lease assets | | $ | 2,707 | | | $ | 457 | |
| | | | | | | | |
Note 18.
Fair Value Measurements
The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions of what market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company has an established process for determining fair value for its financial assets and liabilities, principally cash and cash equivalents and interest rate swaps. 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 section describes 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.
Cash equivalents. Included within “Cash and cash equivalents” are investments in non-domestic term deposits. The carrying amounts approximate fair value because of the short maturity of the instruments.
LIBOR-Based interest rate swaps. To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps will become effective in February 2017 at which point it will effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. The fair value of the interest rate swaps is based on market-observable forward interest rates and represents the estimated amount that the Company would pay to terminate the agreements. As such, the swap agreements have been classified as Level 2 within the fair value hierarchy.
The following assets of the Company were measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2015 and December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date
Using | | | | | | | Fair Value Measurements at Reporting Date
Using | |
| | | December 31,
2015 | | | Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | | | | | December 31,
2014 | | | Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-domestic bank term deposits | | $ | 1,939 | | | $ | 1,939 | | | $ | — | | | $ | — | | | | | | | $ | 25 | | | $ | 25 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 1,939 | | | $ | 1,939 | | | $ | — | | | $ | — | | | | | | | $ | 25 | | | $ | 25 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 196 | | | $ | — | | | $ | 196 | | | $ | — | | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Liabilities | | $ | 196 | | | $ | — | | | $ | 196 | | | $ | — | | | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Information regarding the fair value disclosures associated with the assets of the Company’s defined benefit plans can be found in Note 16, Retirement Plans.
Note 19.
Commitments and Contingent Liabilities
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 that is adjusted on a monthly basis as a percentage of cost of sales. This product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims.
The following table sets forth the Company’s product warranty accrual:
| | | | |
| | | Warranty Liability | |
Balance at December 31, 2014 | | $ | 11,500 | |
Additions to warranty liability | | | 1,794 | |
Warranty liability utilized | | | (4,650 | ) |
Acquisitions | | | 111 | |
| | | | |
Balance at December 31, 2015 | | $ | 8,755 | |
| | | | |
Included within the above table are concrete tie warranty reserves of approximately $7,544 and $10,331, respectively, at December 31, 2015 and 2014. For the periods ended December 31, 2015, 2014, and 2013, the Company recorded approximately $972, $9,854 and $612, respectively, in pre-tax concrete tie warranty charges within “Cost of Goods Sold” in the Company’s Rail Products and Services segment primarily related to concrete ties manufactured at the Company’s former Grand Island, NE facility.
UPRR Warranty Claims
On July 12, 2011, UPRR notified (the “UPRR Notice”) the Company and its subsidiary, CXT Incorporated (“CXT”), of a warranty claim under CXT’s 2005 supply contract relating to the sale of pre-stressed concrete railroad ties to UPRR. UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at CXT’s Grand Island, NE facility failed to meet contract specifications, had workmanship defects and were cracking and failing prematurely. Of the 3.0 million ties manufactured between 1998 and 2011 from the Grand Island, NE facility, approximately 1.6 million ties were sold during the period UPRR had claimed nonconformance. The 2005 contract called for each concrete tie which failed to conform to the specifications or had a material defect in workmanship to be replaced with 1.5 new concrete ties, provided, that, within five years of the sale of a concrete tie, UPRR notified CXT of such failure to conform or such defect in workmanship. The UPRR Notice did not specify how many ties manufactured during this period were defective nor the exact nature of the alleged workmanship defect.
Following the UPRR Notice, the Company worked with material scientists and pre-stressed concrete experts to test a representative sample of Grand Island, NE concrete ties and assess warranty claims for certain concrete ties made in its Grand Island, NE facility between 1998 and 2011. The Company discontinued manufacturing operations in Grand Island, NE in early 2011.
2012
During 2012, the Company completed sufficient testing and analysis to further understand this matter. Based upon testing results and expert analysis, the Company believed it discovered conditions, which largely related to the 2006 to 2007 manufacturing period, that can shorten the life of the concrete ties produced during this period. During the fourth quarter of 2012 and first quarter of 2013, the Company reached agreement with UPRR on several matters including a process for the Company and UPRR to work together to identify, prioritize, and replace defective ties that meet the criteria for replacement. This process applies to the ties the Company shipped to UPRR from its Grand Island, NE facility from 1998 to 2011. During most of this period the Company’s warranty policy for UPRR carried a 5 year warranty with a 1.5:1 replacement ratio for any defective ties. In order to accommodate UPRR and other customer concerns, the Company also reverted to a previously used warranty policy providing a 15-year warranty with a 1:1 replacement ratio. This change provided an additional
10 years of warranty protection. In the amended 2005 supply agreement, the Company and UPRR also extended the supply of Tucson ties by five years and agreed on a cash payment of $12,000 to UPRR as compensation for concrete ties already replaced by UPRR during the investigation period.
During 2012, as a result of the testing that the Company conducted on concrete ties manufactured at its former Grand Island, NE facility and the developments related to UPRR and other customer matters, the Company recorded pre-tax warranty charges of $22,000 in “Cost of Goods Sold” within its Rail Products and Services segment based on the Company’s estimate of the number of defective concrete ties that will ultimately require replacement during the applicable warranty periods.
2013
Throughout 2013, at UPRR’s request and under the terms of the amended 2005 supply agreement, the Company provided warranty replacement concrete ties for use across certain UPRR subdivisions. The Company attempted to reconcile the quantity of warranty claims for ties replaced and obtain supporting detail for the ties removed. The Company believes that UPRR did not replace concrete ties in accordance with the amended agreement and has not furnished adequate documentation throughout the replacement process in these subdivisions to support its full warranty claim. Based on the information received by the Company to date, the Company believes that a significant number of ties which UPRR replaced in these subdivisions did not meet the criteria to be covered as warranty replacement ties under the amended 2005 supply agreement. The disagreement related to the 2013 warranty replacement activity includes approximately 170,000 ties where the Company provided detailed documentation supporting our position with reason codes that detail why these ties are not eligible for a warranty claim.
In late November 2013, the Company received notice from UPRR asserting a material breach of the amended 2005 supply agreement. UPRR’s notice asserted that the failure to honor its claims for warranty ties in these subdivisions was a material breach. Following receipt of this notice, the Company provided information to UPRR to refute UPRR’s claim of breach and included the reconciliation of warranty claims supported by substantial findings from the Company’s track observation team, all within the 90 day cure period. The Company also proposed further discussions to reach agreement on reconciliation for 2013 replacement activities and future replacement activities and a recommended process that will ensure future replacement activities are done with appropriate documentation and per the terms of the amended 2005 supply agreement.
2014
During the first quarter of 2014, the Company further responded within the 90 day cure period to UPRR’s claim and presented a reconciliation for the subdivisions at issue. This proposed reconciliation was based on empirical data and visual observation from Company employees that were present during the replacement process for a substantial majority of the concrete ties replaced. The Company spent considerable time documenting facts related to concrete tie condition and track condition to assess whether the ties replaced met the criteria to be eligible for replacement under the terms of the amended 2005 supply agreement.
During 2014, the Company increased its accrual by an additional $8,766 based on revised estimates of ties to be replaced based upon scientific testing and other analysis, adjusted for ties already provided to UPRR. The Company continued to work with UPRR to identify, replace, and reconcile defective ties related to the warranty claim in accordance with the amended 2005 supply agreement. The Company and UPRR met during the third quarter of 2014 to evaluate each other’s position in an effort to work towards agreement on the unreconciled 2013 and 2014 replacement activity as well as the standards and practices to be implemented for future replacement activity and warranty tie replacement.
In November and December of 2014, the Company received additional notices from UPRR asserting that ties manufactured in 2000 were defective and again asserting material breaches of the amended 2005 supply agreement relating to warranty tie replacements as well as certain new ties provided to UPRR being out of specification.
As of December 31, 2014, the Company and UPRR had not been able to reconcile the disagreement related to the 2013 and 2014 warranty replacement activity. The disagreement relating to the 2014 warranty replacement activity includes approximately 90,100 ties that the Company believes are not warranty-eligible.
2015
On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT, asserting, among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing,
and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various incidental and consequential damages. The amended 2005 supply agreement provides that UPRR’s exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or otherwise contained a material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Company’s warranty does not apply to ties that (a) have been repaired or altered without the Company’s written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been improperly maintained or used contrary to the specifications for which such ties were produced. The amended 2005 supply agreement also continues to provide that the Company’s warranty is in lieu of all other express or implied warranties and that neither party shall be subject to or liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement
that are inaccurately rated
thatunder concrete tie rating guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that UPRR in future years will be entitled to warranty replacement ties for virtually all of the Grand Island ties. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system.
By Third Amended Scheduling Order dated September 26, 2017, a June 29, 2018 deadline for completion of discovery has been established with trial to proceed at some future date on or after October 1, 2018. The parties continued to conduct discovery, with various disputes that required and will likely require court resolution. The Company intends to continue to engage in discussions in an effort to resolve the UPRR matter. However, we cannot predict that such discussions will be successful, or that the results of the litigation with UPRR, or any settlement or judgment amounts, will reasonably approximate our estimated accruals for loss contingencies. Future potential costs pertaining to UPRR’s claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows.
Year-to-date Results Comparison
The segment gross profit measures presented within Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) constitute non-GAAP financial measures disclosed by management to provide investors and other users information to evaluate the performance of the Company’s segments on a more comparable basis to market trends and peers. These non-GAAP financial measures exclude significant cost allocations to the reportable segments:
•Allows users to understand the operational performance of our reportable segments;
•Provides greater comparability to other registrants with similar businesses and avoids possible non-comparability at the reportable segment pre-tax profit level resulting from our specific corporate cost allocations; and
•Facilitates a clearer, market-based perspective on the strength or weakness of our reportable segments in their markets to better aid in investment decisions.
In addition, these non-GAAP financial measures have historically been key metrics utilized by segment managers to monitor selling prices and quantities as well as production and service costs to better evaluate key profitability drivers and trends that may develop due to industry and competitive conditions. The following table reconciles the non-GAAP financial measures to the profitability of the segments reporting in accordance with GAAP:
|
| | | | | | | | | | | | | | | | |
| Twelve months ended December 31, 2017 | | Rail Products and
Services | | Construction
Products | | Tubular and Energy
Services | | Total |
| Reportable Segment Profit | | $ | 12,216 |
| | $ | 11,620 |
| | $ | 3,849 |
| | $ | 27,685 |
|
| Segment and Allocated Selling & Administrative | | 36,975 |
| | 18,796 |
| | 16,036 |
| | 71,807 |
|
| Amortization Expense | | 3,698 |
| | 151 |
| | 3,143 |
| | 6,992 |
|
| Asset Impairments | | — |
| | — |
| | — |
| | — |
|
| Non-GAAP Segment Gross Profit | | $ | 52,889 |
| | $ | 30,567 |
| | $ | 23,028 |
| | $ | 106,484 |
|
| | | | | | | | | |
| Twelve months ended December 31, 2016 | | Rail Products and
Services | | Construction
Products | | Tubular and Energy
Services | | Total |
| Reportable Segment (Loss) Profit | | $ | (26,228 | ) | | $ | 8,189 |
| | $ | (116,126 | ) | | $ | (134,165 | ) |
| Segment and Allocated Selling & Administrative | | 40,696 |
| | 18,739 |
| | 17,978 |
| | 77,413 |
|
| Amortization Expense | | 3,881 |
| | 151 |
| | 5,543 |
| | 9,575 |
|
| Asset Impairments | | 32,725 |
| | — |
| | 103,159 |
| | 135,884 |
|
| Non-GAAP Segment Gross Profit | | $ | 51,074 |
| | $ | 27,079 |
| | $ | 10,554 |
| | $ | 88,707 |
|
| | | | | | | | | |
| Twelve months ended December 31, 2015 | | Rail Products and
Services | | Construction
Products | | Tubular and Energy
Services | | Total |
| Reportable Segment Profit (Loss) | | $ | 27,037 |
| | $ | 12,958 |
| | $ | (81,344 | ) | | $ | (41,349 | ) |
| Segment and Allocated Selling & Administrative | | 44,204 |
| | 20,969 |
| | 15,520 |
| | 80,693 |
|
| Amortization Expense | | 4,035 |
| | 242 |
| | 7,968 |
| | 12,245 |
|
| Asset Impairments | | — |
| | — |
| | 80,337 |
| | 80,337 |
|
| Non-GAAP Segment Gross Profit | | $ | 75,276 |
| | $ | 34,169 |
| | $ | 22,481 |
| | $ | 131,926 |
|
Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Percent of Total Net Sales
Twelve Months Ended December 31, | | Percent
Increase/(Decrease) |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Net Sales: | | | | | | | | | | | | | | | | |
| Rail Products and Services | | $ | 256,127 |
| | $ | 239,127 |
| | $ | 328,982 |
| | 47.8 | % | | 49.5 | % | | 52.7 | % | | 7.1 | % | | (27.3 | )% |
| Construction Products | | 161,801 |
| | 145,602 |
| | 176,394 |
| | 30.2 |
| | 30.1 |
| | 28.2 |
| | 11.1 |
| | (17.5 | ) |
| Tubular and Energy Services | | 118,449 |
| | 98,785 |
| | 119,147 |
| | 22.0 |
| | 20.4 |
| | 19.1 |
| | 19.9 |
| | (17.1 | ) |
| Total net sales | | $ | 536,377 |
| | $ | 483,514 |
| | $ | 624,523 |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 10.9 | % | | (22.6 | )% |
| | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Non-GAAP / Reported
Gross Profit Percentage
Twelve Months Ended December 31, | | Percent
Increase/(Decrease) |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Gross Profit: | | | | | | | | | | | | | | | | |
| Non-GAAP Rail Products and Services | | $ | 52,889 |
| | $ | 51,074 |
| | $ | 75,276 |
| | 20.6 | % | | 21.4 | % | | 22.9 | % | | 3.6 | % | | (32.2 | )% |
| Non-GAAP Construction Products | | 30,567 |
| | 27,079 |
| | 34,169 |
| | 18.9 |
| | 18.6 |
| | 19.4 |
| | 12.9 |
| | (20.7 | ) |
| Non-GAAP Tubular and Energy Services | | 23,028 |
| | 10,554 |
| | 22,481 |
| | 19.4 |
| | 10.7 |
| | 18.9 |
| | 118.2 |
| | (53.1 | ) |
| Non-GAAP Segment gross profit | | 106,484 |
| | 88,707 |
| | 131,926 |
| | | | | | | | | | |
| LIFO (expense) income | | (2,009 | ) | | 2,643 |
| | 2,468 |
| | (0.4 | ) | | 0.5 |
| | 0.4 |
| | (176.0 | ) | | 7.1 |
|
| Other | | (1,223 | ) | | (994 | ) | | (741 | ) | | (0.2 | ) | | (0.2 | ) | | (0.1 | ) | | (23.0 | ) | | (34.1 | ) |
| Total gross profit | | $ | 103,252 |
| | $ | 90,356 |
| | $ | 133,653 |
| | 19.2 | % | | 18.7 | % | | 21.4 | % | | 14.3 | % | | (32.4 | )% |
| | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Percent of Total Net Sales
Twelve Months Ended December 31, | | Percent
Increase/(Decrease) |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Expenses: | | | | | | | | | | | | | | | | |
| Selling and administrative expenses | | $ | 80,521 |
| | $ | 85,976 |
| | $ | 92,648 |
| | 15.0 | % | | 17.8 | % | | 14.8 | % | | (6.3 | )% | | (7.2 | )% |
| Amortization expense | | 6,992 |
| | 9,575 |
| | 12,245 |
| | 1.3 |
| | 2.0 |
| | 2.0 |
| | (27.0 | ) | | (21.8 | ) |
| Asset impairments | | — |
| | 135,884 |
| | 80,337 |
| | — |
| | 28.1 |
| | 12.9 |
| | (100.0 | ) | | 69.1 |
|
| Interest expense | | 8,377 |
| | 6,551 |
| | 4,378 |
| | 1.6 |
| | 1.4 |
| | 0.7 |
| | 27.9 |
| | 49.6 |
|
| Interest income | | (307 | ) | | (228 | ) | | (206 | ) | | (0.1 | ) | | — |
| | — |
| | (34.6 | ) | | (10.7 | ) |
| Equity (income) loss of nonconsolidated investments | | (6 | ) | | 1,290 |
| | 413 |
| | — |
| | 0.3 |
| | 0.1 |
| | (100.5 | ) | | 212.3 |
|
| Other income | | (367 | ) | | (1,523 | ) | | (5,585 | ) | | (0.1 | ) | | (0.3 | ) | | (0.9 | ) | | 75.9 |
| | 72.7 |
|
| Total expenses | | $ | 95,210 |
| | $ | 237,525 |
| | $ | 184,230 |
| | 17.8 | % | | 49.1 | % | | 29.5 | % | | (59.9 | )% | | 28.9 | % |
| Income (loss) before income taxes | | $ | 8,042 |
| | $ | (147,169 | ) | | $ | (50,577 | ) | | 1.5 | % | | (30.4 | )% | | (8.1 | )% | | 105.5 | % | | (191.0 | )% |
| Income tax expense (benefit) | | 3,929 |
| | (5,509 | ) | | (6,132 | ) | | 0.7 |
| | (1.1 | ) | | (1.0 | ) | | 171.3 |
| | 10.2 |
|
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) | | 0.8 | % | | (29.3 | )% | | (7.1 | )% | | 102.9 | % | | (218.7 | )% |
Fiscal 2017 Compared to Fiscal 2016 — Company Analysis
Net sales of $536,377 for the year ended December 31, 2017 increased by $52,863, or 10.9%, compared to the prior year period. Each of the three segments reported overall year over year increases of 19.9%, 11.1%, and 7.1% for Tubular and Energy Services, Construction Products, and Rail Products and Services, respectively.
Gross profit margin for 2017 was 19.2%, or 50 basis points (“bps”) higher than the prior year. The current year margin was significantly impacted by the recovery in the oil and gas market but partially offset by pricing pressure within the rail market. Included in the 2017 gross profit was $2,009 related to LIFO expense compared to $2,643 of income in the prior year.
Selling and administrative expenses decreased by $5,455, or 6.3%, over the prior year period. The decrease was primarily attributable to the prior year restructuring activity of $2,827 and, to a lesser extent, the reduction of legal costs related to the UPRR matter of $1,250 and reduced insurance reserves of $1,075.
The Company did not record asset impairments for the year ended December 31, 2017. Non-cash asset impairments of $135,884 were recorded during the year ended December 31, 2016. During the second quarter of 2016, the Company identified various indicators that suggested that there was a more likely than not probability that the carrying values of certain assets and reporting units were less than their respective fair values in the prior year. The impairment indicators included a rapid deterioration in actual performance against forecasts, downward revisions in projected financial results, declines in the Company’s market capitalization, and reductions in new order activity.
Asset groups that had indicators of impairment were analyzed to determine if the carrying values were recoverable. Based upon the recoverability assessment, the Company determined that certain intangible assets and property, plant, and equipment within the Test and Inspection Services business unit and certain intangible assets within the Chemtec business unit were impaired. The impairment assessment was finalized during the three-month period ended September 30, 2016 resulting in a $59,786 definite-lived intangible asset impairment and a $14,956 property, plant, and equipment impairment that were recorded within the Tubular and Energy Services segment. The remaining asset groups tested for recoverability were substantially in excess of their respective carrying values.
The Company performed an interim goodwill impairment review as of June 1, 2016 as a result of the adverse effect on certain reporting units of reduced capital spending and cost reduction priorities that oil and gas developers and railroad customers have enacted as well as the indicators previously noted. The forecasts for the Chemtec, Protective Coatings, and Rail Technologies business units did not indicate a timely recovery to support the carrying values of the business units. Upon finalization of the interim impairment assessment during the three-month period ended September 30, 2016, the Company recognized a goodwill impairment of $61,142, which represented the full impairment of goodwill related to the Chemtec and Protective Coatings business units and approximately 68% of the Rail Technologies goodwill value. The estimated fair values of the remaining reporting units were substantially in excess of the carrying value of those reporting units.
Amortization expense for the year ended December 31, 2017 was reduced by $2,583 as a direct result of the prior year definite-lived intangible asset impairments.
Other income was reduced by $1,156 compared to the prior year which was primarily due to foreign exchange losses of $804.
The Company’s effective income tax rate for 2017 was 48.9%, compared to 3.7% in the prior year period. The Company’s 2017 effective income tax rate was significantly affected by the recently enacted U.S. tax legislation, including a provisional tax expense of $3,298 related to the one-time transition tax on earnings of foreign subsidiaries, partially offset by a $1,508 provisional tax benefit related to the remeasurement of deferred tax assets and liabilities at the 21% federal corporate tax rate. In addition, the Company realized domestic tax benefits previously offset by a valuation allowance.
The Company's effective income tax rate in the prior year period included a valuation allowance of $29,719 against deferred tax assets, as well as deferred U.S. income taxes and foreign withholding taxes of $7,932 related to accumulated foreign earnings not permanently reinvested outside of the United States.
Net income for the year ended December 31, 2017 was $4,113, or $0.39 per diluted share, compared to the net loss for the 2016 period of $141,660, or $13.79 per diluted share.
Fiscal 2016 Compared to Fiscal 2015 – Company Analysis
Net sales of $483,514 for the year ended December 31, 2016 decreased by $141,009 or 22.6% compared to the prior year period. All segments reported overall year over year declines of 27.3%, 17.5% and 17.1% for Rail Products and Services, Construction Products and Tubular and Energy Services, respectively.
Gross profit margin for 2016 was 18.7%, or 271 basis points lower than the prior year. The current year margin was significantly impacted by the prolonged weakness in the oil and gas market and reduced activity in the rail market. Included in the 2016 gross profit was $2,643 related to the LIFO income compared to $2,468 in the prior year.
Selling and administrative expenses decreased by $6,672, or 7.2%, over the prior year period. The decrease was primarily attributable to cost reduction initiatives related to personnel and travel costs of $2,982, incentive compensation reductions of $3,777, prior year acquisition and integration costs of $1,212 and other strategic spending reductions of $4,024,
which were partially offset by increased litigation related costs for the UPRR matter of $2,671, the fourth quarter employment claim settlement expense of $900, and other miscellaneous items including ERP costs totaling $1,799.
The Company recorded non-cash asset impairments of $135,884 during the year ended December 31, 2016. During the second quarter of 2016, the Company identified various indicators that suggested that there was a more likely than not probability that the carrying values of certain assets and reporting units were less than their respective fair values. The impairment indicators included a rapid deterioration in actual performance against forecasts, downward revisions in projected financial results, declines in the Company’s market capitalization, and reductions in new order activity.
Asset groups that had indicators of impairment were analyzed to determine if the carrying values were recoverable. Based upon the recoverability assessment, the Company determined that certain intangible assets and property, plant, and equipment within the Test and Inspection Services division and certain intangible assets within the Chemtec division were impaired. The impairment assessment was finalized during the three-month period ended September 30, 2016 resulting in a $59,786 definite-lived intangible asset impairment and a $14,956 property, plant, and equipment impairment that were recorded within the Tubular and Energy Services segment. The remaining asset groups tested for recoverability were substantially in excess of their respective carrying values.
The Company performed an interim goodwill impairment review as of June 1, 2016 as a result of the adverse effect on certain reporting units of reduced capital spending and cost reduction priorities that oil and gas developers and railroad customers have enacted as well as the indicators previously noted. The forecasts for the Chemtec, Protective Coatings, and Rail Technologies reporting units did not indicate a timely recovery to support the carrying values of the reporting units. Upon finalization of the interim impairment assessment during the three-month period ended September 30, 2016, the Company recognized a goodwill impairment of $61,142, which represented the full impairment of goodwill related to the Chemtec and Protective Coatings reporting units and approximately 68% of the Rail Technologies goodwill value. The estimated fair values of the remaining reporting units were substantially in excess of the carrying value of those reporting units.
Other income during the prior year was favorably impacted by the sale of assets at our Tucson, AZ facility resulting in a gain of $2,279, realized and unrealized foreign exchange gains totaling $1,616, and other less significant income items.
The Company’s effective income tax rate for 2016 was 3.7%, compared to 12.1% in the prior year period. The Company accrued deferred U.S. income taxes and foreign withholding taxes of $7,932 in the current year, related to accumulated foreign earnings that management no longer intends to permanently reinvest outside of the United States. The Company also recorded a valuation allowance of $29,719 against deferred tax assets in the current year.
Net loss for the year ended December 31, 2016 was $141,660, or $13.79 per diluted share, compared to the net loss for the 2015 period of $44,445, or $4.33 per diluted share.
Results of Operations — Segment Analysis
Rail Products and Services
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Increase | | Decrease | | Percent
Increase | | Percent
Decrease |
| | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Net Sales | | $ | 256,127 |
| | $ | 239,127 |
| | $ | 328,982 |
| | $ | 17,000 |
| | $ | (89,855 | ) | | 7.1 | % | | (27.3 | )% |
| Segment Profit (Loss) | | $ | 12,216 |
| | $ | (26,228 | ) | | $ | 27,037 |
| | $ | 38,444 |
| | $ | (53,265 | ) | | 146.6 | % | | (197.0 | )% |
| Segment Profit (Loss) Percentage | | 4.8 | % | | (11.0 | )% | | 8.2 | % | | 15.7 | % | | (19.2 | )% | | 143.5 | % | | (233.5 | )% |
Fiscal 2017 Compared to Fiscal 2016
Rail Products and Services segment sales increased $17,000, or 7.1%, compared to the prior year period. For 2017, our Rail Technologies business accounted for 4.1% of the segment increase. This business unit serves the global market with locations in North America and Europe, with each of our regions experiencing sales growth in the current year. Our Rail Products and CXT Concrete Ties business units accounted for 1.6% and 1.4%, respectively, of the segment increase. The Company was encouraged by the impact of North American carload traffic during 2017, particularly intermodal traffic levels, as well as capitalizing on opportunities with the expansion of the global transit market.
The Rail Products and Services segment profit for 2017 was $12,216, and a segment profit margin of 4.8% compared to segment loss of $26,228, and a margin of (11.0)% for 2016. The increase was primarily attributable to the 2016 goodwill impairment of $32,725 related to the Rail Technologies business unit. Additionally, profit was favorably impacted by a $3,221 reduction in selling and administrative expenses in 2017, resulting from the successful 2016 restructuring and a 2017 gain on patent sale of $500. Non-GAAP gross profit increased by $1,815, or 3.6%, although the segment gross profit margin decreased by 80 bps principally attributable to declines in Rail Technologies and, to a lesser extent, Rail Products margins.
During 2017, the Rail Products and Services segment increased new orders by 17.0% compared to the prior year. Each of the three business units within the segment had increases in new orders compared to 2016. The growth in new orders strengthened backlog by 9.7% compared to the prior year, ending 2017 at $68,850.
Fiscal 2016 Compared to Fiscal 2015
Rail Products and Services segment sales decreased $89,855, or 27.3%, compared to the prior year period. For 2016, our Rail Distribution business accounted for approximately 47.9% of the decrease. This division serves Class II freight, rail and transit railroads and the North American industrial rail market, which experienced price and project declines. All rail divisions experienced reductions in sales over the prior year period attributable to continued weakness in the North American freight rail market in both commodity carloads as well as intermodal rail traffic. Additionally, due to the ongoing litigation with UPRR, our rail divisions experienced a decline in sales to UPRR of approximately $12,600.
The Rail Products and Services segment loss for 2016 was $26,244, and a margin of (11.0%) compared to segment profit of $27,037, and a margin of 8.2% for 2015. The reduction was primarily attributable to the $32,725 goodwill impairment related to the Rail Technologies reporting unit along with reductions in gross profit due to the lower sales volumes. The non-GAAP gross profit decreased by $24,202, or 32.2%, and the corresponding margin decreased by 150 basis points principally attributable to declines in Rail Technologies and CXT Concrete Tie margins, which were negatively impacted by reduced volumes and the related deleveraging of the businesses. Our Transit Products business also was negatively impacted by a $1,224 pretax warranty charge related to a transit products project.
During 2016, the Rail Products and Services segment had a reduction in new orders of 23.9% compared to the prior year. The Rail Distribution and CXT Concrete Tie businesses represented 31.4% of the current year decline and all other rail divisions experienced double digit declines relative to the prior year due to reductions in rail capital spending.
Construction Products
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Increase | | Decrease | | Percent
Increase | | Percent
Decrease |
| | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Net Sales | | $ | 161,801 |
| | $ | 145,602 |
| | $ | 176,394 |
| | $ | 16,199 |
| | $ | (30,792 | ) | | 11.1 | % | | (17.5 | )% |
| Segment Profit | | $ | 11,620 |
| | $ | 8,189 |
| | $ | 12,958 |
| | $ | 3,431 |
| | $ | (4,769 | ) | | 41.9 | % | | (36.8 | )% |
| Segment Profit Percentage | | 7.2 | % | | 5.6 | % | | 7.3 | % | | 1.6 | % | | (1.7 | )% | | 27.7 | % | | (23.4 | )% |
Fiscal 2017 Compared to Fiscal 2016
Construction Products segment sales increased $16,199, or 11.1%, compared to the prior year period, with increases in each of the three business units. The Fabricated Bridge sales increase was primarily driven by several large projects throughout the year, including the continuation of the Peace Bridge project. Piling sales were favorably impacted by strong demand within the sheet and pipe piling product lines. Lastly, Precast Concrete Products experienced increases in their buildings sales, which were primarily driven by orders from state agencies.
The Construction Products segment profit of $11,620 increased by $3,431 compared to the prior year to 7.2% of net sales. While selling and administrative expenses remained consistent with the prior year, the segment's non-GAAP gross profit increased by $3,488, or 12.9%. The non-GAAP gross profit increase was primarily due to sales volume but was also favorably impacted by improved manufacturing efficiencies.
For 2017, the Construction Products segment had an 8.0% decrease in new orders compared to the prior year period. The decrease primarily relates to the Fabricated Bridge business unit as the prior year included the $15,000 Peace Bridge order. This was partially offset by an increase within our Precast Concrete Products business unit. The segment's backlog at December 31, 2017 was $71,318, a 0.9% decrease as compared to the prior year.
Fiscal 2016 Compared to Fiscal 2015
Construction Products segment sales decreased $30,792, or 17.5%, compared to the prior year period. The Piling business unit represented $24,319 of the reduction and Fabricated Bridge sales represented $8,943, which were both attributable to fewer large project opportunities in the market as compared to the prior year period as well as increased competition leading to fewer project wins. Throughout the year, lower scrap input prices and very low factory utilization rates kept steel prices very competitive. As a result, the Company did not participate in some of the typical projects we serve with pipe pile and H-pile, resulting in lower sales volumes and pricing. Partially offsetting these declines were increased Precast Concrete Product sales.
The Construction Products segment profit of $8,189 declined by $4,769 compared to the prior year as a result of reduced gross profit attributable to lower sales volumes. The non-GAAP gross profit decreased by $7,090, or 20.7%, due to reductions in Piling products and Fabricated Bridge gross profit as a result of the decline in volumes.
For 2016, the Construction Products segment had a 10.1% increase in new orders compared to the prior year period. The increase relates to significant project wins within the Fabricated Bridge business, and to a lesser extent, Precast Concrete Products.
Tubular and Energy Services
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Twelve Months Ended
December 31, | | Increase | | Decrease | | Percent
Increase | | Percent
Decrease |
| | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| Net Sales | | $ | 118,449 |
| | $ | 98,785 |
| | $ | 119,147 |
| | $ | 19,664 |
| | $ | (20,362 | ) | | 19.9 | % | | (17.1 | )% |
| Segment Profit (Loss) | | $ | 3,849 |
| | $ | (116,126 | ) | | $ | (81,344 | ) | | $ | 119,975 |
| | $ | (34,782 | ) | | 103.3 | % | | (42.8 | )% |
| Segment Profit (Loss) Percentage | | 3.2 | % | | (117.6 | )% | | (68.3 | )% | | 120.8 | % | | (49.3 | )% | | 102.8 | % | | (72.2 | )% |
Fiscal 2017 Compared to Fiscal 2016
Tubular and Energy Services segment sales increased $19,664, or 19.9%, compared to the prior year period. The increase was primarily related to our Test and Inspection Services and Protective Coatings business units. These increases were partially offset by a reduction within our Precision Measurement Systems business unit.
Tubular and Energy Services segment profit increased 103.3% to $3,849 in 2017 compared to a loss of $116,126 in 2016. The current year profit increase was primarily attributable to the prior year asset impairment of $103,159 and the $2,400 reduction in 2017 amortization expense due to the 2016 definite-lived intangible asset impairment. Also contributing to the increased profit was the reduction of selling and administrative expenses of $1,942, which was primarily related to the prior year restructuring activity. Non-GAAP gross profit increased by $12,474 which was favorably impacted by improved margins within each division of the segment and most significantly in our Test and Inspection Services business unit. During 2017, our Protective Coatings business unit incurred a $839 warranty charge which negatively impacted the segment profit.
The Tubular and Energy Services segment had an increase in new orders of 53.4% compared to the prior year period. New orders increased during 2017 as both the upstream and midstream energy markets showed recovery during the year and most significantly impacted our Test and Inspection Services and Protective Coatings business units. The increase in new orders lead to a 109.6% increase in backlog, with a December 31, 2017 balance of $26,737.
During 2017, the lease at our Birmingham, Alabama facility expired. The Company negotiated a lease renewal for this facility. The renewal is for a term of five years and is scheduled to expire July 31, 2022.
Fiscal 2016 Compared to Fiscal 2015
Tubular and Energy Services segment sales decreased $20,362, or 17.1%, compared to the prior year period. The decrease related primarily to $15,141 from Test and Inspection Services and $10,488 from Protective Coatings partially offset by an increase of $6,782 related to Precision Measurement Systems.
Tubular and Energy Services segment loss increased 42.8% to $116,126 in 2016 compared to a loss of $81,344 in 2015. The margin for this segment also decreased 492 basis points to (117.5%) compared to (68.3%) in the prior year period. The losses were largely attributable to impairments of $103,176 and $80,337 for 2016 and 2015, respectively. The non-GAAP gross profit declined by $11,927, or 53.1%, which was negatively impacted by our Test and Inspection Services and Protective Coatings businesses. Despite improved volumes during the 2016 fourth quarter, our Test and Inspection Services business was negatively impacted by the weakness in the upstream oil and gas market, where demand levels remained low, leading to heightened competition and reductions in service prices. Similarly, Protective Coatings sales declined significantly beginning in the third quarter 2016, which led to a temporary idling of the Birmingham facility. The facility has restarted operations in early October 2016. Non-GAAP gross profit was also negatively impacted by Precision Measurement Systems sales which produced lower margins due to competitive pressures as a result of the depressed midstream oil and gas market.
The Tubular and Energy Services segment had a reduction in new orders of 36.7% compared to the prior year period. Orders were down due to a reduction in midstream oil and gas new project lettings, with our Protective Coatings division reporting a 56.7% decline.
Liquidity and Capital Resources
Total debt at December 31, 2017 and 2016 was $129,966 and $159,565, respectively, and was primarily comprised of borrowings on the revolving credit facility and, in 2016, the term loan.
Our need for liquidity relates primarily to working capital requirements for operating activities, debt service payments, capital expenditures, and JV capital obligations.
The change in cash and cash equivalents for the three-year periods ended December 31 are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Net cash provided by operating activities | | $ | 39,372 |
| | $ | 18,405 |
| | $ | 56,172 |
|
| Net cash used by investing activities | | (4,687 | ) | | (7,930 | ) | | (205,575 | ) |
| Net cash (used) provided by financing activities | | (29,703 | ) | | (12,519 | ) | | 134,289 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 2,333 |
| | (905 | ) | | (3,598 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 7,315 |
| | $ | (2,949 | ) | | $ | (18,712 | ) |
Cash Flows from Operating Activities
During the year ended December 31, 2017, net cash provided by operating activities was $39,372 compared to $18,405 during the prior year period. For the twelve months ended December 31, 2017, income and adjustments to income from operating activities provided $23,679 compared to $24,261 in 2016. Working capital and other assets and liabilities provided $15,693 in the current period compared to a use of $5,856 during 2016. During the twelve months ended December 31, 2017, the Company received $9,946 and $1,827 from our 2016 and 2015 federal income tax refunds, respectively.
The Company’s calculation of days sales outstanding at December 31, 2017 was 50 days compared to 53 days at December 31, 2016. We believe our receivables portfolio is strong.
During the 2016 period, net cash provided by operating activities provided $18,405, a decrease of $37,767, compared to the 2015 period. For the year ended December 31, 2016, income and adjustments to income from operating activities provided $24,261 compared to $46,971 in 2015. Working capital and other assets and liabilities used $5,856 in 2016 compared to providing $9,201 in 2015. The reduction in cash flows from operations was largely impacted by working capital movement.
Cash Flows from Investing Activities
For the year ended December 31, 2017, the Company had capital expenditures of $6,149, a $1,515 reduction from 2016. The current year expenditures were primarily related to the purchase of 285 trackside rail lubricator units as part of a multiple year service contract with a Class I railroad and, to a lesser extent, the building expansion at our Waverly, WV Precast Concrete Products facility. The Company received proceeds of $1,462 from the sale of assets. These proceeds were primarily from the sale of our Protective Coatings field service division.
Capital expenditures for the year ended December 31, 2016 were $7,664, a decrease of $7,249, compared to 2015 of $14,913. The 2016 expenditures related primarily to the Birmingham, AL inside diameter coating line upgrade and application development of the Company’s new enterprise resource planning system. Also, the Company received proceeds of $969 related to the sale of assets and loaned $1,235 to its LB Pipe JV. Expenditures for the year ended December 31, 2015 related primarily to upgrades to the outside diameter coating line of the Birmingham, AL coating facility as well as general plant and yard improvements across each segment.
During 2015, the Company acquired Tew Plus, Ltd. (“Tew Plus”), Tew Holdings, Ltd. (“Tew”) and IOS. The total purchase price of these acquisitions, net of cash acquired, was $196,001 as of December 31, 2015. Investing activities during 2015 included capital expenditures of $14,913. The 2015 expenditures related primarily to the Birmingham, AL protective coatings facility upgrades, application development of a new enterprise resource planning system, and general plant and yard improvements across each segment. Other investing activities related to cash proceeds of $5,339 from the sale of assets. The sale of the Tucson, AZ concrete tie facility contributed $2,750 of the total proceeds.
Cash Flows from Financing Activities
The Company reduced its outstanding debt by $29,600 during the year ended December 31, 2017, including the payoff of the term loan. During the year ended December 31, 2016, the Company reduced outstanding debt by approximately $9,184, primarily from operational cash flows. The Company also paid $1,417 in financing fees in 2016 related to our 2016 credit agreement amendments. During the 2015 period, the Company had an increase in outstanding debt of approximately $142,326, primarily related to drawings against the revolving credit facility to fund domestic acquisition activity.
The Company withholds shares from employees to pay their withholding taxes in connection with the vesting of restricted stock awards. For the twelve months ended December 31, 2017, the Company withheld 7,277 shares having a value of approximately $103 to satisfy tax obligations. The Company withheld 20,186 shares having a value of approximately $275 for the twelve-month period ended December 31, 2016 compared to withholding 25,340 shares having a value of
approximately $1,114 in the 2015 period. Cash outflows related to dividends were $1,244 and $1,656 for the periods ended December 31, 2016 and 2015, respectively.
Lastly, for the years ended December 31, 2016 and 2015, the Company purchased 5,000 and 80,512 shares of common stock for $67 and $1,587, respectively, under our existing share repurchase authorization. There were no share repurchases during the twelve months ended December 31, 2016.
Financial Condition
On November 7, 2016, the Company, its domestic subsidiaries, and certain of its Canadian subsidiaries entered into the Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as amended by the First Amendment dated June 29, 2016 (the “Amended and Restated Credit Agreement”), with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This Second Amendment modified the Amended and Restated Credit Agreement which had a maximum revolving credit line of $275,000. The Second Amendment reduced the permitted revolving credit borrowings to $195,000 and provides for additional term loan borrowing of $30,000 (“Term Loan”). The Term Loan was 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, triggered mandatory prepayments to the Term Loan. Term Loan borrowings were not available to draw upon following repayment. During 2017, the Company paid off the balance of the Term Loan. 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 ending June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ending September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility. The Second Amendment also includes a Minimum Last Twelve Months EBITDA (as defined by the Amendment) covenant (“Minimum EBITDA”). For the quarter ended December 31, 2016 through the quarter ended June 30, 2017, the Minimum EBITDA had to be at least $18,500. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement increases by various increments. The incremental Minimum EBITDA requirement for the twelve month period ended December 31, 2017 had to be at least $25,000. For the twelve months ended December 31, 2017, the EBITDA calculation as defined by the Amended and Restated Credit Agreement was $37,341. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the credit agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter ended December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit facility. The final financial covenant included in the Second Amendment is a Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ending June 30, 2018.
The Second Amendment includes several changes to certain non-financial covenants as defined in the Credit Agreement. Through the maturity date of the agreement, the Company has been prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Company’s stock has been decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000 from the prior year to $25,000 in the aggregate through the maturity date of the credit facility.
The Second Amendment provides for the elimination of the three lowest tiers of the pricing grid that had previously been defined in the First Amendment. Upon execution of the Second Amendment through the quarter ending March 31, 2018, the Company will be locked into the highest tier of the pricing grid which provides for pricing of the prime rate plus 225 basis points on base rate loans and the applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of the credit facility, the Company’s position on the pricing grid will be governed by a Minimum Net Leverage ratio which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018 the Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing grid, pricing will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans.
The Company generated $39,372 from cash flows from operations during 2017 that was utilized to fund capital expenditures and make payments against our term loan and revolving credit facility. At December 31, 2017, we had $37,678 in cash and cash equivalents and $41,105 of availability under the Second Amendment to the Second Amended and Restated Credit Agreement while carrying $129,966 in total debt. We believe this liquidity will provide adequate flexibility to operate the business in a prudent manner, continue to service our revolving debt facility, and be better leveraged to weather any future downturn in our markets.
Non-domestic cash balances of $35,807 are held in various locations throughout the world. Management determined that the cash balances of our Canadian and United Kingdom subsidiaries exceeded our projected capital needs by $30,200, and does not intend to permanently reinvest such amounts outside of the United States. Accordingly, the Company has accrued the U.S. income tax and foreign withholding taxes associated with the repatriation of the excess cash.
At December 31, 2017, the Company was in compliance with the covenants in the Second Amendment.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. At December 31, 2017, the swap asset was $222 compared to a liability of $334 at December 31, 2016.
Tabular Disclosure of Contractual Obligations
A summary of the Company’s required payments under financial instruments and other commitments at December 31, 2017 are presented in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | Less than
1 year | | 1-3
years | | 4-5
years | | More than
5 years |
| Contractual Cash Obligations | | | | | | | | | | |
| Revolving credit facility (1) | | $ | 128,470 |
| | $ | — |
| | $ | 128,470 |
| | $ | — |
| | $ | — |
|
| Interest | | 12,461 |
| | 5,912 |
| | 6,549 |
| | — |
| | — |
|
| Other debt | | 1,496 |
| | 656 |
| | 840 |
| | — |
| | — |
|
| Pension plan contributions | | 253 |
| | 253 |
| | — |
| | — |
| | — |
|
| Operating leases | | 17,811 |
| | 4,483 |
| | 5,616 |
| | 2,946 |
| | 4,766 |
|
| U.S. transition tax (2) | | 2,617 |
| | 209 |
| | 419 |
| | 419 |
| | 1,570 |
|
| Purchase obligations not reflected in the financial statements | | 31,320 |
| | 31,320 |
| | — |
| | — |
| | — |
|
| Total contractual cash obligations | | $ | 194,428 |
| | $ | 42,833 |
| | $ | 141,894 |
| | $ | 3,365 |
| | $ | 6,336 |
|
| Other Financial Commitments | | | | | | | | | | |
| Standby letters of credit | | $ | 425 |
| | $ | 425 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
| (1) | Repayments of outstanding loan balances are disclosed in Note 10 Long-Term Debt and Related Matters, to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report. |
| |
| (2) | Further detail on the U.S. Tax Cuts and Jobs Act transition tax is disclosed in Note 14 Income Taxes, to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report. |
Other long-term liabilities include items such as deferred income taxes which are not contractual obligations by nature. The Company cannot estimate the settlement years for these items and has excluded them from the above table.
Management believes its internal and external sources of funds are adequate to meet anticipated needs, including those disclosed above, for the foreseeable future.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating leases, purchase obligations, and standby letters of credit disclosed within the contractual obligations table above in the “Liquidity and Capital Resources” section. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.
Backlog
Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:
|
| | | | | | | | | | | | |
| | | Backlog |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Rail Products and Services | | $ | 68,850 |
| | $ | 62,743 |
| | $ | 85,199 |
|
| Construction Products | | 71,318 |
| | 71,954 |
| | 45,371 |
|
| Tubular and Energy Services | | 26,737 |
| | 12,759 |
| | 34,137 |
|
| Total Backlog | | $ | 166,905 |
| | $ | 147,456 |
| | $ | 164,707 |
|
While a considerable portion of our business is backlog driven, certain businesses, including the Test and Inspection Services and the Rail Technologies business units, are not driven by backlog and therefore have insignificant levels of backlog throughout the year.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstance. Application of these accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies relate to the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements. There can be no assurance that actual results will not differ from those estimates. For a summary of our significant accounting policies, including those discussed below, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1 Summary of Significant Accounting Polices to the Consolidated Financial Statements.
Revenue Recognition - The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied: persuasive evidence of a sales arrangement exists; product delivery and transfer of title to the customer has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
Revenues for products under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products, the percentage-of-completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations.
Business Combinations, Goodwill, and Intangible Assets - We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a business is allocated to the underlying net assets of the acquired business based on estimates of their respective fair values. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected cash flows from customer relationships, the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio, future expected cash flows from developed technology, and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.
Intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The judgments made in determining the estimated fair values assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. Because this process involves management making estimates with respect to future revenues and market conditions and because these estimates also form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates.
Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss equal to the excess is recorded as a component of operations. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair values of the reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volume and pricing, costs to produce, and working capital changes. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
The Company considers historical experience and available information at the time the fair values of its reporting units are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, the Company may be exposed to impairment losses that could be material to our results of operations.
There were no goodwill impairments recorded during the year ended December 31, 2017. The Company recorded goodwill impairment charges of $61,142 and $80,337 during 2016 and 2015, respectively, related to reporting units within the Tubular and Energy Services and Rail Products and Services segment.
At December 31, 2017, the Company had $19,785 of goodwill on its Consolidated Balance Sheet. Of the total, $14,638 related to the Rail Products and Services segment and $5,147 related to the Construction Products segment. The Company recorded a $32,725 partial goodwill impairment related to the Rail Products and Services segment during the year ended December 31, 2016. Based on considerations of current year financial results, including consideration of macroeconomic conditions, such as performance of the Company's stock price, the segment's fair value was estimated to be in excess of its carrying value at December 31, 2017. However, the previously recorded partial impairment included assumptions for certain market recoveries throughout the years ended December 31, 2018 and beyond. If these recoveries do not fully develop, the Rail Products and Services segment may require an incremental goodwill impairment. Additional information concerning the impairments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 4 Goodwill and Other Intangible Assets, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7.
Intangible Assets, Long-Lived Assets, and Investments - The Company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The applicable guidance for assets held for use requires that, if the sum of the future expected cash flows associated with an asset, undiscounted and without interest charges, is less than the carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. The accounting estimate related to asset impairments is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the Consolidated Statements of Operations.
The fair value of the Company’s equity investments is dependent on the performance of the investee companies as well as volatility inherent in the external markets for these investments. In assessing potential impairment of these investments, we consider these factors as well as the forecasted financial performance of the investees. If these forecasts are not met and indicate an other-than-temporary decline in value, impairment charges may be required.
During 2017, the Company recorded an other-than-temporary impairment of $413 to its investment in L B Pipe and Coupling Products, LLC joint venture as the asset is held for sale at fair value. No other material impairments of intangible assets, long-lived assets, or investments were recored during the period ended December 31, 2017. The Company recorded definite-lived intangible asset impairments of $59,786 and property, plant and equipment impairment of $14,956 for the year ended December 31, 2016. The impairments related to the Tubular and Energy Services segment. There were no material impairments of intangible assets, long-lived assets, or investments for the years ended December 31, 2015.
Product Warranty - The Company maintains a current warranty for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales. For long-term construction projects, a product warranty accrual is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims. The underlying assumptions used to calculate the product warranty accrual can change from period to period and are dependent upon estimates of the amount and cost of future product repairs or replacements.
At December 31, 2017 and 2016, the product warranty reserve was $8,682 and $10,154, respectively. During the years ended December 31, 2017, 2016, and 2015, the Company recorded product warranty expense of $3,564, $2,524, and $1,794, respectively. For additional information regarding the Company’s product warranty, refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements, Commitments and Contingent Liabilities, included herein.
Contingencies and Litigation - The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period.
In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. When a probable, estimable exposure exists, the Company accrues an estimate of the probable costs for the resolution of these matters. These estimates are based upon an analysis of potential results, assuming a combination of litigation
and settlement strategies. During 2016, we recorded $900 in legal expense related to the anticipated settlement of an employment dispute. This settlement was finalized during 2017 for $797, resulting in an adjustment of $103. There were no such charges for the years ended December 31, 2015. Future results of operations could be materially affected by changes in our assumptions or the outcome of these proceedings.
The Company’s operations are subject to national, state, foreign, and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, regulated materials and waste. These regulations impose liability for the costs of investigation, remediation, and damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Liabilities are recorded when remediation efforts are probable and the costs can be reasonably estimated. Estimates are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Established reserves are periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 Commitments and Contingent Liabilities, to the Consolidated Financial Statements for additional information regarding the Company’s commitments and contingent liabilities.
Income Taxes - The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by Financial Accounting Standard’s Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. This guidance requires management to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. The determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires management to make estimates and judgments of future financial results.
The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters.
The Company’s income tax rate is significantly affected by the tax rate on global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. At December 31, 2017, management does not intend to repatriate accumulated foreign earnings of $2,318. Should we decide to repatriate these accumulated foreign earnings, the Company would have to accrue additional income and withholding taxes in the period in which it is determined that the earnings will no longer be indefinitely invested outside the United States.
Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 14 Income Taxes, included herein for additional information regarding the Company’s deferred tax assets. The Company’s ability to realize these tax benefits may affect the Company’s reported income tax expense and net income.
New Accounting Pronouncements - See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 Summary of Significant Accounting Policies, to the Consolidated Financial Statements, included herein for information regarding new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
Interest Rate Risk
In the ordinary course of business, the Company is exposed to interest rate risks that may adversely affect funding costs associated with its variable-rate debt. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward starting interest rate swap agreements, which effectively convert a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18 Fair Value Measurements, to the Consolidated Financial Statements included herein, for additional information.
For the year ended December 31, 2017, a 1% change in the interest rate for variable rate debt as of December 31, 2017 would increase or decrease interest expense by approximately $1,425.
The Company does not purchase or hold any derivative financial instruments for trading purposes. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.
The Company has entered into three forward starting LIBOR-based interest rate swap agreements with notional values totaling $50,000. At December 31, 2017, the interest rate swap asset was $222 compared to a liability of $334 at December 31, 2016.
Foreign Currency Exchange Rate Risk
The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-year period ended December 31, 2017.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of L.B. Foster Company and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L.B. Foster Company and Subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15 (a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990
Pittsburgh, Pennsylvania
February 28, 2018
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(In thousands, except share data)
|
| | | | | | | | |
| | | 2017 | | 2016 |
| ASSETS |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 37,678 |
| | $ | 30,363 |
|
| Accounts receivable - net | | 76,582 |
| | 66,632 |
|
| Inventories - net | | 97,543 |
| | 83,243 |
|
| Prepaid income tax | | 188 |
| | 14,166 |
|
| Other current assets | | 9,120 |
| | 5,200 |
|
| Total current assets | | 221,111 |
| | 199,604 |
|
| Property, plant, and equipment - net | | 96,096 |
| | 103,973 |
|
| Other assets: | | | | |
| Goodwill | | 19,785 |
| | 18,932 |
|
| Other intangibles - net | | 57,440 |
| | 63,519 |
|
| Investments | | 162 |
| | 4,031 |
|
| Other assets | | 1,962 |
| | 2,964 |
|
| Total assets | | $ | 396,556 |
| | $ | 393,023 |
|
| LIABILITIES AND STOCKHOLDERS' EQUITY |
| Current liabilities: | | | | |
| Accounts payable | | $ | 52,404 |
| | $ | 37,744 |
|
| Deferred revenue | | 10,136 |
| | 7,597 |
|
| Accrued payroll and employee benefits | | 11,888 |
| | 7,497 |
|
| Accrued warranty | | 8,682 |
| | 10,154 |
|
| Current maturities of long-term debt | | 656 |
| | 10,386 |
|
| Other accrued liabilities | | 9,764 |
| | 8,953 |
|
| Total current liabilities | | 93,530 |
| | 82,331 |
|
| Long-term debt | | 129,310 |
| | 149,179 |
|
| Deferred tax liabilities | | 9,744 |
| | 11,371 |
|
| Other long-term liabilities | | 17,493 |
| | 16,891 |
|
| Stockholders' equity: | | | | |
| Common stock, par value $0.01, authorized 20,000,000 shares; shares issued at December 31, 2017 and December 31, 2016, 11,115,779; shares outstanding at December 31, 2017 and December 31, 2016, 10,340,576 and 10,312,625, respectively | | 111 |
| | 111 |
|
| Paid-in capital | | 45,017 |
| | 44,098 |
|
| Retained earnings | | 137,780 |
| | 133,667 |
|
| Treasury stock — at cost, common stock, shares at December 31, 2017 and December 31, 2016, 775,203 and 803,154, respectively | | (18,662 | ) | | (19,336 | ) |
| Accumulated other comprehensive loss | | (17,767 | ) | | (25,289 | ) |
| Total stockholders' equity | | 146,479 |
| | 133,251 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 396,556 |
| | $ | 393,023 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THE THREE YEARS ENDED DECEMBER 31,
(In thousands, except share data)
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Sales of goods | | $ | 431,818 |
| | $ | 415,375 |
| | $ | 537,214 |
|
| Sales of services | | 104,559 |
| | 68,139 |
| | 87,309 |
|
| Total net sales | | 536,377 |
| | 483,514 |
| | 624,523 |
|
| Cost of goods sold | | 346,985 |
| | 331,437 |
| | 420,169 |
|
| Cost of services sold | | 86,140 |
| | 61,721 |
| | 70,701 |
|
| Total cost of sales | | 433,125 |
| | 393,158 |
| | 490,870 |
|
| Gross profit | | 103,252 |
| | 90,356 |
| | 133,653 |
|
| Selling and administrative expenses | | 80,521 |
| | 85,976 |
| | 92,648 |
|
| Amortization expense | | 6,992 |
| | 9,575 |
| | 12,245 |
|
| Asset impairments | | — |
| | 135,884 |
| | 80,337 |
|
| Interest expense | | 8,377 |
| | 6,551 |
| | 4,378 |
|
| Interest income | | (307 | ) | | (228 | ) | | (206 | ) |
| Equity (income) loss of nonconsolidated investments | | (6 | ) | | 1,290 |
| | 413 |
|
| Other income | | (367 | ) | | (1,523 | ) | | (5,585 | ) |
| | | 95,210 |
| | 237,525 |
| | 184,230 |
|
| Income (loss) before income taxes | | 8,042 |
| | (147,169 | ) | | (50,577 | ) |
| Income tax expense (benefit) | | 3,929 |
| | (5,509 | ) | | (6,132 | ) |
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) |
| Basic earnings (loss) per common share | | $ | 0.40 |
| | $ | (13.79 | ) | | $ | (4.33 | ) |
| Diluted earnings (loss) per common share | | $ | 0.39 |
| | $ | (13.79 | ) | | $ | (4.33 | ) |
| Dividends paid per common share | | $ | — |
| | $ | 0.12 |
| | $ | 0.16 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THE THREE YEARS ENDED DECEMBER 31,
(In thousands)
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation adjustment | | 6,024 |
| | (5,896 | ) | | (6,947 | ) |
| Unrealized gain (loss) on cash flow hedges, net of tax (benefit) of $0, ($54), and ($76) | | 426 |
| | (83 | ) | | (121 | ) |
| Pension and post-retirement benefit plans benefit (expense), net of tax expense (benefit): $159, ($491), and $208 | | 920 |
| | (1,671 | ) | | 631 |
|
| Reclassification of pension liability adjustments to earnings, net of tax expense of $5, $135, and $160* | | 152 |
| | 301 |
| | 389 |
|
| Other comprehensive income (loss) | | 7,522 |
| | (7,349 | ) | | (6,048 | ) |
| Comprehensive income (loss) | | $ | 11,635 |
| | $ | (149,009 | ) | | $ | (50,493 | ) |
|
| |
| * | Reclassifications out of accumulated other comprehensive income for pension obligations are reflected in selling and administrative expense. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE THREE YEARS ENDED DECEMBER 31,
(In thousands)
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) |
| Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: | | | | | | |
| Deferred income taxes | | (1,983 | ) | | 3,375 |
| | (14,582 | ) |
| Depreciation | | 12,849 |
| | 13,917 |
| | 14,429 |
|
| Amortization | | 6,992 |
| | 9,575 |
| | 12,245 |
|
| Asset impairments | | — |
| | 135,884 |
| | 80,337 |
|
| Equity (income) loss and remeasurement (gain) | | (6 | ) | | 1,290 |
| | (167 | ) |
| Loss (gain) on sales and disposals of property, plant, and equipment | | 18 |
| | 202 |
| | (2,064 | ) |
| Stock-based compensation | | 1,696 |
| | 1,346 |
| | 1,471 |
|
| Income tax deficiency (benefit) from stock-based compensation | | — |
| | 332 |
| | (253 | ) |
| Change in operating assets and liabilities: | | | | | | |
| Accounts receivable | | (9,217 | ) | | 11,959 |
| | 31,223 |
|
| Inventories | | (12,648 | ) | | 10,479 |
| | 4,331 |
|
| Other current assets | | 350 |
| | 1,380 |
| | 3,248 |
|
| Prepaid income tax | | 13,978 |
| | (13,035 | ) | | 1,134 |
|
| Other noncurrent assets | | 959 |
| | 59 |
| | (909 | ) |
| Dividends from L B Pipe & Coupling Products, LLC | | — |
| | — |
| | 90 |
|
| Accounts payable | | 14,600 |
| | (16,005 | ) | | (17,204 | ) |
| Deferred revenue | | 2,440 |
| | 984 |
| | (2,279 | ) |
| Accrued payroll and employee benefits | | 4,260 |
| | (2,676 | ) | | (5,136 | ) |
| Other current liabilities | | (588 | ) | | 1,432 |
| | (4,189 | ) |
| Other liabilities | | 1,559 |
| | (433 | ) | | (1,108 | ) |
| Net cash provided by operating activities | | 39,372 |
| | 18,405 |
| | 56,172 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Proceeds from the sale of property, plant, and equipment | | 1,462 |
| | 969 |
| | 5,339 |
|
| Capital expenditures on property, plant, and equipment | | (6,149 | ) | | (7,664 | ) | | (14,913 | ) |
| Acquisitions, net of cash acquired | | — |
| | — |
| | (196,001 | ) |
| Loans and capital contributions to equity method investment | | — |
| | (1,235 | ) | | — |
|
| Net cash used by investing activities | | (4,687 | ) | | (7,930 | ) | | (205,575 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Repayments of debt | | (182,718 | ) | | (155,427 | ) | | (161,068 | ) |
| Proceeds from debt | | 153,118 |
| | 146,243 |
| | 301,063 |
|
| Proceeds from exercise of stock options and stock awards | | — |
| | — |
| | 68 |
|
| Financing fees | | — |
| | (1,417 | ) | | (1,670 | ) |
| Treasury stock acquisitions | | (103 | ) | | (342 | ) | | (2,701 | ) |
| Cash dividends on common stock paid to shareholders | | — |
| | (1,244 | ) | | (1,656 | ) |
| Income tax (deficiency) benefit from stock-based compensation | | — |
| | (332 | ) | | 253 |
|
| Net cash (used) provided by financing activities | | (29,703 | ) | | (12,519 | ) | | 134,289 |
|
| Effect of exchange rate changes on cash and cash equivalents | | 2,333 |
| | (905 | ) | | (3,598 | ) |
| Net increase (decrease) in cash and cash equivalents | | 7,315 |
| | (2,949 | ) | | (18,712 | ) |
| Cash and cash equivalents at beginning of period | | 30,363 |
| | 33,312 |
| | 52,024 |
|
| Cash and cash equivalents at end of period | | $ | 37,678 |
| | $ | 30,363 |
| | $ | 33,312 |
|
| Supplemental disclosure of cash flow information: | | | | | | |
| Interest paid | | $ | 7,589 |
| | $ | 4,855 |
| | $ | 3,674 |
|
| Income taxes (received) paid | | $ | (11,189 | ) | | $ | 3,942 |
| | $ | 7,835 |
|
| Capital expenditures funded through financing agreements | | $ | — |
| | $ | — |
| | $ | 288 |
|
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common
Stock | | Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Accumulated
Other
Comprehensive
(Loss) Income | | Total |
| | | (In thousands, except share data) |
| Balance, January 1, 2015 | | $ | 111 |
| | $ | 48,115 |
| | $ | 322,672 |
| | $ | (23,118 | ) | | $ | (11,892 | ) | | $ | 335,888 |
|
| Net loss | | — |
| | — |
| | (44,445 | ) | | — |
| | — |
| | (44,445 | ) |
| Other comprehensive loss, net of tax: | |
| |
| |
| |
| |
| |
|
| Pension liability adjustment | | — |
| | — |
| | — |
| | — |
| | 1,020 |
| | 1,020 |
|
| Foreign currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | (6,947 | ) | | (6,947 | ) |
| Unrealized derivative loss on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | (121 | ) | | (121 | ) |
| Purchase of 80,512 common shares for treasury | | — |
| | — |
| | — |
| | (1,587 | ) | | — |
| | (1,587 | ) |
| Issuance of 59,113 common shares, net of shares withheld for taxes | | — |
| | (3,158 | ) | | — |
| | 2,114 |
| | — |
| | (1,044 | ) |
| Stock-based compensation and related excess tax benefit | | — |
| | 1,724 |
| | — |
| | — |
| | — |
| | 1,724 |
|
| Cash dividends on common stock paid to shareholders | | — |
| | — |
| | (1,656 | ) | | — |
| | — |
| | (1,656 | ) |
| Balance, December 31, 2015 | | 111 |
| | 46,681 |
| | 276,571 |
| | (22,591 | ) | | (17,940 | ) | | 282,832 |
|
| Net loss | | — |
| | — |
| | (141,660 | ) | | — |
| | — |
| | (141,660 | ) |
| Other comprehensive loss, net of tax: | |
| |
| |
| |
| |
| |
|
| Pension liability adjustment | | — |
| | — |
| | — |
| | — |
| | (1,370 | ) | | (1,370 | ) |
| Foreign currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | (5,896 | ) | | (5,896 | ) |
| Unrealized derivative loss on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | (83 | ) | | (83 | ) |
| Purchase of 5,000 common shares for treasury | | — |
| | — |
| | — |
| | (67 | ) | | — |
| | (67 | ) |
| Issuance of 96,619 common shares, net of shares withheld for taxes | | — |
| | (3,597 | ) | | — |
| | 3,322 |
| | — |
| | (275 | ) |
| Stock-based compensation and related excess tax benefit | | — |
| | 1,014 |
| | — |
| | — |
| | — |
| | 1,014 |
|
| Cash dividends on common stock paid to shareholders | | — |
| |
| | (1,244 | ) | | — |
| | — |
| | (1,244 | ) |
| Balance, December 31, 2016 | | 111 |
| | 44,098 |
| | 133,667 |
| | (19,336 | ) | | (25,289 | ) | | 133,251 |
|
| Net income | | — |
| | — |
| | 4,113 |
| | — |
| | — |
| | 4,113 |
|
| Other comprehensive income, net of tax: | |
| |
| |
| |
| |
| |
|
| Pension liability adjustment | | — |
| | — |
| | — |
| | — |
| | 1,072 |
| | 1,072 |
|
| Foreign currency translation adjustment | | — |
| | — |
| | — |
| | — |
| | 6,024 |
| | 6,024 |
|
| Unrealized derivative gain on cash flow hedges | | — |
| | — |
| | — |
| | — |
| | 426 |
| | 426 |
|
| Issuance of 27,951 common shares, net of shares withheld for taxes | | — |
| | (777 | ) | | — |
| | 674 |
| | — |
| | (103 | ) |
| Stock-based compensation | | — |
| | 1,696 |
| | — |
| | — |
| | — |
| | 1,696 |
|
| Balance, December 31, 2017 | | $ | 111 |
| | $ | 45,017 |
| | $ | 137,780 |
| | $ | (18,662 | ) | | $ | (17,767 | ) | | $ | 146,479 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data unless otherwise noted)
Note 1.
Summary of Significant Accounting Policies
Basis of financial statement presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, joint ventures, and partnerships in which a controlling interest is held. Inter-company transactions and accounts have been eliminated. The Company utilizes the equity method of accounting for companies where its ownership is less than or equal to 50% and significant influence exists.
Cash and cash equivalents
The Company considers cash and other instruments with maturities of three months or less, when purchased, to be cash and cash equivalents. The Company invests available funds in a manner to maximize returns, preserve investment principal, and maintain liquidity while seeking the highest yield available.
Cash and cash equivalents held in non-domestic accounts were $35,807 and $29,400 at December 31, 2017 and 2016, respectively. Included in non-domestic cash equivalents are investments in bank term deposits of approximately $17 and $16 at December 31, 2017 and 2016, respectively. The carrying amounts approximated fair value because of the short maturity of the instruments.
Inventories
Certain inventories are valued at the lower of the last-in, first-out (“LIFO”) cost or market. Approximately 50% in 2017 and 47% in 2016 of the Company’s inventory is valued at average cost or net realizable value, whichever is lower. Slow-moving inventory is reviewed and adjusted regularly, based upon product knowledge, physical inventory observation, and the age of the inventory. Inventory contains product costs, including inbound freight, direct labor, overhead costs relating to the manufacturing and distribution of products, and absorption costs representing the excess of manufacturing or production costs over the amounts charged to cost of sales or services.
Property, plant, and equipment
Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of 5 to 40 years for buildings and 2 to 10 years for machinery and equipment. Leasehold improvements are amortized over 5 to 13 years, which represent the lives of the respective leases or the lives of the improvements, whichever is shorter. Depreciation expense is recorded within “Cost of sales” and “Selling and administrative expenses" based upon the particular asset’s use. The Company reviews a long-lived asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company impaired $14,956 of property, plant, and equipment related to the Test and Inspection Services business unit within the Tubular and Energy Services segment during the year ended December 31, 2016. There were no material property, plant, and equipment impairments recorded for the years ended December 31, 2017 and 2015.
Maintenance, repairs, and minor renewals are charged to operations as incurred. Major renewals and betterments that substantially extend the useful life of the property are capitalized at cost. Upon sale or other disposition of assets, the costs and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in other income or loss.
Allowance for doubtful accounts
The allowance for doubtful accounts is recorded to reflect the ultimate realization of the Company’s accounts receivable and includes assessment of the probability of collection and the credit-worthiness of certain customers. Reserves for uncollectible accounts are recorded as part of "Selling and administrative expenses" on the Consolidated Statements of Operations. The Company reviews its accounts receivable aging and calculates an allowance through application of historic reserve factors to overdue receivables. This calculation is supplemented by specific account reviews performed by the Company’s credit department. As necessary, the application of the Company’s allowance rates to specific customers is reviewed and adjusted to more accurately reflect the credit risk inherent within that customer relationship.
Assets held for sale
The Company classifies assets as held for sale when management approves and commits to a formal plan of sale with the expectation the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.
Investments
Investments in companies in which the Company has the ability to exert significant influence, but not control, over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method. Under the equity method, investments are initially recorded at cost and adjusted for dividends and undistributed earnings and losses. The equity method of accounting requires a company to recognize a loss in the value of an equity method investment that is other than a temporary decline.
Goodwill and other intangible assets
Goodwill is tested annually for impairment or more often if there are indicators of impairment. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss equal to the excess is recorded as a component of operations. The Company performs its annual impairment tests as of October 1st.
No goodwill impairment was recognized during 2017. During 2016 and 2015, the Company identified certain triggering events that indicated an interim impairment test was required. As a result of the Company’s assessment, the Company recorded goodwill impairment of $61,142 and $80,337 during 2016 and 2015, respectively. The 2016 charges related to the full impairment of the Chemtec Energy Services (or “Precision Measurement Systems”) and Protective Coatings business units goodwill within the Tubular and Energy Services segment resulting from the Chemtec Energy Services acquisition in 2014 and the 2013 acquisition of Ball Winch, LLC and a partial impairment of the Rail Technologies business unit goodwill within the Rail Products and Services segments, respectively. The 2015 impairment charge related to the goodwill resulting from the acquisition of IOS (or “Test and Inspection Services”) and Chemtec Energy Services within the Tubular and Energy Services segment. The measurement of goodwill impairment is a Level 3 fair value measurement, since the primary assumptions, including estimates of future revenue growth, gross margin, and EBITDA margin, are not market observable and require management to make judgments regarding future outcomes. Additional information concerning the impairments is set forth in Note 4 Goodwill and Other Intangible Assets.
The Company has no indefinite-lived intangible assets. The Company reviews a long-lived intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. All 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 December 31, 2017. There were no definite-lived intangible asset impairments during the years ended December 31, 2017 and 2015. During the year ended December 31, 2016, the Company recorded a definite-lived intangible asset impairment of $59,786 related to the Chemtec Energy Services and Test and Inspection Services business units within the Tubular and Energy Services segment. See Note 4 Goodwill and Other Intangible Assets for additional information regarding the Company’s intangible assets.
Environmental remediation and compliance
Environmental remediation costs are accrued when the liability is probable and costs are estimable. Environmental compliance costs, which principally include the disposal of waste generated by routine operations, are expensed as incurred. Capitalized environmental costs, when appropriate, are depreciated over their useful life. Reserves are not reduced by potential claims for recovery and are not discounted. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Reserves are periodically reviewed throughout the year and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. See Note 19 Commitments and Contingent Liabilities, for additional information regarding the Company’s outstanding environmental and litigation reserves.
Earnings per share
Basic earnings per share is calculated by dividing net income by the weighted average of common shares outstanding during the year. Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and restricted stock utilizing the treasury stock method.
Revenue recognition
The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied: persuasive evidence of a sales arrangement exists; product delivery and transfer of title to the customer has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
Revenues for products and services under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products and services, the percentage of completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations. Costs in excess of billings are classified as work-in-process inventory. Projects with billings in excess of costs are recorded within deferred revenue.
Deferred revenue
Deferred revenue consists of customer billings or payments received for which the revenue recognition criteria have not yet been met as well as billings in excess of costs on percentage of completion projects. Advanced payments from customers typically relate to contracts with respect to which the Company has significantly fulfilled its obligations, but due to the Company’s continuing involvement with the project, revenue is precluded from being recognized until title, ownership, and risk of loss have passed to the customer.
Fair value of financial instruments
The Company’s financial instruments consist of cash equivalents, accounts receivable, accounts payable, interest rate swap agreements, and debt. The carrying amounts of the Company’s financial instruments at December 31, 2017 and 2016 approximate fair value. See Note 18 Fair Value Measurements, for additional information.
Stock-based compensation
The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation - Stock Compensation,” to account for the Company’s stock-based compensation. Under the guidance, stock-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. See Note 15 Stock-based Compensation, for additional information.
Product warranty
The Company maintains a current warranty liability for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales based upon historical experience. For long-lived construction products, a warranty is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims or due to changes in the Company’s historical warranty experience. At December 31, 2017 and 2016, the product warranty reserve was $8,682 and $10,154, respectively. See Note 19 Commitments and Contingencies for additional information regarding the product warranty.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax laws and rates expected to be in effect when such differences are recovered or settled. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date of the change.
The Company makes judgments regarding the recognition of deferred tax assets and the future realization of these assets. As prescribed by FASB ASC 740, “Income Taxes” and applicable guidance, valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The guidance requires the Company to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. The determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires the Company to make estimates and judgments of future financial results.
The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.
Foreign currency translation
The assets and liabilities of our foreign subsidiaries are measured using the local currency as the functional currency and are translated into U.S. dollars at exchange rates as of the balance sheet date. Income statement amounts are translated at the
weighted-average rates of exchange during the year. The translation adjustment is accumulated as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in determining net income. Included in net income or loss for the years ended December 31, 2017 and 2016 were foreign currency transaction losses of approximately $804 and $12, respectively, and a gain of $1,616 for the year ended December 31, 2015.
Research and development
The Company expenses research and development costs as costs are incurred. For the years ended December 31, 2017, 2016, and 2015, research and development expenses were $2,241, $3,511, and $3,937, respectively, and were principally related to the Company’s friction management and railroad monitoring system products within the Rail Products and Services segment.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Recently issued accounting guidance
In May 2014, the 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 will adopt the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. Revenue from the Company's product and service sales will continue to be recognized when products are shipped or services are rendered (i.e., point in time). Revenue from the Company's product and services provided under long-term agreements will continue to be recognized as the Company transfers control of the product or provides the service to its customers (i.e., over time), which approximates the previously used percentage-of-completion or completed contract methods of accounting. The adoption of ASU 2014-09 is not expected to have a material impact to the Company's financial position or results of operations; however, the Company will present the disclosures required by this new standard beginning with our 2018 interim financial reporting.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new accounting requirements include the accounting for, presentation of, and classification of leases. The guidance will result in most leases being capitalized as a right of use asset with a related liability on our balance sheets. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is in the process of analyzing the impact of ASU 2016-02 on our financial position. The Company has a significant number of operating leases, and, as a result, expects this guidance to have a material impact on its Condensed Consolidated Balance Sheet. The change will not affect the covenants of the Second Amendment to the Second Amended and Restated Credit Agreement dated March 13, 2015. The Company does not anticipate early adoption as it relates to ASU 2016-02.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory (Topic 740),” (“ASU 2016-16”) which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The ASU is effective on January 1, 2018. The Company continues to evaluate the impact this standard will have on the Company’s financial statements but believes there will not be a material change once adopted. The Company has not elected the early adoption of ASU 2016-16.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715)” (“ASU 2017-07”), which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires that the entity report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and report the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement separately from the service cost component and outside a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. The new standard will be effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company is evaluating its implementation approach and assessing the impact of ASU 2017-07 on the presentation of operations.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income,” (“ASU 2018-02”) that will permit companies the option to reclassify stranded tax effects caused by the newly-enacted US Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to
financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. Adoption of the ASU will be optional and companies will need to disclose if it elects not to adopt the ASU. The ASU will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption will be permitted, including adoption in any interim period, for financial statements that have not yet been issued or made available for issuance. Entities will have the option to apply the amendments retrospectively or to record the reclassification as of the beginning of the period of adoption.
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 or 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 Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718)” (“ASU 2016-09”), which simplifies the accounting for stock-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 Consolidated Financial Statements or interim goodwill testing.
Note 2.
Business Segments
The Company is a leading manufacturer and distributor of products and services for transportation and energy infrastructure with locations in North America and Europe. The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is produced internally that is subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon its segment profit contribution to the Company’s consolidated results.
The Company markets its products directly in all major industrial areas of the United States, Canada, and Europe, primarily through an internal sales force.
The Company’s Rail Products and Services segment provides a full line of new and used rail, trackwork, and accessories to railroads, mines, and other customers in the rail industry. The Rail Products and Services segment also designs and produces insulated rail joints, power rail, track fasteners, concrete railroad ties, coverboards, and special accessories for mass transit and other rail systems. In addition, the Rail Products and Services segment engineers, manufactures, and assembles friction management products and railway wayside data collection and management systems.
The Company’s Construction Products segment sells and rents steel sheet piling, H-bearing pile, and other piling products for foundation and earth retention requirements. The Construction Products segment also sells bridge decking, bridge railing, structural steel fabrications, expansion joints, bridge forms, and other products for highway construction and repair. Lastly, the Construction Products segment produces precast concrete buildings and a variety of specialty precast concrete products.
The Company’s Tubular and Energy Services segment provides pipe coatings for natural gas pipelines and utilities, upstream test and inspection services, and precision measurement systems for the oil and gas market, and produces threaded pipe products for the oil and gas markets as well as industrial water well and irrigation markets.
The following table illustrates net sales, profit (loss), assets, depreciation/amortization, and expenditures for long-lived assets of the Company by segment for the years ended or at December 31, 2017, 2016, and 2015. Segment profit is the earnings from operations before income taxes and includes internal cost of capital charges for net assets used in the segment at a rate of generally 1% per month excluding recently acquired businesses. The internal cost of capital charges are eliminated during the consolidation process. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the Company accounts for inventory on a First-In, First-Out (“FIFO”) basis at the segment level compared to a Last-In, First-Out (“LIFO”) basis at the consolidated level.
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 |
| | | Net Sales | | Segment Profit | | Segment Assets | | Depreciation/Amortization | | Expenditures for Long-Lived Assets |
| Rail Products and Services | | $ | 256,127 |
| | $ | 12,216 |
| | $ | 192,038 |
| | $ | 7,004 |
| | $ | 2,915 |
|
| Construction Products | | 161,801 |
| | 11,620 |
| | 83,154 |
| | 1,955 |
| | 1,390 |
|
| Tubular and Energy Services | | 118,449 |
| | 3,849 |
| | 100,706 |
| | 9,410 |
| | 1,282 |
|
| Total | | $ | 536,377 |
| | $ | 27,685 |
| | $ | 375,898 |
| | $ | 18,369 |
| | $ | 5,587 |
|
| | | | | | | | | | | |
| | | 2016 |
| | | Net Sales | | Segment (Loss) Profit* | | Segment Assets* | | Depreciation/Amortization | | Expenditures for Long-Lived Assets |
| Rail Products and Services | | $ | 239,127 |
| | $ | (26,228 | ) | | $ | 174,049 |
| | $ | 7,276 |
| | $ | 856 |
|
| Construction Products | | 145,602 |
| | 8,189 |
| | 81,074 |
| | 2,256 |
| | 687 |
|
| Tubular and Energy Services | | 98,785 |
| | (116,126 | ) | | 100,006 |
| | 12,644 |
| | 3,810 |
|
| Total | | $ | 483,514 |
| | $ | (134,165 | ) | | $ | 355,129 |
| | $ | 22,176 |
| | $ | 5,353 |
|
| | | | | | | | | | | |
| | | 2015 |
| | | Net Sales | | Segment Profit (Loss)** | | Segment Assets** | | Depreciation/Amortization | | Expenditures for Long-Lived Assets |
| Rail Products and Services | | $ | 328,982 |
| | $ | 27,037 |
| | $ | 241,222 |
| | $ | 8,098 |
| | $ | 4,273 |
|
| Construction Products | | 176,394 |
| | 12,958 |
| | 86,335 |
| | 2,720 |
| | 1,260 |
|
| Tubular and Energy Services | | 119,147 |
| | (81,344 | ) | | 216,715 |
| | 14,857 |
| | 4,303 |
|
| Total | | $ | 624,523 |
| | $ | (41,349 | ) | | $ | 544,272 |
| | $ | 25,675 |
| | $ | 9,836 |
|
|
| |
| * | Segment loss includes impairment of goodwill, definite-lived intangible assets, and property, plant, and equipment as further described in Note 4 Goodwill and Other Intangible Assets and Note 7 Property, Plant, and Equipment. |
|
| |
| ** | Segment loss includes impairment of goodwill as further described in Note 4 Goodwill and Other Intangible Assets. |
During 2017, 2016, and 2015, no single customer accounted for more than 10% of the Company’s consolidated net sales. Sales between segments are immaterial.
Reconciliations of reportable segment net sales, profits (losses), assets, depreciation/amortization, and expenditures for long-lived assets to the Company’s consolidated totals are as follows for the years ended and as of December 31:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Income (loss) from Operations: | | | | | | |
| Profit (loss) for reportable segments | | $ | 27,685 |
| | $ | (134,165 | ) | | $ | (41,349 | ) |
| Interest expense | | (8,377 | ) | | (6,551 | ) | | (4,378 | ) |
| Interest income | | 307 |
| | 228 |
| | 206 |
|
| Other income | | 367 |
| | 1,523 |
| | 5,585 |
|
| LIFO (expense) income | | (2,009 | ) | | 2,643 |
| | 2,468 |
|
| Equity in income (loss) of nonconsolidated investments | | 6 |
| | (1,290 | ) | | (413 | ) |
| Corporate expense, cost of capital elimination, and other unallocated charges | | (9,937 | ) | | (9,557 | ) | | (12,696 | ) |
| Income (loss) before income taxes | | $ | 8,042 |
| | $ | (147,169 | ) | | $ | (50,577 | ) |
| Assets: | | | | | | |
| Total for reportable segments | | $ | 375,898 |
| | $ | 355,129 |
| | $ | 544,272 |
|
| Unallocated corporate assets | | 25,845 |
| | 41,072 |
| | 28,209 |
|
| LIFO | | (5,187 | ) | | (3,178 | ) | | (5,821 | ) |
| Total Assets | | $ | 396,556 |
| | $ | 393,023 |
| | $ | 566,660 |
|
| Depreciation/Amortization: | | | | | | |
| Total for reportable segments | | $ | 18,369 |
| | $ | 22,176 |
| | $ | 25,675 |
|
| Other | | 1,472 |
| | 1,316 |
| | 999 |
|
| Total | | $ | 19,841 |
| | $ | 23,492 |
| | $ | 26,674 |
|
| Expenditures for Long-Lived Assets: | | | | | | |
| Total for reportable segments | | $ | 5,587 |
| | $ | 5,353 |
| | $ | 9,836 |
|
| Expenditures funded through financing agreements | | — |
| | — |
| | 288 |
|
| Other expenditures | | 562 |
| | 2,311 |
| | 5,077 |
|
| Total | | $ | 6,149 |
| | $ | 7,664 |
| | $ | 15,201 |
|
The following table summarizes the Company’s sales by major geographic region in which the Company has operations for the years ended December 31:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| United States | | $ | 431,868 |
| | $ | 390,930 |
| | $ | 522,404 |
|
| Canada | | 38,859 |
| | 30,644 |
| | 40,545 |
|
| United Kingdom | | 37,237 |
| | 37,188 |
| | 26,817 |
|
| Other | | 28,413 |
| | 24,752 |
| | 34,757 |
|
| | | $ | 536,377 |
| | $ | 483,514 |
| | $ | 624,523 |
|
The following table summarizes the Company’s long-lived assets by geographic region at December 31:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| United States | | $ | 89,439 |
| | $ | 96,650 |
| | $ | 118,053 |
|
| Canada | | 4,788 |
| | 5,445 |
| | 6,186 |
|
| United Kingdom | | 1,850 |
| | 1,842 |
| | 2,449 |
|
| Other | | 19 |
| | 36 |
| | 57 |
|
| | | $ | 96,096 |
| | $ | 103,973 |
| | $ | 126,745 |
|
The following table summarizes the Company’s sales by major product line:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Rail Technologies | | $ | 100,257 |
| | $ | 90,469 |
| | $ | 98,237 |
|
| Rail Distribution | | 90,696 |
| | 83,236 |
| | 126,277 |
|
| Piling | | 73,158 |
| | 70,535 |
| | 94,853 |
|
| Precast Concrete Products | | 55,877 |
| | 54,514 |
| | 52,044 |
|
| Test and Inspection Services | | 39,198 |
| | 20,765 |
| | 35,906 |
|
| Protective Coatings | | 38,096 |
| | 23,043 |
| | 33,532 |
|
| Fabricated Bridge | | 32,766 |
| | 20,553 |
| | 29,496 |
|
| Precision Measurement Systems | | 29,670 |
| | 42,830 |
| | 36,048 |
|
| Other products | | 76,659 |
| | 77,569 |
| | 118,130 |
|
| | | $ | 536,377 |
| | $ | 483,514 |
| | $ | 624,523 |
|
Note 3.
Acquisitions
TEW Plus, Ltd
On November 23, 2015, the Company acquired the 75% balance of the remaining shares of TEW Plus, Ltd (“Tew Plus”) for $2,130, net of cash acquired. Headquartered in Nottingham, UK, Tew Plus provides telecommunications and security systems to the railway and commercial markets. Their offerings include full installation services including: design, project management, survey, and commissioning along with future maintenance. The results of Tew Plus’ operations are included within the Rail Products and Services segment from the date of acquisition.
Inspection Oilfield Services
On March 13, 2015, the Company acquired IOS Holdings, Inc. (“IOS” or ”Test and Inspection Services”) for $167,404, net of cash acquired and a net working capital receivable adjustment of $2,363. The purchase agreement included an earn-out provision for the seller to generate an additional $60,000 of proceeds upon achieving certain levels of EBITDA during the three-year period that ended on December 31, 2017. The Company did not accrue an estimated earn-out obligation based upon a probability weighted valuation model of the projected EBITDA results, which indicated that the minimum target would not be achieved. Approximately $7,600 of the purchase price related to amounts held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Houston, TX, IOS is a leading independent provider of tubular management services with operations in every significant oil and gas producing region in the continental United States. The acquisition is included within our Tubular and Energy Services segment from the date of acquisition. See Note 4 Goodwill and Other Intangible Assets, with respect to an impairment of the goodwill related to this acquisition.
TEW Holdings, Ltd
On January 13, 2015, the Company acquired TEW Holdings, Ltd (“Tew”) for $26,467, net of cash acquired, working capital, and net debt adjustments totaling $4,200. The purchase price included approximately $600 which was held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Nottingham, UK, Tew provides application engineering solutions primarily to the rail market and other major industries. The results of Tew’s operations are included within the Rail Products and Services segment from the date of acquisition.
Acquisition Summary
Each transaction was accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles, which requires an acquiring entity to recognize, with limited exceptions, all of the assets acquired and liabilities assumed in a transaction at fair value as of the acquisition date. Goodwill primarily represents the value paid for each acquisition’s enhancement to the Company’s product and service offerings and capabilities, as well as a premium payment related to the ability to control the acquired assets.
No acquisition-related costs were incurred during the years ended December 31, 2017 and 2016. The Company incurred $760 of acquisition-related costs that are included in the results of operations within selling and administrative costs for the year ended December 31, 2015.
The following unaudited pro forma consolidated income statement presents the Company’s results as if the acquisitions of IOS and Tew had occurred on January 1, 2015. The 2015 pro forma results include the impact of the current year impairment of goodwill as further described in Note 4:
|
| | | | |
| | | Twelve months ended December 31, |
| | | 2015 |
| Net sales | | $ | 640,596 |
|
| Gross profit | | 138,123 |
|
| Net loss | | (44,399 | ) |
| Diluted loss per share | | |
| As Reported | | $ | (4.33 | ) |
| Pro forma | | $ | (4.32 | ) |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the dates of the acquisition:
|
| | | | | | | | | | | | |
| Allocation of Purchase Price | | November 23,
2015 - Tew Plus | | March 13,
2015 - IOS | | January 13,
2015 - Tew |
| Current assets | | $ | 4,420 |
| | $ | 19,877 |
| | $ | 12,125 |
|
| Other assets | | — |
| | 708 |
| | — |
|
| Property, plant, and equipment | | 47 |
| | 51,453 |
| * | 2,398 |
|
| Goodwill | | 822 |
| | 69,908 |
| * | 8,772 |
|
| Other intangibles | | 1,074 |
| | 50,354 |
| * | 14,048 |
|
| Liabilities assumed | | (3,597 | ) | | (23,596 | ) | | (6,465 | ) |
| Total | | $ | 2,766 |
| | $ | 168,704 |
| | $ | 30,878 |
|
|
| |
| * | See Note 4 Goodwill and Other Intangible Assets, and Note 7 Property, Plant, and Equipment, with respect to an impairment of property, plant, and equipment, intangible assets, and goodwill related to this acquisition. |
The following table summarizes the estimates of the fair values and amortizable lives of the identifiable intangible assets acquired:
|
| | | | | | | | | | | | |
| Intangible Asset | | November 23,
2015 - Tew Plus | | March 13,
2015 - IOS | | January 13,
2015 - Tew |
| Trade name | | $ | — |
| | $ | 2,641 |
| | $ | 870 |
|
| Customer relationships | | 817 |
| | 41,171 |
| | 10,035 |
|
| Technology | | 203 |
| | 4,364 |
| | 2,480 |
|
| Non-competition agreements | | 54 |
| | 2,178 |
| | 663 |
|
| Total identified intangible assets | | $ | 1,074 |
| | $ | 50,354 |
| ** | $ | 14,048 |
|
|
| |
| ** | See Note 4 Goodwill and Other Intangible Assets, with respect to an impairment of intangible assets related to this acquisition. |
Note 4.
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, 2015: | | $ | 48,188 |
| | $ | 5,147 |
| | $ | 28,417 |
| | $ | 81,752 |
|
| Foreign currency translation impact | | (1,524 | ) | | — |
| | — |
| | (1,524 | ) |
| Disposition | | (154 | ) | | — |
| | — |
| | (154 | ) |
| Impairment charges | | (32,725 | ) | | — |
| | (28,417 | ) | | (61,142 | ) |
| Balance at December 31, 2016: | | 13,785 |
| | 5,147 |
| | — |
| | 18,932 |
|
| Foreign currency translation impact | | 853 |
| | — |
| | — |
| | 853 |
|
| Balance at December 31, 2017: | | $ | 14,638 |
| | $ | 5,147 |
| | $ | — |
| | $ | 19,785 |
|
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 was recorded in connection with these evaluations for the twelve months ended December 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.
During the year ended December 31, 2016, various reporting units underperformed against their projections and revised their forecasts downward. The revised forecasts, which were primarily attributable to weakness in the rail and energy markets, indicated longer recovery horizons than we previously projected. In connection with the revisions to the longer term projections and a substantial decline in market capitalization, the Company concluded that these qualitative factors indicated that there was a more likely than not risk that the carrying value of goodwill exceeded its fair value.
As a result of the Company’s qualitative review, with the assistance of an independent valuation firm, the Company performed a quantitative interim test for impairment of goodwill as of June 1, 2016. The valuation included the use of both the income and market approaches. Greater weighting was applied to the income approach since the Company believes it is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. In addition, a lack of comparable market transactions has limited the availability of information necessary for the market approach.
The results of the test indicated that the Rail Technologies (within the Rail Products and Services segment), Chemtec (or “Precision Measurement Systems”), and Protective Coatings (Chemtec and Protective Coatings are within the Tubular and Energy Services segment) business units’ respective fair values were less than their carrying values. All other reporting units that maintain goodwill substantially exceeded their carrying value and were not at risk of impairment. As a result of the continued weakness in the commodity cycles impacting the energy and rail markets, the near term projections of the Rail Technologies, Chemtec, and Protective Coatings business units had deteriorated and the expected future growth of these business units was determined to be insufficient to support the carrying values.
The Company determined the implied fair values of the Rail Technologies, Chemtec, and Protective Coatings business units by using level 3 unobservable inputs, which incorporated assumptions that we believe would be a reasonable market participant’s view in a hypothetical purchase, to develop the discounted cash flows of the respective reporting units. Significant level 3 inputs included estimates of future revenue growth, gross margin and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The resulting fair values of each reporting unit were allocated to the assets and liabilities of the respective reporting unit as if each reporting unit had been acquired in a business combination as of the test date and the fair value was the purchase price paid to acquire each reporting unit. The results of the step 2 analysis indicated that the carrying amounts of the goodwill of Rail Technologies, Chemtec, and Protective Coatings exceeded the implied fair values of that goodwill. Accordingly, the Company recognized a non-cash goodwill impairment of $61,142, which represented the full impairment of goodwill within the Chemtec and Protective Coatings business units and approximately 68% of Rail Technologies goodwill. No additional impairments were triggered as a result of the Company’s 2016 annual impairment test.
At December 31, 2017, approximately $14,638 of the Company’s goodwill balance is allocated to the Rail Technologies business unit within the Rail Products and Services reportable segment.
In 2015, the Company compared the implied fair values of the IOS (or “Test and Inspection Services”) and Chemtec goodwill amounts to the carrying amounts of that goodwill. The fair values of the IOS and Chemtec business units were allocated to all of the assets and liabilities of the respective reporting unit as if IOS and Chemtec had been acquired in business combinations as of the test date and the fair value was the purchase price paid to acquire each reporting unit. As a result of this
valuation, it was determined that the carrying amounts of IOS’s and Chemtec’s goodwill exceeded the implied fair values of that goodwill. The Company recognized a non-cash goodwill impairment charge of $80,337 to write down the carrying values to the implied fair values, of which $69,908 represented the full carrying value of goodwill related to the IOS acquisition and the remaining $10,429 related to the Chemtec reporting unit. No additional impairments were triggered as a result of the Company’s 2015 annual impairment test.
At December 31, 2017, the Company had an aggregate goodwill impairment of $141,479, which was related to the 2016 and 2015 write downs.
The following table represents the gross definite-lived intangible assets balance by reportable segment at December 31:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Rail Products and Services | | $ | 57,654 |
| | $ | 56,476 |
|
| Construction Products | | 1,348 |
| | 1,348 |
|
| Tubular and Energy Services | | 29,179 |
| | 29,179 |
|
| | | $ | 88,181 |
| | $ | 87,003 |
|
During the year ended December 31, 2017, based on the Company's review of impairment indicators, there was no test performed on the recoverability of our definite-lived intangible assets. There were no definite-lived intangible asset impairments recorded during the years ended December 31, 2017 or 2015.
During the year ended December 31, 2016, the results of our testing indicated that the long-lived assets related to the IOS and Chemtec business units, within the Tubular and Energy Services segment, had carrying values in excess of the asset groups’ fair value. Based upon level 3 unobservable inputs, the Company incorporated assumptions that it believes would be a reasonable market participant’s view in a hypothetical purchase, to develop the discounted cash flows. Significant level 3 inputs included estimates of future revenue growth, gross margin and EBITDA. As a result of the analysis, the Company recorded a $42,982 non-cash impairment of definite-lived intangible assets related to the IOS business unit and a $16,804 non-cash impairment of definite-lived intangible assets related to the Chemtec business unit.
The components of the Company’s intangible assets are as follows at:
|
| | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Weighted Average
Amortization
Period In Years | | Gross
Carrying
Value | | Accumulated
Amortization | | Net
Carrying
Amount |
| Non-compete agreements | | 5 | | $ | 4,238 |
| | $ | (3,100 | ) | | $ | 1,138 |
|
| Patents | | 10 | | 389 |
| | (164 | ) | | 225 |
|
| Customer relationships | | 17 | | 37,679 |
| | (9,171 | ) | | 28,508 |
|
| Trademarks and trade names | | 14 | | 10,085 |
| | (4,091 | ) | | 5,994 |
|
| Technology | | 14 | | 35,790 |
| | (14,215 | ) | | 21,575 |
|
| | | | | $ | 88,181 |
| | $ | (30,741 | ) | | $ | 57,440 |
|
| | | | | | | | | |
| | | December 31, 2016 |
| | | Weighted Average
Amortization
Period In Years | | Gross
Carrying
Value | | Accumulated
Amortization | | Net
Carrying
Amount |
| Non-compete agreements | | 5 | | $ | 4,219 |
| | $ | (2,217 | ) | | $ | 2,002 |
|
| Patents | | 10 | | 373 |
| | (143 | ) | | 230 |
|
| Customer relationships | | 18 | | 36,843 |
| | (6,582 | ) | | 30,261 |
|
| Trademarks and trade names | | 14 | | 10,018 |
| | (3,238 | ) | | 6,780 |
|
| Technology | | 14 | | 35,550 |
| | (11,304 | ) | | 24,246 |
|
| | | | | $ | 87,003 |
| | $ | (23,484 | ) | | $ | 63,519 |
|
Intangible assets are amortized over their useful lives ranging from 4 to 25 years, with a total weighted average amortization period of approximately 15 years. Amortization expense for the years ended December 31, 2017, 2016, and 2015 was $6,992, $9,575, and $12,245, respectively.
Estimated amortization expense for the years 2018 and thereafter is as follows:
|
| | | | |
| | | Amortization
Expense |
| 2018 | | $ | 7,036 |
|
| 2019 | | 6,314 |
|
| 2020 | | 5,991 |
|
| 2021 | | 5,971 |
|
| 2022 | | 5,904 |
|
| 2023 and thereafter | | 26,224 |
|
| | | $ | 57,440 |
|
Note 5.
Accounts Receivable
Accounts receivable at December 31, 2017 and 2016 are summarized as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Trade | | $ | 74,514 |
| | $ | 64,707 |
|
| Allowance for doubtful accounts | | (2,151 | ) | | (1,417 | ) |
| | | 72,363 |
| | 63,290 |
|
| Other | | 4,219 |
| | 3,342 |
|
| | | $ | 76,582 |
| | $ | 66,632 |
|
The Company’s customers are principally in the transportation and energy infrastructure sectors. At December 31, 2017 and 2016, trade receivables, net of allowance for doubtful accounts, from customers were as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Rail Products and Services | | $ | 31,225 |
| | $ | 29,552 |
|
| Construction Products | | 20,070 |
| | 20,531 |
|
| Tubular and Energy Services | | 21,068 |
| | 13,207 |
|
| | | $ | 72,363 |
| | $ | 63,290 |
|
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices.
Note 6.
Inventory
Inventories at December 31, 2017 and 2016 are summarized in the following table:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Finished goods | | $ | 55,846 |
| | $ | 46,673 |
|
| Work-in-process | | 29,379 |
| | 21,716 |
|
| Raw materials | | 17,505 |
| | 18,032 |
|
| Total inventories at current costs | | 102,730 |
| | 86,421 |
|
| Less: LIFO reserve | | (5,187 | ) | | (3,178 | ) |
| | | $ | 97,543 |
| | $ | 83,243 |
|
At December 31, 2017 and 2016, approximately 50% and 53% of the Company’s inventory was valued at the lower of LIFO cost or market. At December 31, 2017 and 2016, the LIFO carrying value of inventories for book purposes exceeded the LIFO value for tax purposes by approximately $10,694 and $8,925, respectively. At December 31, 2017, liquidation of certain LIFO inventory layers carried at costs that were lower than the costs of current purchases resulted in a decrease in cost of goods sold of $16 and at December 31, 2016 and 2015 liquidation of certain LIFO inventory layers carried at costs that were higher than the costs of their current purchases resulted in an increase in cost of goods sold of $1,304 and $115, respectively.
Note 7.
Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2017 and 2016 consist of the following:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Land | | $ | 14,869 |
| | $ | 14,826 |
|
| Improvements to land and leaseholds | | 17,415 |
| | 17,408 |
|
| Buildings | | 34,929 |
| | 33,910 |
|
| Machinery and equipment, including equipment under capitalized leases | | 120,806 |
| | 118,060 |
|
| Construction in progress | | 1,057 |
| | 1,291 |
|
| | | 189,076 |
| | 185,495 |
|
| Less: accumulated depreciation and amortization, including accumulated amortization of capitalized leases | | 92,980 |
| | 81,522 |
|
| | | $ | 96,096 |
| | $ | 103,973 |
|
There were no impairments of property, plant, and equipment recorded during the years ended December 31, 2017 or 2015.
During the year ended December 31, 2016, the Company performed recoverability tests on reporting units when it was more likely than not that the carrying value of the long-lived asset group would not be recoverable. The results of our testing indicated that the long-lived assets related to the IOS business, within the Tubular and Energy Services segment, had carrying values in excess of the asset groups’ fair value. Based upon level 3 unobservable inputs, the Company incorporated assumptions that it believes would be a reasonable market participant’s view in a hypothetical purchase, to develop the discounted cash flows. Significant level 3 inputs included estimates of future revenue growth, gross margin, and EBITDA. As a result of the analysis, the Company recorded a $14,956 non-cash impairment of property, plant and equipment related to the IOS business.
Depreciation expense, including amortization of assets under capital leases, for the years ended December 31, 2017, 2016, and 2015 amounted to $12,849, $13,917, and $14,429, respectively.
Note 8.
Investments
The Company is a member of a joint venture, L B Pipe and Coupling Products, LLC (“L B Pipe JV”), in which it maintains a 45% ownership interest. L B Pipe JV manufactures, markets, and sells various machined components and precision coupling products for the energy, water well, and construction markets and is scheduled to terminate on June 30, 2019.
Under applicable guidance for variable interest entities in FASB ASC 810, “Consolidation,” the Company previously determined that L B Pipe JV was a variable interest entity. The Company concluded that it was not the primary beneficiary of the variable interest entity, as the Company did not have a controlling financial interest and did not have the power to direct the activities that most significantly impact the economic performance of L B Pipe JV.
During the year ended December 31, 2017, pursuant to the limited liability company agreement, the Company determined to sell its 45% ownership to the other 45% equity holder and no longer classified the L B Pipe JV as a variable interest entity. The Company concluded that it has met the criteria under applicable guidance for a long-lived asset to be held for sale, and has, accordingly, reclassified L B Pipe JV investment of $3,875 as a current asset held for sale within "Other current assets" on the Consolidated Balance Sheet. During 2017, the asset was remeasured to its fair market value. The difference between the fair market value, $3,875, and the Company's carrying amount, $4,288, resulted in a $413 other-than-temporary impairment for the twelve months ended December 31, 2017. The Company performed recoverability tests over its nonconsolidated equity method investments and concluded that the fair values exceeded the carrying values and no impairment was recorded by the Company during the years ended December 31, 2016 or 2015.
During the years ended December 31, 2017 and 2016, each of the L B Pipe JV members received proportional distributions from L B Pipe JV. During 2016, the Company and the other 45% member each executed a revolving line of credit with L B Pipe JV with an available limit of $1,350. The Company and the other 45% member each loaned $1,235 to L B Pipe JV in an effort to maintain compliance with L B Pipe JV’s debt covenants with an unaffiliated bank. Pursuant to the sale agreement, the Company is to receive its outstanding loan balance, including applicable interest, upon its sale of L B Pipe JV.
The Company recorded equity in the income of L B Pipe JV of approximately $386 and losses of $1,345 and $410 for the years ended December 31, 2017, 2016, and 2015, respectively.
At December 31, 2017 and 2016, the Company had a nonconsolidated equity method investment of $3,875, recorded as an asset held for sale in “Other current assets,” and $3,902, recorded in “Investments,” respectively, in L B Pipe JV and other investments totaling $162 and $129 at December 31, 2017 and 2016, respectively.
The Company is leasing five acres of land and two facilities to L B Pipe JV through June 30, 2019, with a 5.5-year renewal period. The current monthly lease payments, including interest, approximate $17, with a balloon payment of approximately $488, which is required to be paid 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 FASB ASC 840-30, “Leases.”
The following is a schedule of the direct financing minimum lease payments for the years 2017 and thereafter:
|
| | | | |
| | | Minimum Lease Payments |
| 2018 | | $ | 150 |
|
| 2019 | | 585 |
|
| | | $ | 735 |
|
The Company’s exposure to loss results from its capital contributions, net of the Company’s share of L B Pipe JV’s income or loss, its revolving line of credit, and its net investment in the direct financing lease covering the facility used by L B Pipe JV for its operations. The carrying amounts with the maximum exposure to loss of the Company at December 31, 2017 and 2016, respectively, are as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| LB Pipe JV equity method investment | | $ | 3,875 |
| | $ | 3,902 |
|
| Revolving line of credit | | 1,235 |
| | 1,235 |
|
| Net investment in direct financing lease | | 735 |
| | 871 |
|
| | | $ | 5,845 |
| | $ | 6,008 |
|
Note 9.
Deferred Revenue
Deferred revenue of $10,136 and $7,597 at December 31, 2017 and 2016, respectively, consists of customer billings or payments received for which the revenue recognition criteria have not yet been met as well as billings in excess of costs on percentage of completion projects. Advanced payments from customers typically relate to contracts with respect to which the Company has significantly fulfilled its obligations, but due to the Company’s continuing involvement with the project, revenue is precluded from being recognized until title, ownership, and risk of loss have passed to the customer.
Note 10.
Long-Term Debt and Related Matters
Long-term debt at December 31, 2017 and 2016 consists of the following:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Revolving credit facility with an interest rate of 4.78% at December 31, 2017 and 4.22% at December 31, 2016 | | $ | 128,470 |
| | $ | 127,073 |
|
| Term loan payable in quarterly installments through January 1, 2020 with an interest rate of 3.92% at December 31, 2016 | | — |
| | 30,000 |
|
| Financing agreement payable in installments through July 1, 2017 with an interest rate of 3.00% at December 31, 2016 | | — |
| | 534 |
|
| Lease obligations payable in installments through 2020 with a weighted average interest rate of 3.21% at December 31, 2017 and 3.10% at December 31, 2016 | | 1,496 |
| | 1,958 |
|
| Total | | 129,966 |
| | 159,565 |
|
| Less current maturities | | 656 |
| | 10,386 |
|
| Long-term portion | | $ | 129,310 |
| | $ | 149,179 |
|
The maturities of long-term debt are as follows:
|
| | | | |
| | | December 31, 2017 |
| 2018 | | $ | 656 |
|
| 2019 | | 576 |
|
| 2020 | | 128,734 |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 and thereafter | | — |
|
| Total | | $ | 129,966 |
|
Borrowings
United States
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 (“Term Loan”). The Term Loan was subject to quarterly straight line amortization until the scheduled maturity of January 1, 2020. Furthermore, certain matters, including excess cash flow, asset sales, and equity issuances, triggered mandatory prepayments to the Term Loan. Term Loan borrowings were not available to draw upon following repayment. During 2017, the Company paid off the balance of the Term Loan. 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 ending June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ending September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility of March 13, 2020. The Second Amendment also includes a Minimum Last Twelve Months EBITDA covenant (“Minimum EBITDA”). For the quarter ended December 31, 2016 through the quarter ended June 30, 2017, the Minimum EBITDA had to be at least $18,500. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement will increase by various increments. The incremental Minimum EBITDA requirement for the period ended December 31, 2017 was at least $25,000. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the credit agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter ended December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit facility. The final financial covenant included in the Second Amendment is a Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ending June 30, 2018.
The Second Amendment includes several changes to certain non-financial covenants as defined in the Credit Agreement. Through the maturity date of the agreement, the Company has been prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Company’s stock was decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales was 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 December 31, 2017, the Company was in compliance with the covenants in the Second Amendment.
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 ending March 31, 2018, the Company will be locked into the highest tier of the pricing grid which provides for pricing of the prime rate plus 225 basis points on base rate loans and the applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of the credit facility, the Company’s position on the pricing grid will be governed by a Minimum Net Leverage ratio which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018 the Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing
grid, pricing will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans.
At December 31, 2017 and 2016, the Company had outstanding letters of credit of approximately $425 and had net available borrowing capacity of $41,105 and $67,502, respectively. 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 that includes an overdraft availability of £1,500 pounds sterling (approximately $2,027 at December 31, 2017). This credit facility supports the United Kingdom’s working capital requirements and is collateralized by substantially all of the assets of the subsidiary's operations. The interest rate on this facility is the financial institution’s base rate plus 2.50%. Outstanding performance bonds reduce availability under this credit facility. There were no outstanding borrowings under this credit facility at December 31, 2017, however, there were $533 in outstanding guarantees (as defined in the underlying agreement) at December 31, 2017. This credit facility was renewed and amended during the fourth quarter of 2017 with all underlying terms and conditions remaining unchanged as a result of the renewal. It is the Company’s intention to renew this credit facility with NatWest Bank during the annual review in 2018.
The United Kingdom loan agreements contain certain financial covenants that require the subsidiary to maintain senior interest and cash flow coverage ratios. The subsidiary was in compliance with these financial covenants at December 31, 2017 and 2016. The subsidiary had available borrowing capacity of $1,494 and $1,650 at December 31, 2017 and 2016, respectively.
Note 11.
Stockholders’ Equity
The Company had authorized shares of 20,000,000 in common stock with 11,115,779 shares issued at December 31, 2017 and 2016. The common stock has a par value of $0.01 per share and the Company paid dividends of $0.04 per share for each of the first three quarters of 2016 and suspended dividend payments during the fourth quarter of 2016, which continued throughout 2017.
At December 31, 2017 and 2016, the Company had authorized shares of 5,000,000 in preferred stock. No preferred stock has been issued. No par value has been assigned to the preferred stock.
On December 4, 2013, the Company’s Board of Directors authorized the purchase of up to $15,000 in shares of its common stock through a share repurchase program at prevailing market prices or privately negotiated transactions. The Company repurchased 80,512 shares, for an aggregate price of $1,587, during 2015 under the repurchase program. On December 9, 2015, the Board of Directors authorized the repurchase of up to $30,000 of the Company’s common shares until December 31, 2017. This authorization became effective January 1, 2016 and replaced the prior authorization. The Second Amendment limits the amount of common shares that the Company can repurchase. The Company repurchased 5,000 shares, for an aggregate price of $67, during 2016 under the repurchase program. There were no repurchases under the program for the year ended December 31, 2017. Approximately $29,933 remained of our $30,000 share repurchase program that was announced December 9, 2015 and expired on December 31, 2017.
At December 31, 2017 and 2016, the Company withheld 7,277 and 20,186 shares for approximately $103 and $275, respectively, from employees to pay their withholding taxes in connection with the exercise and/or vesting of stock options and restricted stock awards.
Cash dividends of $0, $1,244, and $1,656 were declared and paid in 2017, 2016, and 2015, respectively.
|
| | | | | | |
| | | Common Stock |
| | | Treasury | | Outstanding |
| Share Activity | | (Number of Shares) |
| Balance at end of 2014 | | 873,374 |
| | 10,242,405 |
|
| Issued for stock-based compensation plans | | (59,113 | ) | | 59,113 |
|
| Repurchased common stock | | 80,512 |
| | (80,512 | ) |
| Balance at end of 2015 | | 894,773 |
| | 10,221,006 |
|
| Issued for stock-based compensation plans | | (96,619 | ) | | 96,619 |
|
| Repurchased common stock | | 5,000 |
| | (5,000 | ) |
| Balance at end of 2016 | | 803,154 |
| | 10,312,625 |
|
| Issued for stock-based compensation plans | | (27,951 | ) | | 27,951 |
|
| Balance at end of 2017 | | 775,203 |
| | 10,340,576 |
|
Note 12.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, for the years ended December 31, 2017 and 2016, are as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Pension and post-retirement benefit plan adjustments | | $ | (3,367 | ) | | $ | (4,439 | ) |
| Unrealized gain (loss) on interest rate swap contracts | | 222 |
| | (204 | ) |
| Foreign currency translation adjustments | | (14,622 | ) | | (20,646 | ) |
| | | $ | (17,767 | ) | | $ | (25,289 | ) |
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non U.S. subsidiaries. See Note 14 Income Taxes for further information.
Note 13.
Earnings Per Common Share
(Share amounts in thousands)
The following table sets forth the computation of basic and diluted earnings per common share for the three years ended December 31:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Numerator for basic and diluted earnings (loss) per common share: | | | | | | |
| Net income (loss) | | $ | 4,113 |
| | $ | (141,660 | ) | | $ | (44,445 | ) |
| Denominator: | | | | | | |
| Weighted average shares outstanding | | 10,334 |
| | 10,273 |
| | 10,254 |
|
| Denominator for basic earnings per common share | | 10,334 |
| | 10,273 |
| | 10,254 |
|
| Effect of dilutive securities: | | | | | | |
| Stock compensation plans | | 149 |
| | — |
| | — |
|
| Dilutive potential common shares | | 149 |
| | — |
| | — |
|
| Denominator for diluted earnings per common share - adjusted weighted average shares outstanding and assumed conversions | | 10,483 |
| | 10,273 |
| | 10,254 |
|
| Basic earnings (loss) per common share | | $ | 0.40 |
| | $ | (13.79 | ) | | $ | (4.33 | ) |
| Diluted earnings (loss) per common share | | $ | 0.39 |
| | $ | (13.79 | ) | | $ | (4.33 | ) |
| Dividends paid per common share | | $ | — |
| | $ | 0.12 |
| | $ | 0.16 |
|
There were 143 and 130 anti-dilutive shares in 2016 and 2015, respectively, that were excluded from the above calculation.
Note 14.
Income Taxes
Income (loss) before income taxes, as shown in the accompanying consolidated statements of operations, includes the following components:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Domestic | | $ | 2,072 |
| | $ | (151,027 | ) | | $ | (55,061 | ) |
| Foreign | | 5,970 |
| | 3,858 |
| | 4,484 |
|
| Income (loss) from operations, before income taxes | | $ | 8,042 |
| | $ | (147,169 | ) | | $ | (50,577 | ) |
Significant components of the provision for income taxes are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Federal | | $ | 2,630 |
| | $ | (9,980 | ) | | $ | 5,571 |
|
| State | | 822 |
| | (487 | ) | | 1,540 |
|
| Foreign | | 2,460 |
| | 1,583 |
| | 1,339 |
|
| Total current | | 5,912 |
| | (8,884 | ) | | 8,450 |
|
| Deferred: | | | | | | |
| Federal | | (1,559 | ) | | 2,555 |
| | (12,016 | ) |
| State | | 17 |
| | 706 |
| | (2,014 | ) |
| Foreign | | (441 | ) | | 114 |
| | (552 | ) |
| Total deferred | | (1,983 | ) | | 3,375 |
| | (14,582 | ) |
| Total income tax expense (benefit) | | $ | 3,929 |
| | $ | (5,509 | ) | | $ | (6,132 | ) |
The reconciliation of income tax computed at statutory rates to income tax expense (benefit) is as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Statutory rate | | $ | 2,815 |
| | 35.0 | % | | $ | (51,509 | ) | | 35.0 | % | | $ | (17,702 | ) | | 35.0 | % |
| Foreign tax rate differential | | (717 | ) | | (8.9 | ) | | (485 | ) | | 0.3 |
| | (419 | ) | | 0.8 |
|
| State income taxes, net of federal benefit | | 368 |
| | 4.6 |
| | (2,893 | ) | | 2.0 |
| | (159 | ) | | 0.3 |
|
| Non-deductible goodwill impairment | | — |
| | — |
| | 11,448 |
| | (7.8 | ) | | 12,737 |
| | (25.2 | ) |
| Non-deductible expenses | | 323 |
| | 4.0 |
| | 262 |
| | (0.2 | ) | | 452 |
| | (0.9 | ) |
| Domestic production activities deduction | | (405 | ) | | (5.0 | ) | | 700 |
| | (0.5 | ) | | (507 | ) | | 1.0 |
|
| U.S. Tax Cuts and Jobs Act: remeasurement of deferred taxes | | 10,260 |
| | 127.6 |
| | — |
| | — |
| | — |
| | — |
|
| U.S. Tax Cuts and Jobs Act: deferred foreign earnings | | 4,009 |
| | 49.9 |
| | — |
| | — |
| | — |
| | — |
|
| Tax on unremitted foreign earnings | | (6,712 | ) | | (83.5 | ) | | 7,932 |
| | (5.4 | ) | | — |
| | — |
|
| Change in valuation allowance | | (6,023 | ) | | (74.9 | ) | | 29,719 |
| | (20.2 | ) | | — |
| | — |
|
| Other | | 11 |
| | 0.1 |
| | (683 | ) | | 0.5 |
| | (534 | ) | | 1.1 |
|
| Total income tax expense (benefit) / Effective rate | | $ | 3,929 |
| | 48.9 | % | | $ | (5,509 | ) | | 3.7 | % | | $ | (6,132 | ) | | 12.1 | % |
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Goodwill and other intangibles | | $ | 19,324 |
| | $ | 32,699 |
|
| Pension and post-retirement liability | | 1,532 |
| | 2,186 |
|
| Warranty reserve | | 2,060 |
| | 3,633 |
|
| Deferred compensation | | 2,385 |
| | 1,227 |
|
| Contingent liabilities | | 1,669 |
| | 2,336 |
|
| Net operating loss / tax credit carryforwards | | 1,816 |
| | 1,384 |
|
| Other | | 1,442 |
| | 2,190 |
|
| Total deferred tax assets | | 30,228 |
| | 45,655 |
|
| Less: valuation allowance | | (23,696 | ) | | (29,719 | ) |
| Net deferred tax assets | | 6,532 |
| | 15,936 |
|
| Deferred tax liabilities: | | | | |
| Goodwill and other intangibles | | (5,721 | ) | | (6,087 | ) |
| Depreciation | | (7,079 | ) | | (10,586 | ) |
| Unremitted earnings of foreign subsidiaries | | (1,220 | ) | | (7,932 | ) |
| Inventories | | (1,743 | ) | | (1,506 | ) |
| Other | | (513 | ) | | (1,196 | ) |
| Total deferred tax liabilities | | (16,276 | ) | | (27,307 | ) |
| Net deferred tax liabilities | | $ | (9,744 | ) | | $ | (11,371 | ) |
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. The provisional tax benefit related to the remeasurement of certain deferred tax assets and liabilities was $1,508, and was included as a component of income tax expense from continuing operations. The provisional tax expense related to the one-time transition tax on mandatory deemed repatriation of foreign earnings, and related items, was $3,298 based on cumulative foreign earnings of $65,113 and was also included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. Our estimates may be adjusted in future periods throughout 2018 as we gain a more thorough understanding of the tax law, as further guidance is issued, and as we evaluate our income tax accounting policies with regard to certain provisions of the Act.
A provisional estimate could not be made for the global intangible low-taxed income ("GILTI") provisions of the Act, as the Company has not yet completed its assessment or elected an accounting policy to either recognize deferred taxes for basis differences expected to reverse as GILTI or to record GILTI as period costs if and when incurred. Additional information is necessary to prepare a more detailed analysis of the Company's deferred tax assets and liabilities and historical foreign earnings, as well as potential correlative adjustments.
Each quarter, management reviews operations and liquidity needs in each jurisdiction to assess the Company’s intent to reinvest foreign earnings outside of the United States. At December 31, 2017, management determined that cash balances of its Canadian and United Kingdom subsidiaries exceeded projected capital needs by $30,200. Management does not intend for such amounts to be permanently reinvested outside of the United States and has therefore accrued foreign withholding taxes of $1,220 at December 31, 2017.
At December 31, 2017, the Company has not recorded deferred U.S. income taxes or foreign withholding taxes on remaining undistributed foreign earnings of $2,318. It is management's intent and practice to indefinitely reinvest such earnings outside of the United States. Determination of the amount of any unrecognized deferred income tax liability associated with these undistributed earnings is not practicable because of the complexities of the hypothetical calculation.
A valuation allowance is required to be established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has
considered all available evidence, both positive and negative, in assessing the need for a valuation allowance in each jurisdiction.
The negative evidence considered in evaluating U.S. deferred tax assets included cumulative financial losses over the three-year period ended December 31, 2017 and the inability to consistently achieve forecasted results. Positive evidence considered included the composition and reversal patterns of existing taxable and deductible temporary differences between financial reporting and tax, as well as the composition of financial losses. Cumulative financial losses over the three-year period ended December 31, 2017 were a significant piece of objective negative evidence, and typically limit a Company’s ability to consider other subjective evidence. Based on our evaluation, a valuation allowance of $23,696 was recorded at December 31, 2017 to recognize only the amount of deferred tax assets more likely than not to be realized. The amount of deferred tax assets considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative financial losses is no longer present, and additional weight is given to subjective evidence such as our projections for growth.
At December 31, 2017 and 2016, the tax benefit of net operating loss carryforwards available for state income tax purposes was $1,708 and $1,378, respectively. The state net operating loss carryforwards will expire in various years through 2037. We believe it is more likely than not that the tax benefit from state operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $1,708 against deferred tax assets related to state operating loss carryforwards at December 31, 2017.
At December 31, 2017, the Company has net operating loss carryforwards in certain foreign jurisdictions of $1,363, which may be carried forward indefinitely. The foreign jurisdictions have incurred cumulative financial losses over the three-year period ended December 31, 2017 and have projected future taxable losses. We believe it is more likely than not that the tax benefit from these loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $481, collectively, against deferred tax assets in foreign jurisdictions at December 31, 2017.
The determination to record or not record a valuation allowance involves management judgment, based on the consideration of positive and negative evidence available at the time of the assessment. Management will continue to assess the realization of its deferred tax assets based upon future evidence, and may record adjustments to valuation allowances against deferred tax assets in future periods, as appropriate, that could materially impact net income.
The following table provides a reconciliation of unrecognized tax benefits at December 31, 2017 and 2016:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Unrecognized tax benefits at beginning of period: | | $ | 619 |
| | $ | 582 |
|
| Increases based on tax positions for prior periods | | — |
| | 37 |
|
| Decreases based on tax positions for prior periods | | (20 | ) | | — |
|
| Balance at end of period | | $ | 599 |
| | $ | 619 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $599 at December 31, 2017. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. At December 31, 2017 and 2016, the Company had accrued interest and penalties related to unrecognized tax benefits of $500 and $464, respectively. At December 31, 2017, the Company does not expect any material increases or decreases to its unrecognized tax benefits within the next 12 months. Ultimate realization of this decrease is dependent upon the occurrence of certain events, including the completion of audits by tax authorities and expiration of statutes of limitations.
The Company files income tax returns in the United States and in various state, local, and foreign jurisdictions. The Company is subject to federal income tax examinations for the 2014 period and thereafter. With respect to the state, local, and foreign filings, certain entities of the Company are subject to income tax examinations for the 2013 period and thereafter.
Note 15.
Stock-based Compensation
The Company applies the provisions of FASB ASC 718, “Compensation - Stock Compensation,” to account for the Company’s stock-based compensation. Stock-based compensation cost is measured at the grant date based on the calculated fair value of the award and is recognized over the employees’ requisite service period. The Company recorded stock-based compensation expense of $1,696, $1,346, and $1,471 for the years ended December 31, 2017, 2016, and 2015, respectively, related to fully-vested stock awards, restricted stock awards, and performance unit awards. At December 31, 2017, unrecognized compensation expense for awards the Company expects to vest approximated $3,687. The Company will recognize this expense over the upcoming 3.3 year period 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 but previously unissued common stock.
The Company realized reductions in excess tax benefits of $0 and $332 for the years ended December 31, 2017 and 2016, respectively, and excess tax benefits for the tax deduction from stock-based compensation of $253 for the year ended December 31, 2015. This excess tax benefit or deficiency is included in "Cash flows from financing activities" in the Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015. Applying the prospective approach in accordance with FASB ASU 2016-09, a charge of $127 was recorded in "Income tax expense" in the Consolidated Statements of Operations, and is now included in "Cash flows from operating activities" for the twelve months ended December 31, 2017 in the Consolidated Statements of Cash Flows.
At December 31, 2017, the Company had stock awards issued pursuant to the 2006 Omnibus Incentive Plan, as amended and restated in May 2016 (“Omnibus Plan”). The Omnibus Plan allows for the issuance of 1,270,000 shares of common stock through the granting of stock options or stock awards (including performance units convertible into stock) to key employees and directors at no less than 100% of fair market value on the date of the grant. The Omnibus Plan provides for the granting of “nonqualified options” with a duration of not more than ten years from the date of grant. The Omnibus Plan also provides that, unless otherwise set forth in the option agreement, stock options are exercisable in installments of up to 25% annually beginning one year from the date of grant. No stock options have been granted under the Omnibus Plan and, as such, there was no stock-based compensation expense related to stock options recorded in 2017, 2016, or 2015.
Stock Option Awards
No stock options were outstanding during the years ended December 31, 2017 and 2016. Certain information for the year ended December 31, 2015 relative to employee stock options is summarized as follows:
|
| | | |
| | 2015 |
| Number of shares under the plans: | | |
| Outstanding and exercisable at beginning of year | | 7,500 |
|
| Granted | | — |
|
| Canceled | | — |
|
| Exercised | | (7,500 | ) |
| Outstanding and exercisable at end of year | | — |
|
The weighted average exercise price per share of the stock options exercised in 2015 was $9.08. The total intrinsic value of stock options exercised during the years ended December 31, 2015 was $253.
Fully-Vested Stock Awards
Non-employee directors are automatically awarded fully vested shares of the Company’s common stock on each date the non-employee directors are elected at the annual shareholders’ meeting to serve as directors. During the quarter ended June 30, 2017, the Nomination and Governance Committee and Board of Directors jointly approved the Deferred Compensation Plan for Non-Employee Directors under the 2006 Omnibus Incentive Plan, which permits non-employee directors of the Company to defer receipt of earned cash and/or stock compensation for service on the Board.
The non-employee directors were granted a total of 39,280, 59,598, and 14,000 fully-vested shares for the years ended December 31, 2017, 2016, and 2015, respectively. Compensation expense recorded by the Company related to fully-vested stock awards to non-employee directors was approximately $704, $698, and $534 for the years ended December 31, 2017, 2016, and 2015, respectively. During 2017, 26,860 deferred share units were allotted to the accounts of the non-employee directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.
The weighted average fair value of all the fully-vested stock grants awarded was $17.92, $11.72, and $38.15 per share for 2017, 2016, and 2015, respectively.
Restricted Stock Awards and Performance Unit Awards
Under the 2006 Omnibus Plan, the Company grants eligible employees restricted stock and performance unit awards. The forfeitable restricted stock awards granted prior to March 2015 generally time-vest after a four-year period, and those granted subsequent to March 2015 generally time-vest ratably over a three-year period, unless indicated otherwise by the underlying restricted stock agreement. Performance unit awards are offered annually under separate three-year long-term incentive programs. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying program. If the Company’s estimate of the number of performance stock awards expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change future expense over the remaining vesting period.
The following table summarizes the restricted stock award, deferred stock, and performance unit award activity for the three-year periods ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | | |
| | | Restricted
Stock | | Deferred
Stock | | Performance
Stock
Units | | Weighted Average
Aggregate Grant Date
Fair Value |
| Outstanding at January 1, 2015 | | 108,237 |
| | — |
| | 71,990 |
| | $ | 36.25 |
|
| Granted | | 29,656 |
| | — |
| | 41,114 |
| | 44.93 |
|
| Vested | | (39,076 | ) | | — |
| | (23,877 | ) | | 32.35 |
|
| Adjustment for incentive awards expected to vest | | — |
| | — |
| | (53,228 | ) | | 43.26 |
|
| Canceled and forfeited | | (5,000 | ) | | — |
| | — |
| | 44.84 |
|
| Outstanding at December 31, 2015 | | 93,817 |
| | — |
| | 35,999 |
| | $ | 39.66 |
|
| Granted | | 48,283 |
| | — |
| | 129,844 |
| | 12.50 |
|
| Vested | | (56,807 | ) | | — |
| | — |
| | 28.45 |
|
| Adjustment for incentive awards not expected to vest | | — |
| | — |
| | (93,103 | ) | | 24.79 |
|
| Canceled and forfeited | | (6,021 | ) | | — |
| | (9,050 | ) | | 18.82 |
|
| Outstanding at December 31, 2016 | | 79,272 |
| | — |
| | 63,690 |
| | $ | 21.66 |
|
| Granted | | 175,196 |
| | 26,860 |
| | 120,583 |
| | 14.46 |
|
| Vested | | (22,808 | ) | | — |
| | — |
| | 28.88 |
|
| Adjustment for incentive awards not expected to vest | | — |
| | — |
| | 46,130 |
| | 19.00 |
|
| Canceled and forfeited | | (44,854 | ) | | — |
| | (49,062 | ) | | 15.40 |
|
| Outstanding at December 31, 2017 | | 186,806 |
| | 26,860 |
| | 181,341 |
| | $ | 16.53 |
|
Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying plan. The aggregate fair value in the above table is based upon achieving 100% of the performance targets as defined in the underlying plan.
Excluding the fully-vested stock awards granted to non-employee directors, the Company recorded stock-based compensation expense of $1,499, $648, and $937, respectively, for the periods ended December 31, 2017, 2016, and 2015 related to restricted stock and performance unit awards. The following table presents the number of shares available for future grants:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Number of shares available for future grant: | | | | | | |
| Beginning of year | | 675,447 |
| | 407,307 |
| | 469,840 |
|
| End of year | | 639,390 |
| | 675,447 |
| | 407,307 |
|
Note 16.
Retirement Plans
The Company has three retirement plans that cover its hourly and salaried employees in the United States: one defined benefit plan, which is frozen, and two defined contribution plans. On December 31, 2017, the Company consolidated its three United States defined benefit plans into one United States defined benefit plan and consolidated its prior four United States defined contribution plans into two United States defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Company’s contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Company’s policy and investment guidelines of the applicable plan. The Company’s policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
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, which is frozen. These plans are discussed in further detail below.
United States Defined Benefit Plan
The following tables present a reconciliation of the changes in the benefit obligation, the fair market value of the assets, and the funded status of the plan, as of December 31, 2017 and 2016:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Changes in benefit obligation: | | | | |
| Benefit obligation at beginning of year | | $ | 18,241 |
| | $ | 17,759 |
|
| Service cost | | — |
| | 36 |
|
| Interest cost | | 684 |
| | 746 |
|
| Actuarial loss | | 775 |
| | 534 |
|
| Benefits paid | | (917 | ) | | (834 | ) |
| Benefit obligation at end of year | | $ | 18,783 |
| | $ | 18,241 |
|
| Change to plan assets: | | | | |
| Fair value of assets at beginning of year | | $ | 14,180 |
| | $ | 14,235 |
|
| Actual gain on plan assets | | 1,629 |
| | 779 |
|
| Benefits paid | | (917 | ) | | (834 | ) |
| Fair value of assets at end of year | | 14,892 |
| | 14,180 |
|
| Funded status at end of year | | $ | (3,891 | ) | | $ | (4,061 | ) |
| Amounts recognized in the consolidated balance sheet consist of: | | | | |
| Other long-term liabilities | | $ | (3,891 | ) | | $ | (4,061 | ) |
| Amounts recognized in accumulated other comprehensive income consist of: | | | | |
| Net loss | | $ | 3,913 |
| | $ | 4,186 |
|
The actuarial loss included in accumulated other comprehensive loss that will be recognized in net periodic pension cost during 2018 is $96, before taxes.
Net periodic pension costs for the three years ended December 31, 2017 are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Components of net periodic benefit cost: | | |
| Service cost | | $ | — |
| | $ | 36 |
| | $ | 38 |
|
| Interest cost | | 684 |
| | 746 |
| | 742 |
|
| Expected return on plan assets | | (710 | ) | | (717 | ) | | (816 | ) |
| Amortization of prior service cost | | — |
| | — |
| | 3 |
|
| Recognized net actuarial loss | | 130 |
| | 276 |
| | 275 |
|
| Net periodic pension cost | | $ | 104 |
| | $ | 341 |
| | $ | 242 |
|
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Discount rate | | 3.9 | % | | 4.3 | % | | 4.3 | % |
| Expected rate of return on plan assets | | 5.9 | % | | 5.2 | % | | 5.2 | % |
The expected long-term rate of return is based on numerous factors including the target asset allocation for plan assets, historical rate of return, long-term inflation assumptions, and current and projected market conditions. The increase in the expected rate of return on plan assets reflects the expected increased corporate shareholder returns resulting from the Tax Cuts and Jobs Act of 2017.
Amounts applicable to the Company’s pension plan with accumulated benefit obligations in excess of plan assets are as follows at December 31:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Projected benefit obligation | | $ | 18,783 |
| | $ | 18,241 |
|
| Accumulated benefit obligation | | 18,783 |
| | 18,241 |
|
| Fair value of plan assets | | 14,892 |
| | 14,180 |
|
Plan assets consist primarily of various fixed income and equity investments. The Company’s primary investment objective is to provide long-term growth of capital while accepting a moderate level of risk. The investments are limited to cash and cash equivalents, bonds, preferred stocks, and common stocks. The investment target ranges and actual allocation of pension plan assets by major category at December 31, 2017 and 2016 are as follows:
|
| | | | | | | | |
| | | Target | | 2017 | | 2016 |
| Asset Category | | | | | | |
| Cash and cash equivalents | | 0 - 10% | | 2 | % | | 5 | % |
| Total fixed income funds | | 25 - 50 | | 32 |
| | 33 |
|
| Total mutual funds and equities | | 50 - 70 | | 66 |
| | 62 |
|
| Total | | | | 100 | % | | 100 | % |
In accordance with the fair value disclosure requirements of FASB ASC 820, “Fair Value Measurements and Disclosures,” the following assets were measured at fair value on a recurring basis at December 31, 2017 and 2016. Additional information regarding FASB ASC 820 and the fair value hierarchy can be found in Note 18 Fair Value Measurements.
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Asset Category | | | | |
| Cash and cash equivalents | | $ | 284 |
| | $ | 660 |
|
| Fixed income funds | | | | |
| Corporate bonds | | 4,755 |
| | 4,767 |
|
| Total fixed income funds | | 4,755 |
| | 4,767 |
|
| Equity funds and equities | | | | |
| Mutual funds | | 712 |
| | 8,753 |
|
| Exchange-Traded Funds (“ETF”) | | 9,141 |
| | — |
|
| Total mutual funds and equities | | 9,853 |
| | 8,753 |
|
| Total | | $ | 14,892 |
| | $ | 14,180 |
|
Cash equivalents. The Company uses quoted market prices to determine the fair value of these investments in interest-bearing cash accounts 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.
Fixed income funds. Investments within the fixed income funds category consist of fixed income corporate debt. The Company uses quoted market prices to determine the fair values of these fixed income funds. These instruments consist of exchange-traded government and corporate bonds and are classified in Level 1 of the fair value hierarchy.
Equity funds and equities. The valuation of investments in registered investment companies is based on the underlying investments in securities. Securities traded on security exchanges are valued at the latest quoted sales price. Securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the average of the last reported bid and ask quotations. These investments are classified in Level 1 of the fair value hierarchy.
The Company currently does not anticipate contributions to its United States defined benefit plan in 2018.
The following benefit payments are expected to be paid:
|
| | | | |
| | | Pension |
| | | Benefits |
| 2018 | | $ | 927 |
|
| 2019 | | 996 |
|
| 2020 | | 1,003 |
|
| 2021 | | 1,058 |
|
| 2022 | | 1,071 |
|
| Years 2023-2027 | | 5,608 |
|
United Kingdom Defined Benefit Plan
The Portec Rail Products (UK) Limited Pension Plan covers certain current employees, former employees, and retirees. The plan has been frozen to new entrants since April 1, 1997 and also covers the former employees of a merged plan after January 2002. Benefits under the plan were based on years of service and eligible compensation during defined periods of service. Our funding policy for the plan is to make minimum annual contributions required by applicable regulations.
The funded status of the United Kingdom defined benefit plan at December 31, 2017 and 2016 is as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Changes in benefit obligation: | | | | |
| Benefit obligation at beginning of year | | $ | 8,104 |
| | $ | 7,862 |
|
| Interest cost | | 236 |
| | 259 |
|
| Actuarial (gain) loss | | (451 | ) | | 1,532 |
|
| Benefits paid | | (322 | ) | | (273 | ) |
| Foreign currency exchange rate changes | | 768 |
| | (1,276 | ) |
| Benefit obligation at end of year | | $ | 8,335 |
| | $ | 8,104 |
|
| Change to plan assets: | | | | |
| Fair value of assets at beginning of year | | $ | 5,826 |
| | $ | 6,661 |
|
| Actual gain on plan assets | | 573 |
| | 265 |
|
| Employer contribution | | 276 |
| | 253 |
|
| Benefits paid | | (322 | ) | | (273 | ) |
| Foreign currency exchange rate changes | | 551 |
| | (1,080 | ) |
| Fair value of assets at end of year | | 6,904 |
| | 5,826 |
|
| Funded status at end of year | | $ | (1,431 | ) | | $ | (2,278 | ) |
| Amounts recognized in the consolidated balance sheet consist of: | | | | |
| Other long-term liabilities | | $ | (1,431 | ) | | $ | (2,278 | ) |
| Amounts recognized in accumulated other comprehensive income consist of: | | | | |
| Net loss | | $ | 1,161 |
| | $ | 2,015 |
|
| Prior service cost | | 39 |
| | 53 |
|
| | | $ | 1,200 |
| | $ | 2,068 |
|
Net periodic pension costs for the three years ended December 31 are as follows:
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Components of net periodic benefit cost: | | |
| Interest cost | | $ | 236 |
| | $ | 259 |
| | $ | 295 |
|
| Expected return on plan assets | | (280 | ) | | (290 | ) | | (324 | ) |
| Amortization of prior service cost | | 19 |
| | 17 |
| | 27 |
|
| Recognized net actuarial loss | | 192 |
| | 275 |
| | 225 |
|
| Net periodic pension cost | | $ | 167 |
| | $ | 261 |
| | $ | 223 |
|
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Discount rate | | 2.5 | % | | 2.7 | % | | 4.0 | % |
| Expected rate of return on plan assets | | 4.1 | % | | 4.4 | % | | 5.2 | % |
Amounts applicable to the Company’s pension plans with accumulated benefit obligations in excess of plan assets are as follows at December 31:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Projected benefit obligation | | $ | 8,335 |
| | $ | 8,104 |
|
| Accumulated benefit obligation | | 8,335 |
| | 8,104 |
|
| Fair value of plan assets | | 6,904 |
| | 5,826 |
|
The Company has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations, and recent changes in long-term interest rates based on publicly available information.
Plan assets are invested by the trustees in accordance with a written statement of investment principles. This statement permits investment in equities, corporate bonds, United Kingdom government securities, commercial property, and cash, based on certain target allocation percentages. Asset allocation is primarily based on a strategy to provide steady growth without undue fluctuations. The target asset allocation percentages for 2017 are as follows:
|
| | |
| | Portec Rail |
| | Plan |
| Equity securities | | Up to 100% |
| Commercial property | | Not to exceed 50% |
| U.K. Government securities | | Not to exceed 50% |
| Cash | | Up to 100% |
Plan assets held within the United Kingdom defined benefit plan consist of cash and marketable securities that have been classified as Level 1 of the fair value hierarchy. All other plan assets have been classified as Level 2 of the fair value hierarchy.
The plan assets by category for the two years ended December 31, 2017 and 2016 are as follows:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Asset Category | | |
| Cash and cash equivalents | | $ | 695 |
| | $ | 707 |
|
| Equity securities | | 2,707 |
| | 2,617 |
|
| Bonds | | 2,276 |
| | 1,347 |
|
| Other | | 1,226 |
| | 1,155 |
|
| Total | | $ | 6,904 |
| | $ | 5,826 |
|
United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. The Company anticipates making contributions of $253 to the United Kingdom defined benefit plan during 2018.
The following estimated future benefits payments are expected to be paid under the United Kingdom defined benefit plan:
|
| | | | |
| | | Pension |
| | | Benefits |
| 2018 | | $ | 259 |
|
| 2019 | | 275 |
|
| 2020 | | 291 |
|
| 2021 | | 299 |
|
| 2022 | | 317 |
|
| Years 2023-2027 | | 2,040 |
|
Other Post-Retirement Benefit Plan
Rail Technologies’ operation near Montreal, Quebec, Canada, maintains a post-retirement benefit plan, which provides retiree life insurance, health care benefits, and, for a closed group of employees, dental care. Retiring employees with a minimum of 10 years of service are eligible for the plan benefits. The plan is not funded. Cost of benefits earned by employees is charged to expense as services are rendered. The expense related to this plan was not material for 2017 or 2016. Rail Technologies’ accrued benefit obligation was $1,104 and $909 as of December 31, 2017 and 2016, respectively. This obligation is recognized within other long-term liabilities. Benefit payments anticipated for 2018 are not material.
The weighted average assumptions in the following table represent the rates used to develop the actuarial present value of the projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
|
| | | | | | |
| | | 2017 | | 2016 |
| Discount rate | | 3.6 | % | | 4.0 | % |
| Weighted average health care trend rate | | 5.1 | % | | 5.1 | % |
The weighted average health care rate trends downward to an ultimate rate of 4.4% in 2035.
Defined Contribution Plans
The Company sponsors six 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.
|
| | | | | | | | | | | | |
| | | Twelve Months Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| United States | | $ | 2,641 |
| | $ | 1,813 |
| | $ | 2,434 |
|
| Canada | | 223 |
| | 225 |
| | 226 |
|
| United Kingdom | | 450 |
| | 376 |
| | 494 |
|
| | | $ | 3,314 |
| | $ | 2,414 |
| | $ | 3,154 |
|
Note 17.
Rental and Lease Information
The Company has capital and operating leases for certain plant facilities, office facilities, and equipment. Rental expense for the years ended December 31, 2017, 2016, and 2015 amounted to $5,278, $4,864, and $4,611, respectively. Generally, land and building leases include escalation clauses.
The following is a schedule, by year, of the future minimum payments under capital and operating leases, together with the present value of the net minimum payments at December 31, 2017:
|
| | | | | | | | |
| | | Capital | | Operating |
| Year ending December 31, | | Leases | | Leases |
| 2018 | | $ | 711 |
| | $ | 4,483 |
|
| 2019 | | 598 |
| | 3,149 |
|
| 2020 | | 265 |
| | 2,467 |
|
| 2021 | | — |
| | 1,769 |
|
| 2022 | | — |
| | 1,177 |
|
| 2023 and thereafter | | — |
| | 4,766 |
|
| Total minimum lease payments | | 1,574 |
| | $ | 17,811 |
|
| Less: amount representing interest | | 78 |
| | |
| Total present value of minimum payments with interest rates ranging from 2.95% to 4.25% | | $ | 1,496 |
| | |
Assets recorded under capital leases are as follows for the years ended December 31, 2017 and 2016:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| Machinery and equipment at cost | | $ | 3,164 |
| | $ | 3,152 |
|
| Less: accumulated amortization | | 1,066 |
| | 829 |
|
| Net capital lease assets | | $ | 2,098 |
| | $ | 2,323 |
|
Note 18.
Fair Value Measurements
The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions of what market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company has an established process for determining fair value for its financial assets and liabilities, principally cash and cash equivalents and interest rate swaps. 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 section describes 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.
Cash equivalents. Included within “Cash and cash equivalents” are investments in non-domestic term deposits. The carrying amounts approximate fair value because of the short maturity of the instruments.
LIBOR-Based interest rate swaps. To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective in February 2017 at which point they effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. The fair value of the interest rate swaps is based on market-observable forward interest rates and represents the estimated amount that the Company would pay to terminate the agreements. As such, the swap agreements have been classified as Level 2 within the fair value hierarchy.
The following assets of the Company were measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC 820, “Fair Value Measurement,” at December 31, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date
Using | | | Fair Value Measurements at Reporting Date
Using |
| | | December 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 | | $ | 17 |
| | $ | 17 |
| | $ | — |
| | $ | — |
| | | $ | 16 |
| | $ | 16 |
| | $ | — |
| | $ | — |
|
| Interest rate swaps | | 222 |
| | — |
| | 222 |
| | — |
| | | — |
| | — |
| | — |
| | — |
|
| Total assets | | $ | 239 |
| | $ | 17 |
| | $ | 222 |
| | $ | — |
| | | $ | 16 |
| | $ | 16 |
| | $ | — |
| | $ | — |
|
| Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | | $ | 334 |
| | $ | — |
| | $ | 334 |
| | $ | — |
|
| Total liabilities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | | $ | 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 Consolidated Statements of Operations. For the twelve months ended December 31, 2017, interest expense from interest rate swaps was $378.
In accordance with the provisions of FASB ASC 820, the Company measures certain nonfinancial assets and liabilities at fair value, that are recognized or disclosed on a nonrecurring basis. During the year ended December 31, 2017, a $413 other-than-temporary impairment charge was recorded with respect to L B Pipe JV assets held for sale utilizing a Level 2 fair value measurement. The impairment was a result of the Company's carrying value being greater than the agreed-upon sales price, or fair market value. See Note 8 Investments contained herein for additional information.
Information regarding the fair value disclosures associated with the assets of the Company’s defined benefit plans can be found in Note 16 Retirement Plans.
Note 19.
Commitments and Contingent Liabilities
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 that is adjusted on a monthly basis as a percentage of cost of sales. This product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims.
The following table sets forth the Company’s product warranty accrual:
|
| | | |
| | Warranty Liability |
| Balance at December 31, 2016 | $ | 10,154 |
|
| Additions to warranty liability | 3,564 |
|
| Warranty liability utilized | (5,036 | ) |
| Balance at December 31, 2017 | $ | 8,682 |
|
Included within the above table are concrete tie warranty reserves of approximately $7,595 and $7,574, respectively, at December 31, 2017 and 2016. For the periods ended December 31, 2017, 2016, and 2015, the Company recorded approximately $21, $204, and $972, respectively, in pre-tax concrete tie warranty charges within “Cost of goods sold” in the Company’s Rail Products and Services segment primarily related to concrete ties manufactured at the Company’s former Grand Island, NE facility. For the year ended December 31, 2017, the Company recorded $839 in pre-tax warranty charges within “Cost of services sold” in our Tubular and Energy Services segment related to a Protective Coatings claim. During the year ended December 31, 2016, the Company recorded approximately $1,224 in pre-tax warranty charges within “Cost of goods sold” in the Company’s Rail Products and Services segment related to Transit Products project.
UPRR Warranty Claims
On July 12, 2011, UPRR notified (the “UPRR Notice”) the Company and its subsidiary, CXT Incorporated (“CXT”), of a warranty claim under CXT’s 2005 supply contract relating to the sale of pre-stressed concrete railroad ties to UPRR. UPRR asserted that a significant percentage of concrete ties manufactured in 2006 through 2011 at CXT’s Grand Island, NE facility failed to meet contract specifications, had workmanship defects and were cracking and failing prematurely. Of the 3.0 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 Company’s warranty policy for UPRR carried a 5-year warranty with a 1.5:1 replacement ratio for any defective ties. In order to accommodate UPRR and other customer concerns, the Company also reverted to a previously used warranty policy providing a 15-year warranty with a 1:1 replacement ratio. This change provided an additional 10 years of warranty protection. In the amended 2005 supply agreement, the Company and UPRR also extended the supply of Tucson ties by 5 years and agreed on a cash payment of $12,000 to UPRR as compensation for concrete ties already replaced by UPRR during the investigation period.
During 2012, as a result of the testing that the Company conducted on concrete ties manufactured at its former Grand Island, NE facility and the developments related to UPRR and other customer matters, the Company recorded pre-tax warranty charges of $22,000 in “Cost of Goods Sold” within its Rail Products and Services segment based on the Company’s estimate of the number of defective concrete ties that will ultimately require replacement during the applicable warranty periods.
2013
Throughout 2013, at UPRR’s request and under the terms of the amended 2005 supply agreement, the Company provided warranty replacement concrete ties for use across certain UPRR subdivisions. The Company attempted to reconcile the quantity of warranty claims for ties replaced and obtain supporting detail for the ties removed. The Company believes that UPRR did not replace concrete ties in accordance with the amended agreement and has not furnished adequate documentation throughout the replacement process in these subdivisions to support its full warranty claim. Based on the information received by the Company to date, the Company believes that a significant number of ties which UPRR replaced in these subdivisions did not meet the criteria to be covered as warranty replacement ties under the amended 2005 supply agreement. The disagreement related to the 2013 warranty replacement activity includes approximately 170,000 ties where the Company provided detailed documentation supporting our position with reason codes that detail why these ties are not eligible for a warranty claim.
In late November 2013, the Company received notice from UPRR asserting a material breach of the amended 2005 supply agreement. UPRR’s notice asserted that the failure to honor its claims for warranty ties in these subdivisions was a material breach. Following receipt of this notice, the Company provided information to UPRR to refute UPRR’s claim of breach and included the reconciliation of warranty claims supported by substantial findings from the Company’s track observation team, all within the 90-day cure period. The Company also proposed further discussions to reach agreement on reconciliation for 2013 replacement activities and future replacement activities and a recommended process that will ensure future replacement activities are done with appropriate documentation and per the terms of the amended 2005 supply agreement.
2014
During the first quarter of 2014, the Company further responded within the 90-day cure period to UPRR’s claim and presented a reconciliation for the subdivisions at issue. This proposed reconciliation was based on empirical data and visual observation from Company employees that were present during the replacement process for a substantial majority of the concrete ties replaced. The Company spent considerable time documenting facts related to concrete tie condition and track condition to assess whether the ties replaced met the criteria to be eligible for replacement under the terms of the amended 2005 supply agreement.
During 2014, the Company increased its accrual by an additional $8,766 based on revised estimates of ties to be replaced based upon scientific testing and other analysis, adjusted for ties already provided to UPRR. The Company continued to work with UPRR to identify, replace, and reconcile defective ties related to the warranty claim in accordance with the amended 2005 supply agreement. The Company and UPRR met during the third quarter of 2014 to evaluate each other’s position in an effort to work towards agreement on the unreconciled 2013 and 2014 replacement activity as well as the standards and practices to be implemented for future replacement activity and warranty tie replacement.
In November and December of 2014, the Company received additional notices from UPRR asserting that ties manufactured in 2000 were defective and again asserting material breaches of the amended 2005 supply agreement relating to warranty tie replacements as well as certain new ties provided to UPRR being out of specification.
At December 31, 2014, the Company and UPRR had not been able to reconcile the disagreement related to the 2013 and 2014 warranty replacement activity. The disagreement relating to the 2014 warranty replacement activity includes approximately 90,100 ties that the Company believes are not warranty-eligible.
2015
On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT, asserting, among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various incidental and consequential damages. The amended 2005 supply agreement provides that UPRR’s exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or otherwise contained a material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Company’s warranty does not apply to ties that (a) have been repaired or altered without the Company’s written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been improperly maintained or used contrary to the specifications for which such ties were produced. The amended 2005 supply agreement also continues to provide that the Company’s warranty is in lieu of all other express or implied warranties and that neither party shall be subject to or liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are inaccurately under concrete tie rating guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement rated and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that UPRR in future years will be entitled to warranty replacement ties for virtually all of the Grand Island ties. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system.
In June 2015, UPRR delivered an additional notice alleging
defectsdeficiencies in
certain ties produced in the Company’s Tucson and Spokane locations and other claimed material breaches which the Company contends are unfounded. The Company again responded to UPRR that it was not in material breach of the amended 2005 supply agreement relating to warranty tie replacements and that
newthe ties
being manufacturedin 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 Company’s Spokane, WA production facility. Since that time, UPRR has discontinued submitting purchase orders to the Company for shipment of warranty replacement ties.
On May 29, 2015, the Company and CXT filed an Answer, Affirmative Defenses and Counterclaims in response to the Complaint, denying liability to UPRR. As a result of UPRR’s subsequent June 16-17, 2015 actions and certain related conduct, the Company on October 5, 2015 amended the pending Answer, Affirmative Defenses and Counterclaims to add, among other things, assertions that UPRR’s conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to UPRR’s claims and also for the Company’s counterclaims.
2016
By Scheduling Order dated September 3, 2015, a December 30,June 29, 2016, an August 31, 2017 deadline for the completion of fact discovery has beenwas established andwith trial mayto proceed at some future date after March 3,October 30, 2017, although noand UPRR filed an amended notice of trial dateto commence on October 30, 2017.
2017
By Third Amended Scheduling Order dated September 26, 2017, a June 29, 2018 deadline for completion of discovery has been
set. Theestablished with trial to proceed at some future date on or after October 1, 2018. During the twelve months ended December 31, 2017, the parties
are currently conducting discovery.continued to conduct discovery, with various disputes that required and will likely require court resolution. The Company continuesintends to continue to engage in discussions in an effort to resolve thisthe 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 be within the range ofreasonably approximate our estimated accruals for loss contingencies. Future potential costs pertaining to UPRR’s claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows.
As a result of the preliminary status of the litigation and the uncertainty of any potential judgment, an estimate of any additional loss, or a range of additional loss, associated with this litigation cannot be made based upon currently available information.
In June and September 2017, the Company recorded a cumulative pre-tax warranty charge within “Cost of services sold” in its Tubular and Energy Services segment of $839 from a claim alleging a pipe expansion issue caused by our Protective Coatings services. The claim was settled during the year ended December 31, 2017.
In December 2016, the Company recorded a pre-tax warranty charge within “Cost of goods sold” within its Rail Products and Services segment of approximately $1,224 with respect to allegedly defective products provided in connection with a transit project.
In September 2015, the Company was notified of a collective action complaint by current and former Test and Inspection Services employees to recover unpaid overtime wages and other damages under the Fair Labor Standards Act. The parties commenced court-ordered mediation on October 17, 2016. In December 2016, the Company reached an agreement in principle to settle the claim for $900 and no admission of liability, subject to negotiation of a settlement agreement and approval by the court, which is expected to occur in the first half of 2017. For the year ended December 31, 2016, the Company recorded within “Selling and administrative expenses” in the Company’s Tubular and Energy Services segment a pre-tax charge of approximately $900 related to the anticipated settlement of this claim. For the year ended December 31, 2017, the final settlement of $797 was approved. The approval resulted in a pre-tax income adjustment of $103 within “Selling and administrative expenses” reported in the Company’s Tubular and Energy Services segment.
The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. InLegal actions are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened legal actions. Based on available information, it is the opinion of management that the amountultimate resolution of ultimate liability with respect to thesepending or threatened legal actions, both individually and in the aggregate, will not materially affect the financial condition or liquidity of the Company. The resolution,result in any reporting period, of one or more of these matters could havelosses having a material adverse effect on the Company’s resultsCompany's financial position or liquidity at December 31, 2017.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of
operations forany accrual) will be incurred in connection with any legal actions, the Company discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that
period.an estimate cannot be made. Based on the Company's assessment at December 31, 2017, no such disclosures were considered necessary.
The Company is subject to national, state, foreign, and/or local laws and regulations relating to the protection of the environment. The Company is monitoring its potential environmental exposure related to current and former facilities. The Company’s efforts to comply with environmental regulations may have an adverse effect on its future earnings.
On June 5, 2017, a General Notice Letter was received from the United States Environmental Protection Agency (“EPA”) indicating that the Company may be a potentially responsible party regarding the Portland Harbor Superfund Site cleanup along with numerous other companies. The Company is reviewing the basis for its identification by the EPA and the nature of the historic operations of an L.B. Foster predecessor on the site. 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 following table sets forth the Company’s undiscounted environmental obligation:
| | | | |
| | | Environmental liability | |
Balance at December 31, 2014 | | $ | 3,344 | |
Additions to environmental obligations | | | 50 | |
Environmental obligations utilized | | | (214 | ) |
Acquisitions | | | 3,460 | |
| | | | |
Balance at December 31, 2015 | | $ | 6,640 | |
| | | | |
|
| | | |
| | Environmental liability |
| Balance at December 31, 2016 | $ | 6,270 |
|
| Additions to environmental obligations | 143 |
|
| Environmental obligations utilized | (269 | ) |
| Balance at December 31, 2017 | $ | 6,144 |
|
The following table summarizes the Company’s other income for the three years ended December 31,
2015, 2014,2017, 2016, and
2013. | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
Gain on Tucson, AZ asset sale(a) | | $ | (2,279 | ) | | $ | — | | | $ | — | |
Foreign currency gains | | | (1,616 | ) | | | (422 | ) | | | (433 | ) |
Remeasurement gain on equity method investment(b) | | | (580 | ) | | | — | | | | — | |
Legal settlement gain(c) | | | (460 | ) | | | — | | | | — | |
Other | | | (650 | ) | | | (256 | ) | | | (644 | ) |
| | | | | | | | | | | | |
| | $ | (5,585 | ) | | $ | (678 | ) | | $ | (1,077 | ) |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Gain on Protective Coatings Field Service asset sale (a) | | $ | (487 | ) | | $ | — |
| | $ | — |
|
| Gain on Rail Segment patent sale (b) | | (500 | ) | | — |
| | — |
|
| Gain on Tucson, AZ asset sale (c) | | — |
| | — |
| | (2,279 | ) |
| Foreign currency losses (gains) | | 804 |
| | 12 |
| | (1,616 | ) |
| Remeasurement gain on equity method investment (d) | | — |
| | — |
| | (580 | ) |
| Legal settlement gain (e) | | — |
| | — |
| | (460 | ) |
| Other | | (184 | ) | | (1,535 | ) | | (650 | ) |
| | | $ | (367 | ) | | $ | (1,523 | ) | | $ | (5,585 | ) |
| |
| a) | On August 7, 2017, the Company sold the assets of its Protective Coatings Field Services business for $1,200, resulting in a pre-tax gain on sale of $487 within our Tubular and Energy Services segment. |
| |
| b) | On August 8, 2017, the Company sold its rights in European transit rail patents. The gain on sale of $500 was recorded within the Rail Products and Services segment. |
| |
| c) | On December 23, 2015, the Company sold certain assets related to the former Tucson, AZ precast concrete tie facility for $2,750 resulting in a pre-tax gain on sale of $2,279. |
b) | |
| d) | On November 23, 2015, the Company acquired the remaining 75% of shares of Tew Plus resulting in a gain of $580, which is recorded within other income as of December 31, 2015. The gain is included in equity loss (income) and remeasurement gain within the Consolidated Statements of Cash Flows. |
c) | |
| e) | During the fourth quarter of 2015 the Company received $460 from the Steel Antitrust Settlement Fund related to a claim regarding steel purchased by the Company between 2005 and 2007. |
Quarterly Financial Information (Unaudited)
As more fully described in Note 3, “Acquisitions,” the Company acquired Tew, Tew Plus, and IOS during 2015 and Carr, FWO, and Chemtec during 2014. The results of the subsidiary’s operations are included from the acquisition dates.
Quarterly financial information for the years ended December 31,
20152017 and
20142016 is presented below:
| | | | | | | | | | | | | | | | |
| | | 2015 | |
| | | First
Quarter | | | Second
Quarter | | | Third
Quarter(1) | | | Fourth
Quarter(2) | |
Net sales | | $ | 137,907 | | | $ | 171,419 | | | $ | 176,059 | | | $ | 139,138 | |
Gross profit | | $ | 30,653 | | | $ | 37,089 | | | $ | 36,038 | | | $ | 29,872 | |
Net income (loss) | | $ | 4,285 | | | $ | 5,362 | | | $ | (57,422 | ) | | $ | 3,328 | |
Basic earnings (loss) per common share | | $ | 0.42 | | | $ | 0.52 | | | $ | (5.60 | ) | | $ | 0.33 | |
Diluted earnings (loss) per common share | | $ | 0.41 | | | $ | 0.52 | | | $ | (5.60 | ) | | $ | 0.32 | |
Dividends paid per common share | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | |
|
| | | | | | | | | | | | | | | | |
| | | 2017 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter (1) |
| Net sales | | $ | 118,702 |
| | $ | 144,860 |
| | $ | 131,492 |
| | $ | 141,323 |
|
| Gross profit | | $ | 21,252 |
| | $ | 27,736 |
| | $ | 26,365 |
| | $ | 27,899 |
|
| Net (loss) income | | $ | (2,422 | ) | | $ | 3,024 |
| | $ | 3,222 |
| | $ | 289 |
|
| Basic (loss) earnings per common share | | $ | (0.23 | ) | | $ | 0.29 |
| | $ | 0.31 |
| | $ | 0.03 |
|
| Diluted (loss) earnings per common share | | $ | (0.23 | ) | | $ | 0.29 |
| | $ | 0.31 |
| | $ | 0.03 |
|
| Dividends paid per common share | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Differences between the sum of quarterly results and
the annual amounts in the Consolidated
StatementStatements of Operations
are due to rounding.
(1) | - Third quarter 2015 includes $80,337 ($63,887 net of tax) impairment of goodwill related to the IOS and Chemtec reporting units. |
(2)(1) | - Fourth quarter 20152017 includes $2,279 pre-tax gain on saleprovisional tax amounts related to the enactment of Tucson, AZ concrete tie facility.the U.S. Tax Cuts and Jobs Act, including additional tax expense of $3,298 related to the one-time transition tax and a $1,508 tax benefit related to the remeasurement of certain deferred tax assets and liabilities. |
| | | | | | | | | | | | | | | | |
| | | 2014 | |
| | | First
Quarter | | | Second
Quarter(1) | | | Third
Quarter | | | Fourth
Quarter(2) | |
Net sales | | $ | 111,414 | | | $ | 166,832 | | | $ | 167,797 | | | $ | 161,149 | |
Gross profit | | $ | 24,127 | | | $ | 30,700 | | | $ | 35,159 | | | $ | 31,605 | |
Net income | | $ | 3,649 | | | $ | 6,862 | | | $ | 9,116 | | | $ | 6,029 | |
Basic earnings per common share | | $ | 0.36 | | | $ | 0.67 | | | $ | 0.89 | | | $ | 0.59 | |
Diluted earnings per common share | | $ | 0.35 | | | $ | 0.67 | | | $ | 0.88 | | | $ | 0.58 | |
Dividends paid per common share | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.04 | |
|
| | | | | | | | | | | | | | | | |
| | | 2016 |
| | | First
Quarter | | Second
Quarter (1) | | Third
Quarter (2) | | Fourth
Quarter (3) |
| Net sales | | $ | 126,310 |
| | $ | 135,994 |
| | $ | 114,644 |
| | $ | 106,566 |
|
| Gross profit | | $ | 23,960 |
| | $ | 27,813 |
| | $ | 19,803 |
| | $ | 18,779 |
|
| Net loss | | $ | (2,832 | ) | | $ | (91,996 | ) | | $ | (5,982 | ) | | $ | (40,851 | ) |
| Basic loss per common share | | $ | (0.28 | ) | | $ | (8.96 | ) | | $ | (0.58 | ) | | $ | (3.97 | ) |
| Diluted loss per common share | | $ | (0.28 | ) | | $ | (8.96 | ) | | $ | (0.58 | ) | | $ | (3.97 | ) |
| Dividends paid per common share | | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.04 |
| | $ | — |
|
| |
| (1) | - Second quarter 20142016 includes a $4,000 warranty charge$128,938 impairment of assets related to UPRR warranty claim.the Chemtec, Protective Coatings, IOS, and Rail Technologies product groups. |
| |
| (2) | - Third quarter 2016 includes $6,946 related to the finalization of the impairment analysis of the Chemtec and Rail Technologies product groups. |
| |
| (3) | - Fourth quarter 20142016 includes deferred U.S. income taxes and foreign withholding taxes of $7,932 on unremitted foreign earnings and a $4,766 warranty charge related to UPRR warranty claim.valuation allowance of $29,719 against deferred tax assets. |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
L.B. Foster Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule
13a-15(e) 13a–15(e) under the Securities
and Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the end of the period covered by this report.
Managements’ Report on Internal Control Over Financial Reporting
The management of L.B. Foster Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f)13a–15(f). L.B. Foster Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Accordingly, even effective controls can provide only reasonable assurance with respect to financial statement preparation and presentation. There were no significant changes in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of
20152017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
L.B. Foster Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.2017. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Control - Integrated Framework (2013 Framework). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting at December 31, 2015.2017.The SEC’s general guidance permits the exclusion of an assessment of the effectiveness of a registrant’s internal control over financial reporting for an acquired business during the first year following such acquisition, if among other circumstances and factors there is not adequate time between the acquisition date and the date of assessment. As previously discussed in Note 3, “Acquisitions,” of the consolidated financial statements included in this Annual Report on Form 10-K, L.B. Foster Company completed the acquisition of IOS Holdings, Inc. (“IOS”) on March 13, 2015 and Tew Plus, LTD (“Tew Plus”) on November 23, 2015. These acquired businesses constituted approximately $110.2 million of the Company’s consolidated assets at December 31, 2015 and $37.2 million of the Company’s consolidated sales for the year ended December 31, 2015. In addition, these acquired businesses contributed $5.3 million in pre-tax losses to the Company (which excludes goodwill impairment charges of $69.9 million related to IOS) as compared to its consolidated pre-tax loss of $44.4 million for the year ended December 31, 2015. Management’s assessment and conclusion on the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting at December 31, 2015 excluded an assessment of the internal control over financial reporting of the assets and businesses acquired in the IOS and Tew Plus acquisitions.
Ernst & Young LLP, the independent registered public accounting firm that also audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young’s attestation report on the Company’s internal control over financial reporting appears in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm
The
To the Stockholders and the Board of Directors
and Stockholdersof L.B. Foster Company and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited L.B. Foster Company and Subsidiaries’ internal control over financial reporting as of December 31, 2015,2017, based on criteria established in Internal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, L.B. Foster Company and Subsidiaries’Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the index at Item 15(a) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements’ Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of IOS Holdings, Inc. (IOS) and Tew Plus, LTD (Tew Plus), which are included in the 2015 consolidated financial statements of L.B. Foster Company and Subsidiaries and constituted approximately $110.2 million of consolidated assets as of December 31, 2015 and $37.2 million of consolidated sales for the year then ended. In addition, these acquired businesses contributed $5.3 million in pre-tax losses to the Company (which excludes goodwill impairment charges of $69.9 million related to IOS) as compared to its consolidated pre-tax loss of $44.4 million for the year ended December 31, 2015. Our audit of internal control over financial reporting of L.B. Foster Company and Subsidiaries also did not include an evaluation of the internal control over financial reporting of IOS and Tew Plus.
In our opinion, L. B. Foster Company and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of L.B. Foster Company and Subsidiaries, as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015 and our report dated March 1, 2016 expressed an unqualified opinion thereon.
Pittsburgh, Pennsylvania
March 1, 2016
ITEM 9B. | OTHER INFORMATION |
February 28, 2018
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item regarding the directors of the Company is incorporated herein by reference to the information included in the Company’s proxy statement for the
20162018 annual meeting of stockholders (the “Proxy Statement”) under the caption “Election of Directors.”
The information required by this Item regarding the executive officers of the Company is set forth in Part I of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” and is incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the
Securities Exchange Act
of 1934 is incorporated herein by reference to the information included in the Proxy Statement under the caption “Section 16(a) Beneficial Reporting Compliance.”
The information required by this Item regarding our Code of Ethics is set forth in Part I of this Annual Report on Form 10-K under the caption “Code of Ethics” and is incorporated herein by reference.
The information required by this Item regarding our audit committee and the audit committee financial expert(s) is incorporated herein by reference to the information included in the Proxy Statement under the caption “Corporate
Governance—Governance — Board
Committees—Committees — Audit Committee.”
ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding executive compensation is incorporated herein by reference to the information included in the Proxy Statement under the captions “Director Compensation—
2015,2017,” “Executive Compensation,” “Summary Compensation Table
(2015, 2014,(2017, 2016, and
2013)2015),” “Grants of Plan-Based Awards in
2015,2017,” “Outstanding Equity Awards At
20152017 Fiscal Year-End,”
“2015“2017 Options Exercises and Stock Vested Table,”
“2015“2017 Nonqualified Deferred Compensation,” “Change-In-Control,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item regarding the Company’s equity compensation plans is set forth in Part II, Item 5 of this Annual Report on Form 10-K under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated herein by reference.
The information required by this Item regarding the beneficial ownership of the Company is incorporated herein by reference to the information included in the Proxy Statement under the caption “Stock Ownership.”
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item regarding transactions with related persons is incorporated herein by reference to the information included in the Proxy Statement under the caption “Corporate
Governance—Governance — Transactions with Related Parties.”
The information required by this Item regarding director independence is incorporated herein by reference to information included in the Proxy Statement under the caption “Corporate
Governance—Governance — The Board,
Board Meetings, Independence and
Board Meetings.Tenure.”
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item regarding principal accountant fees and services is incorporated herein by reference to information included in the Proxy Statement under the caption “Independent Registered Public Accountants’ Fees.”
PART IV
ITEM 15. ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
(a)(1). Financial Statements The following Reports of Independent Registered Public Accounting Firm, consolidated financial statements, and accompanying notes are included in Item 8 of this Report:
| | |
Reports of Independent Registered Public Accounting Firm.
| | |
Consolidated Balance Sheets as of December 31, 2015 and 2014. | | |
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014, and 2013. | | |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014, and 2013. | | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013. | | |
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014, and 2013. | | |
| |
Notes to Consolidated Financial Statements. | | |
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2017 and 2016.
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015.
Notes to Consolidated Financial Statements.
(a)(2). Financial Statement Schedule Schedules for the Years Ended December 31,
2015, 2014,2017, 2016, and
2013: |
II – Valuation and Qualifying Accounts.
|
2015:
II – Valuation and Qualifying Accounts.
The remaining schedules are omitted because of the absence of conditions upon which they are required.
The Index to Exhibits immediately following
the signature page arePart IV, Item 16 Form 10-K Summary filed as part of this Annual Report on Form 10-K.
L. B. FOSTER COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
2015, 2014,2017, 2016, AND
2013 | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Year | | | Additions
Charged to
Costs and
Expenses | | | Deductions (1) | | | Balance
at End
of Year | |
2015 | | | | | | | | | | | | | | | | |
Deducted from assets to which they apply: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,036 | | | $ | 1,113 | | | $ | 664 | | | $ | 1,485 | |
| | | | | | | | | | | | | | | | |
2014 | | | | | | | | | | | | | | | | |
Deducted from assets to which they apply: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,099 | | | $ | 462 | | | $ | 525 | | | $ | 1,036 | |
| | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | |
Deducted from assets to which they apply: | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 899 | | | $ | 236 | | | $ | 36 | | | $ | 1,099 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Balance at Beginning of Year | | Additions Charged to Costs and Expenses | | Deductions (1) | | Balance at End of Year |
| 2017 | | | | | | | | |
| Deducted from assets to which they apply: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,417 |
| | $ | 1,517 |
| | $ | 783 |
| | $ | 2,151 |
|
| Valuation allowance for deferred tax assets | | $ | 29,719 |
| | $ | — |
| | $ | 6,023 |
| | $ | 23,696 |
|
| 2016 | | | | | | | | |
| Deducted from assets to which they apply: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,485 |
| | $ | 982 |
| | $ | 1,050 |
| | $ | 1,417 |
|
| Valuation allowance for deferred tax assets | | $ | — |
| | $ | 29,719 |
| | $ | — |
| | $ | 29,719 |
|
| 2015 | | | | | | | | |
| Deducted from assets to which they apply: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,036 |
| | $ | 1,113 |
| | $ | 664 |
| | $ | 1,485 |
|
| |
| (1) | Notes and accounts receivable written off as uncollectible. |
ITEM 16. PursuantFORM 10-K SUMMARY
We may voluntarily include a summary of information required by Annual Report on Form 10-K under this Item 16. We have elected not to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalfinclude such summary information.
INDEX TO EXHIBITS
All exhibits are incorporated herein by
the undersigned, thereunto duly authorized.reference: | | | | | | |
| | |
| Exhibit Number | | | | L.B. FOSTER COMPANY |
| | | |
Date: March 1, 2016
| | | | By: | | /s/ Robert P. Bauer
|
| | | | | | (Robert P. Bauer, |
| | | | | | President and Chief Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | Description |
| | | Name
| | Position
| | Date
|
| | | |
By:
| | /s/ Lee B. Foster II
| | Chairman of the Board and Director | | March 1, 2016 |
| | (Lee B. Foster II) | | | | |
| | | |
By:
| | /s/ Robert P. Bauer
| | President, Chief Executive Officer | | March 1, 2016 |
| | (Robert P. Bauer) | | and Director | | |
| | | |
By:
| | /s/ Dirk Jungé
| | Director | | March 1, 2016 |
| | (Dirk Jungé) | | | | |
| | | |
By:
| | /s/ G. Thomas McKane
| | Director | | March 1, 2016 |
| | (G. Thomas McKane) | | | | |
| | | |
By:
| | /s/ Diane B. Owen
| | Director | | March 1, 2016 |
| | (Diane B. Owen) | | | | |
| | | |
By:
| | /s/ Robert S. Purgason
| | Director | | March 1, 2016 |
| | (Robert S. Purgason) | | | | |
| | | |
By:
| | /s/ William H. Rackoff
| | Director | | March 1, 2016 |
| | (William H. Rackoff) | | | | |
| | | |
By:
| | /s/ Suzanne B. Rowland
| | Director | | March 1, 2016 |
| | (Suzanne B. Rowland) | | | | |
| | | |
By:
| | /s/ Bradley S. Vizi
| | Director | | March 1, 2016 |
| | (Bradley S. Vizi) | | | | |
| | | |
By:
| | /s/ David J. Russo
| | Senior Vice President, | | March 1, 2016 |
| | (David J. Russo) | | Chief Financial Officer
and Treasurer
| | |
| | | |
By:
| | /s/ Christopher T. Scanlon
| | Controller and Chief Accounting Officer | | March 1, 2016 |
| | (Christopher T. Scanlon) | | | | |
INDEX TO EXHIBITS
All exhibits are incorporated herein by reference:
| | |
| 2.1 | | |
| 3.1 | | |
| 3.2 | | |
4.1 | | Rights Agreement, amended and restated as of November 19, 2012, between L.B. Foster Company and American Stock Transfer & Trust Company, including the form of Rights Certificate and the Summary of Rights attached thereto, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on November 20, 2012. |
| 10.1 | | $335,000,000 Amended and Restated Credit Agreement dated March 13, 2015, between Registrant and PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K/A, File No. 0-10436, filed on March 16, 2015. |
| 10.2 | | First Amendment dated June 29, 2016 to Amended and Restated Credit Agreement dated March 13, 2015, between Registrant and PNC Bank N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company including forms of Security Agreement and Pledge Agreement is incorporated by herein by reference to Exhibit 10.1 to the Current Report on form 8-K, File No. 0-10436, filed on July 1, 2016. |
| 10.3 | | Second Amendment dated November 7, 2016 to the Second Amended and Restated Credit Agreement dated March 13, 2015, and as amended by the First Amendment dated June 29, 2016, among Registrant and PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K/A, File No. 0-10436, filed on November 8, 2016. |
| 10.4 ** | | Employment Agreement with Robert P. Bauer, dated January 18, 2012, |
10.310.5 ** | | 2006 Omnibus Incentive Plan, as amended and restated October 30, 2013, incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, File No. 0-10436, filed on February 27, 2014. |
10.4 ** | | |
10.510.6 ** | | |
10.6 ** | | Retention Performance Share Unit Award Agreement between Registrant and David R. Sauder dated March 15, 2011, incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, File No. 0-10436, filed on March 15, 2012. |
| 10.7 ** | | Form of Performance Share Unit Award Agreement (2013), incorporated by reference to Exhibit 10.13.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, File No. 0-10436, filed on March 8, 2013. |
10.8 ** | | |
10.910.8 ** | | Executive Annual Incentive Compensation Plan (as Amended and Restated), incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A, filed on April 12, 2013. |
10.10 ** | | Amended and Restated Key Employee Separation Plan, incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, FileNo. 0-10436, filed on March 8, 2013. |
| | |
10.11 ** | | |
10.1210.9 ** | | Medical Reimbursement |
| 10.10 ** | | |
10.1310.11 ** | | Medical Reimbursement Plan (MRP2) effective January 1, 2006, incorporated by reference to Exhibit 10.45.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, File No. 0-10436, filed on March 16, 2011. |
10.14 ** | | Amendments to MRP2, incorporated by reference to Exhibit 10.45.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, File No. 0-10436, filed on March 16, 2011. |
10.15 ** | | |
10.1610.12 ** | | 2014 Executive Annual Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 0-10436, filed May 5, 2014. |
10.17 ** | | Form of 2014 Restricted Stock Agreement, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 0-10436, filed May 5, 2014. |
10.18 ** | | Retirement and Consulting Agreement and Non-Competition and Non-Solicitation Agreement dated June 20, 2014 between L.B. Foster Company and Donald L. Foster, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on June 20, 2014. |
10.19 ** | | Release Agreement dated June 20, 2014 between L.B. Foster Company and Donald L. Foster, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, FileNo. 0-10436, filed on June 20, 2014. |
10.20 ** | | |
10.2110.13 ** | | |
10.2210.14 ** | | |
*10.23**10.15 ** | | |
|
*10.24** | | |
| 10.16 ** | | |
*10.25**10.17 ** | | |
*10.26**10.18 ** | | |
*10.27**10.19 ** | | |
10.2810.20 ** | | |
| 10.21 ** | | |
| 10.22 ** | | |
| 10.23 ** | | |
| 10.24 ** | | |
| 10.25 | | Agreement dated February 12, 2016, among L. B. Foster Company, Legion Partners, L.P. I, Legion Partners, L.P. II, Legion Partners Special Opportunities, L.P. II, Legion Partners Holdings, LLC, Legion Partners Asset Management, LLC, Legion Partners Holdings, LLC, Bradley S. Vizi, Christopher S. Kiper, and Raymond White, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on February 17, 2016. |
| | |
10.2910.26 | | Confidentiality Agreement dated February 12, 2016, among L.B. Foster Company, Legion Partners, L.P. I, Legion Partners, L.P. II, Legion Partners Special Opportunities, L.P. II, Legion Partners Holdings, LLC, Legion Partners Asset Management, LLC, Legion Partners Holdings, LLC, Bradley S. Vizi, Christopher S. Kiper, Raymond White, David A. Katz, and Justin Albert incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on February 17, 20162016. |
| *21 | | |
| *23 | | |
| *31.1 | | |
| *31.2 | | |
| *32.0 | | |
| *101.INS | | XBRL Instance Document. |
| *101.SCH | | XBRL Taxonomy Extension Schema Document. |
| *101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| *101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| *101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| *101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| * | | Exhibits are filed herewith. |
| ** | | Exhibit represents a management contract or compensatory plan, contract or arrangement required to be filed as Exhibits to this Annual Report on Form 10-K. |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | | |
| | | L.B. FOSTER COMPANY |
| | | (Registrant) |
| | | |
| Date: | February 28, 2018 | By: | /s/ Robert P. Bauer |
| | | (Robert P. Bauer, |
| | | President and Chief Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | | | |
| | | | | | |
| | Name | | Position | | Date |
| | | |
| By: | | /s/ Lee B. Foster II | | Chairman of the Board and Director | | February 28, 2018 |
| | (Lee B. Foster II) | | | | |
| | | |
| By: | | /s/ Robert P. Bauer | | President, Chief Executive Officer, | | February 28, 2018 |
| | (Robert P. Bauer) | | and Director | | |
| | | |
| By: | | /s/ Dirk Jungé | | Director | | February 28, 2018 |
| | (Dirk Jungé) | | | | |
| | | |
| By: | | /s/ Diane B. Owen | | Director | | February 28, 2018 |
| | (Diane B. Owen) | | | | |
| | | |
| By: | | /s/ Robert S. Purgason | | Director | | February 28, 2018 |
| | (Robert S. Purgason) | | | | |
| | | |
| By: | | /s/ William H. Rackoff | | Director | | February 28, 2018 |
| | (William H. Rackoff) | | | | |
| | | |
| By: | | /s/ Suzanne B. Rowland | | Director | | February 28, 2018 |
| | (Suzanne B. Rowland) | | | | |
| | | |
| By: | | /s/ Bradley S. Vizi | | Director | | February 28, 2018 |
| | (Bradley S. Vizi) | | | | |
| | | |
| By: | | /s/ James P. Maloney | | Senior Vice President, | | February 28, 2018 |
| | (James P. Maloney) | | Chief Financial Officer, and Treasurer | | |
| | | |
| By: | | /s/ Christopher T. Scanlon | | Controller and Chief Accounting Officer | | February 28, 2018 |
| | (Christopher T. Scanlon) | | | | |
