UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Forfor the quarterly period endedSeptember 30, 2014March 31, 2015
Or
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission File Number: 0-10436
L.B. Foster Company
(Exact name of Registrant as specified in its charter)
Pennsylvania | 25-1324733 | |
(State of Incorporation) | (I. R. S. Employer Identification No.) |
415 Holiday Drive, Pittsburgh, Pennsylvania | 15220 | |
(Address of principal executive offices) | (Zip Code) |
(412) 928-3400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |||
Common Stock, Par Value $.01 |
L.B. FOSTER COMPANY AND SUBSIDIARIES
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, 2014 | December 31, 2013 | March 31, 2015 | December 31, 2014 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 86,516 | $ | 64,623 | $ | 37,550 | $ | 52,024 | ||||||||
Accounts receivable - net | 91,178 | 98,437 | 93,468 | 90,178 | ||||||||||||
Inventories - net | 90,795 | 76,956 | 105,686 | 95,089 | ||||||||||||
Current deferred tax assets | 461 | 461 | 4,440 | 3,497 | ||||||||||||
Prepaid income tax | 233 | 4,741 | 3,190 | 2,790 | ||||||||||||
Other current assets | 3,556 | 2,000 | 8,334 | 4,101 | ||||||||||||
Current assets of discontinued operations | 14 | 149 | ||||||||||||||
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Total current assets | 272,753 | 247,367 | 252,668 | 247,679 | ||||||||||||
Property, plant, and equipment - net | 63,105 | 50,109 | 125,141 | 74,802 | ||||||||||||
Other assets: | ||||||||||||||||
Goodwill | 59,603 | 57,781 | 215,130 | 82,949 | ||||||||||||
Other intangibles - net | 49,789 | 51,846 | 93,646 | 82,134 | ||||||||||||
Investments | 5,365 | 5,090 | 5,907 | 5,824 | ||||||||||||
Other assets | 1,750 | 1,461 | 3,234 | 1,733 | ||||||||||||
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Total Assets | $ | 452,365 | $ | 413,654 | ||||||||||||
Total assets | $ | 695,726 | $ | 495,121 | ||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 60,229 | $ | 46,620 | $ | 56,764 | $ | 67,166 | ||||||||
Deferred revenue | 9,810 | 5,715 | 8,010 | 8,034 | ||||||||||||
Accrued payroll and employee benefits | 9,333 | 8,927 | 9,984 | 13,419 | ||||||||||||
Accrued warranty | 8,610 | 7,483 | 10,344 | 11,500 | ||||||||||||
Current maturities of long-term debt | 104 | 31 | 675 | 676 | ||||||||||||
Current deferred tax liabilities | 179 | 179 | 77 | 77 | ||||||||||||
Other accrued liabilities | 8,885 | 6,501 | 11,892 | 7,899 | ||||||||||||
Liabilities of discontinued operations | — | 26 | ||||||||||||||
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Total current liabilities | 97,150 | 75,482 | 97,746 | 108,771 | ||||||||||||
Long-term debt | 270 | 25 | 217,560 | 25,752 | ||||||||||||
Deferred tax liabilities | 11,086 | 11,798 | 27,990 | 10,945 | ||||||||||||
Other long-term liabilities | 9,378 | 9,952 | 16,934 | 13,765 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, par value $.01, authorized 20,000,000 shares; shares issued at September 30, 2014 and December 31, 2013, 11,115,779; shares outstanding at September 30, 2014 and December 31, 2013, 10,238,906 and 10,188,521 | 111 | 111 | ||||||||||||||
Common stock, par value $.01, authorized 20,000,000 shares; shares issued at March 31, 2015 and December 31, 2014, 11,115,779; shares outstanding at March 31, 2015 and December 31, 2014, 10,278,801 and 10,242,405, respectively | 111 | 111 | ||||||||||||||
Paid-in capital | 47,649 | 47,239 | 46,966 | 48,115 | ||||||||||||
Retained earnings | 317,057 | 298,361 | 326,541 | 322,672 | ||||||||||||
Treasury stock - at cost, common stock, shares at September 30, 2014 and December 31, 2013, 876,873 and 927,258 | (23,242 | ) | (24,731 | ) | ||||||||||||
Treasury stock - at cost, common stock, shares at March 31, 2015 and December 31, 2014, 836,978 and 873,374, respectively | (21,932 | ) | (23,118 | ) | ||||||||||||
Accumulated other comprehensive loss | (7,094 | ) | (4,583 | ) | (16,190 | ) | (11,892 | ) | ||||||||
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Total stockholders’ equity | 334,481 | 316,397 | 335,496 | 335,888 | ||||||||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 452,365 | $ | 413,654 | $ | 695,726 | $ | 495,121 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Net sales | $ | 167,797 | $ | 162,248 | $ | 446,043 | $ | 441,505 | $ | 137,907 | $ | 111,414 | ||||||||||||
Cost of goods sold | 132,638 | 130,943 | 356,057 | 356,177 | 107,254 | 87,287 | ||||||||||||||||||
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Gross profit | 35,159 | 31,305 | 89,986 | 85,328 | 30,653 | 24,127 | ||||||||||||||||||
Selling and administrative expenses | 20,644 | 17,547 | 58,268 | 52,628 | 22,251 | 18,025 | ||||||||||||||||||
Amortization expense | 1,191 | 701 | 3,504 | 2,102 | 2,157 | 1,141 | ||||||||||||||||||
Interest expense | 126 | 118 | 375 | 376 | 613 | 123 | ||||||||||||||||||
Interest income | (140 | ) | (149 | ) | (431 | ) | (494 | ) | (57 | ) | (144 | ) | ||||||||||||
Equity in income of nonconsolidated investments | (477 | ) | (296 | ) | (823 | ) | (892 | ) | (173 | ) | (204 | ) | ||||||||||||
Other income | (47 | ) | (638 | ) | (297 | ) | (953 | ) | (803 | ) | (135 | ) | ||||||||||||
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21,297 | 17,283 | 60,596 | 52,767 | 23,988 | 18,806 | |||||||||||||||||||
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Income from continuing operations before income taxes | 13,862 | 14,022 | 29,390 | 32,561 | ||||||||||||||||||||
Income before income taxes | 6,665 | 5,321 | ||||||||||||||||||||||
Income tax expense | 4,743 | 4,229 | 9,774 | 10,560 | 2,380 | 1,672 | ||||||||||||||||||
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Income from continuing operations | 9,119 | 9,793 | 19,616 | 22,001 | ||||||||||||||||||||
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Discontinued operations: | ||||||||||||||||||||||||
(Loss) Income from discontinued operations before income taxes | (5 | ) | — | 18 | 23 | |||||||||||||||||||
Income tax (benefit) expense | (2 | ) | — | 7 | 9 | |||||||||||||||||||
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(Loss) Income from discontinued operations | (3 | ) | — | 11 | 14 | |||||||||||||||||||
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Net income | $ | 9,116 | $ | 9,793 | $ | 19,627 | $ | 22,015 | $ | 4,285 | $ | 3,649 | ||||||||||||
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Basic earnings per common share: | ||||||||||||||||||||||||
From continuing operations | $ | 0.89 | $ | 0.96 | $ | 1.92 | $ | 2.16 | ||||||||||||||||
From discontinued operations | (0.00 | ) | — | 0.00 | 0.00 | |||||||||||||||||||
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Basic earnings per common share | $ | 0.89 | $ | 0.96 | $ | 1.92 | $ | 2.16 | $ | 0.42 | $ | 0.36 | ||||||||||||
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Diluted earnings per common share: | ||||||||||||||||||||||||
From continuing operations | $ | 0.88 | $ | 0.95 | $ | 1.90 | $ | 2.15 | ||||||||||||||||
From discontinued operations | (0.00 | ) | — | 0.00 | 0.00 | |||||||||||||||||||
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Diluted earnings per common share | $ | 0.88 | $ | 0.95 | $ | 1.90 | $ | 2.15 | $ | 0.41 | $ | 0.35 | ||||||||||||
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Dividends paid per common share | $ | 0.03 | $ | 0.03 | $ | 0.09 | $ | 0.09 | $ | 0.04 | $ | 0.03 | ||||||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Net income | $ | 9,116 | $ | 9,793 | $ | 19,627 | $ | 22,015 | $ | 4,285 | $ | 3,649 | ||||||||||||
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Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustment | (2,693 | ) | 1,480 | (2,648 | ) | (1,790 | ) | (4,387 | ) | (1,750 | ) | |||||||||||||
Reclassification of pension liability adjustments to earnings, net of tax expense of $24, $36 and $71, $109 * | 47 | 72 | 137 | 211 | ||||||||||||||||||||
Reclassification of pension liability adjustments to earnings, net of tax expense of $46 and $21 * | 89 | 41 | ||||||||||||||||||||||
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Other comprehensive (loss) income, net of tax | (2,646 | ) | 1,552 | (2,511 | ) | (1,579 | ) | |||||||||||||||||
Other comprehensive loss, net of tax | (4,298 | ) | (1,709 | ) | ||||||||||||||||||||
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Comprehensive income | $ | 6,470 | $ | 11,345 | $ | 17,116 | $ | 20,436 | ||||||||||||||||
Comprehensive (loss) income | $ | (13 | ) | $ | 1,940 | |||||||||||||||||||
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* | 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 Condensed Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended | ||||||||||||||||
Nine Months Ended September 30, | March 31, | |||||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Income from continuing operations | $ | 19,616 | $ | 22,001 | ||||||||||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | ||||||||||||||||
Net income | $ | 4,285 | $ | 3,649 | ||||||||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||||
Deferred income taxes | (641 | ) | (661 | ) | (206 | ) | (195 | ) | ||||||||
Depreciation and amortization | 9,247 | 7,098 | 4,776 | 2,902 | ||||||||||||
Equity in income of nonconsolidated investments | (823 | ) | (892 | ) | (173 | ) | (204 | ) | ||||||||
Loss on sales and disposals of property, plant, and equipment | 15 | 48 | — | 12 | ||||||||||||
Share-based compensation | 2,403 | 1,528 | 620 | 575 | ||||||||||||
Excess income tax benefit from share-based compensation | (283 | ) | (192 | ) | (310 | ) | (85 | ) | ||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||||||
Accounts receivable | 7,820 | (28,931 | ) | 16,044 | 31,574 | |||||||||||
Inventories | (11,839 | ) | 13,392 | (8,276 | ) | (833 | ) | |||||||||
Other current assets | (437 | ) | (1,676 | ) | (1,059 | ) | (1,755 | ) | ||||||||
Prepaid income tax | 4,978 | (3,418 | ) | (745 | ) | 450 | ||||||||||
Other noncurrent assets | (448 | ) | 209 | (1,429 | ) | 43 | ||||||||||
Dividends from LB Pipe & Coupling Products, LLC | 630 | 558 | 90 | 90 | ||||||||||||
Accounts payable | 13,727 | 6,298 | (12,478 | ) | (2,568 | ) | ||||||||||
Deferred revenue | 4,092 | (3,454 | ) | (1,083 | ) | 1,401 | ||||||||||
Accrued payroll and employee benefits | 475 | (2,544 | ) | (5,540 | ) | (3,135 | ) | |||||||||
Other current liabilities | 1,206 | (6,231 | ) | (1,928 | ) | (330 | ) | |||||||||
Other liabilities | (114 | ) | (666 | ) | (17 | ) | 595 | |||||||||
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Net cash provided by continuing operating activities | 49,624 | 2,467 | ||||||||||||||
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Net cash provided by discontinued operations | 114 | 257 | ||||||||||||||
Net cash (used) provided by operating activities | (7,429 | ) | 32,186 | |||||||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from the sale of property, plant, and equipment | 184 | — | 4 | 184 | ||||||||||||
Capital expenditures on property, plant, and equipment | (11,593 | ) | (5,648 | ) | (4,466 | ) | (3,499 | ) | ||||||||
Acquisitions | (12,786 | ) | — | |||||||||||||
Capital contributions to equity method investments | (82 | ) | — | |||||||||||||
Acquisitions, net of cash acquired | (189,200 | ) | (495 | ) | ||||||||||||
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Net cash used by continuing investing activities | (24,277 | ) | (5,648 | ) | ||||||||||||
Net cash used by investing activities | (193,662 | ) | (3,810 | ) | ||||||||||||
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L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three Months Ended | ||||||||||||||||
Nine Months Ended September 30, | March 31, | |||||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
(In thousands) | (Unaudited) | |||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Repayments of other long-term debt | (78 | ) | (14 | ) | ||||||||||||
Proceeds from other long-term debt | 316 | — | ||||||||||||||
Repayments of long-term debt | (28,084 | ) | (19 | ) | ||||||||||||
Proceeds from long-term debt | 219,891 | 316 | ||||||||||||||
Proceeds from exercise of stock options and stock awards | 131 | 35 | 68 | — | ||||||||||||
Financing Fees | (473 | ) | — | |||||||||||||
Financing fees | (1,670 | ) | — | |||||||||||||
Treasury stock acquisitions | (918 | ) | (633 | ) | (962 | ) | (747 | ) | ||||||||
Cash dividends on common stock paid to shareholders | (931 | ) | (931 | ) | (416 | ) | (309 | ) | ||||||||
Excess income tax benefit from share-based compensation | 283 | 192 | 310 | 85 | ||||||||||||
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Net cash used by continuing financing activities | (1,670 | ) | (1,351 | ) | ||||||||||||
Net cash provided (used) by financing activities | 189,137 | (674 | ) | |||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | (1,898 | ) | (1,192 | ) | (2,520 | ) | (1,194 | ) | ||||||||
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Net increase (decrease) in cash and cash equivalents | 21,893 | (5,467 | ) | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (14,474 | ) | 26,508 | |||||||||||||
Cash and cash equivalents at beginning of period | 64,623 | 101,464 | 52,024 | 64,623 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 86,516 | $ | 95,997 | $ | 37,550 | $ | 91,131 | ||||||||
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Supplemental disclosure of cash flow information: | ||||||||||||||||
Interest paid | $ | 267 | $ | 257 | $ | 288 | $ | 87 | ||||||||
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Income taxes paid | $ | 4,849 | $ | 14,747 | $ | 3,551 | $ | 1,480 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.2015. Amounts included in the balance sheet as of December 31, 20132014 were derived from our audited balance sheet. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.2014. In this Quarterly Report on Form 10-Q, references to “Foster,” “we,” “us,” “our,” and the “Company” refer collectively to L.B. Foster and its consolidated subsidiaries.
Recently issued accounting standards
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, 2016,2017, 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 August 2014,April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” (“ASU 2014-15, “Presentation of Financial Statements—Going Concern—Disclosures of Uncertainties about an entity’s Ability2015- 03”). ASU 2015-03 requires that debt issuance costs related to Continuea recognized debt liability be presented in the balance sheet as a Going Concern.” ASU 2014-15 providesdirect deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company is currently assessing the impact that adopting this new accounting guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporatingwill have on its consolidated financial statements and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for
Reclassifications
Certain amounts in previously issued financial statements have been reclassified to conform to the annualcurrent period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant impact on the Condensed Consolidated Financial Statements.presentation.
2.BUSINESS SEGMENTS
The Company is a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy, and utility markets. The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is produced internally and is subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon their contribution to the Company’s consolidated results based upon segment profit.
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 Rail Products and Services and Tubular and Energy Services, respectively. The name changes principally relate to adjacent market growth which has created a platform to enhance 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 following tables illustratetable illustrates revenues and profits from continuing operations of the Company by segment for the periods indicated:
Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||
Net Sales | Segment Profit | Net Sales | Segment Profit | |||||||||||||
Rail Products | $ | 102,105 | $ | 11,533 | $ | 283,085 | $ | 23,685 | ||||||||
Construction Products | 49,907 | 3,251 | 119,100 | 7,838 | ||||||||||||
Tubular Products | 15,785 | 1,661 | 43,858 | 4,973 | ||||||||||||
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Total | $ | 167,797 | $ | 16,445 | $ | 446,043 | $ | 36,496 | ||||||||
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Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
Net Sales | Segment Profit | Net Sales | Segment Profit | March 31, 2015 | March 31, 2014 | |||||||||||||||||||||||||||
Rail Products | $ | 105,552 | $ | 9,713 | $ | 277,843 | $ | 21,749 | ||||||||||||||||||||||||
Net | Segment | Net | Segment | |||||||||||||||||||||||||||||
Sales | Profit | Sales | Profit | |||||||||||||||||||||||||||||
Rail Products and Services | $ | 77,676 | $ | 6,072 | $ | 73,496 | $ | 5,316 | ||||||||||||||||||||||||
Construction Products | 49,320 | 2,855 | 129,828 | 5,373 | 34,290 | 1,228 | 27,383 | 1,216 | ||||||||||||||||||||||||
Tubular Products | 7,376 | 985 | 33,834 | 8,139 | ||||||||||||||||||||||||||||
Tubular and Energy Services | 25,941 | 1,958 | 10,535 | 586 | ||||||||||||||||||||||||||||
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Total | $ | 162,248 | $ | 13,553 | $ | 441,505 | $ | 35,261 | $ | 137,907 | $ | 9,258 | $ | 111,414 | $ | 7,118 | ||||||||||||||||
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Segment profits from continuing operations, as shown above, include internal cost of capital charges for assets used in the segment at a rate of generally 1% per month. There has been no change in the measurement of segment profit from continuing operations from December 31, 2013.2014. The internal cost of capital charges are eliminated during the consolidation process.
The following table provides a reconciliation of reportable segment net profit from continuing operations to the Company’s consolidated total:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Income for reportable segments | $ | 16,445 | $ | 13,553 | $ | 36,496 | $ | 35,261 | $ | 9,258 | $ | 7,118 | ||||||||||||
Interest expense | (126 | ) | (118 | ) | (375 | ) | (376 | ) | (613 | ) | (123 | ) | ||||||||||||
Interest income | 140 | 149 | 431 | 494 | 57 | 144 | ||||||||||||||||||
Other income | 47 | 638 | 297 | 953 | 803 | 135 | ||||||||||||||||||
LIFO income | 302 | 553 | 500 | 299 | ||||||||||||||||||||
LIFO expense | (6 | ) | (4 | ) | ||||||||||||||||||||
Equity in income of nonconsolidated investments | 477 | 296 | 823 | 892 | 173 | 204 | ||||||||||||||||||
Corporate expense, cost of capital elimination, and other unallocated charges | (3,423 | ) | (1,049 | ) | (8,782 | ) | (4,962 | ) | (3,007 | ) | (2,153 | ) | ||||||||||||
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Income from continuing operations before income taxes | $ | 13,862 | $ | 14,022 | $ | 29,390 | $ | 32,561 | ||||||||||||||||
Income before income taxes | $ | 6,665 | $ | 5,321 | ||||||||||||||||||||
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The following table illustrates assets of the Company by segment:
March 31, | December 31, | |||||||
2015 | 2014 | |||||||
Rail Products and Services | $ | 248,870 | $ | 239,951 | ||||
Construction Products | 93,617 | 102,978 | ||||||
Tubular and Energy Services | 323,472 | 130,289 | ||||||
Unallocated corporate assets | 38,062 | 30,192 | ||||||
LIFO | (8,295 | ) | (8,289 | ) | ||||
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Total | $ | 695,726 | $ | 495,121 | ||||
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3.ACQUISITIONS
Inspection Oilfield Services (IOS)
On March 13, 2015, the Company acquired IOS Holdings, Inc. for approximately $166,933, net of cash acquired and an estimated working capital receivable adjustment of $2,834. 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. As of March 31, 2015, the Company has not been able to estimate the earn-out
proceeds that are expected to be earned. Approximately $7,600 of the purchase price is held in escrow to satisfy potential indemnity claims made under the purchase agreement. 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 has been included within our Tubular and Energy Services segment from the date of acquisition through March 31, 2015.
Tew Holdings, LTD
On January 13, 2015, the Company acquired Tew Holdings, LTD (Tew) for $26,424, net of cash acquired. The purchase price includes an estimated $4,156 related to working capital and net debt adjustments. The non-domestic cash payment 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 have been included within the Rail Products and Services segment from the date of acquisition through March 31, 2015.
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. 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.
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. 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 entered into an asset purchase agreement to acquire and assume substantially all of the assets and liabilities ofacquired Carr Concrete Corporation (Carr) for $12,491,$12,480, inclusive of an accrued $200a $189 post-closing purchase price adjustment. Carr is a provider of pre-stressed and precast concrete products located in Waverly, WV and the
transaction was funded with cash on hand. Included within the purchase price is $1,000 which will beis held in escrow to satisfy anypotential indemnity claims made under the purchase agreement. The results of Carr’s operations for the period July 7, 2014 through September 30, 2014 are included in our Construction Products segment and were not materialsegment.
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 the periods presented.
Ball Winch
During the prior year, the Company acquired substantiallyrecognize, with limited exceptions, all of the assets acquired and liabilities of Ball Winch, LLC (Ball Winch). Cash payments totaling $37,500 were made during 2013 and a post-closing working capital adjustment of $495 was paid in February 2014 resultingassumed in a total purchase pricetransaction at fair value as of $37,995. Included within the purchase price was $3,300 which is held in escrowacquisition date. Goodwill primarily represents the value paid for each acquisition’s enhancement to satisfy any indemnity claims under the purchase agreement. The results of operations for Ball Winch are included in the Company’s Tubular Products segmentproduct 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. Acquisition related costs for the nine monthsthree-month period ended September 30, 2014.March 31, 2015 were $370.
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 exclusive of the incremental amortization, depreciation, and other fair value adjustments for IOS, as the Company has not yet completed the necessary fair value appraisals to quantify those adjustments:
Three months ended | ||||||||
March 31, | March 31, | |||||||
2015 | 2014 | |||||||
Net sales | $ | 153,981 | $ | 160,118 | ||||
Gross profit | 35,125 | 39,526 | ||||||
Net income | 4,331 | 7,534 | ||||||
Diluted earnings per share | ||||||||
As Reported | $ | 0.41 | $ | 0.35 | ||||
Pro forma | $ | 0.42 | $ | 0.73 |
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 | July 7, 2014 Carr Fair Value | November 7, 2013 Ball Winch Fair Value | March 13, 2015 - IOS | January 13, 2015 - Tew | December 30, 2014 - Chemtec | October 29, 2014 - FWO | July 7, 2014 - Carr | |||||||||||||||||||||
Current assets | $ | 3,204 | $ | 1,857 | $ | 19,104 | $ | 11,957 | $ | 15,528 | $ | 131 | $ | 3,180 | ||||||||||||||
Other assets | 145 | 64 | 90 | — | — | — | 45 | |||||||||||||||||||||
Property, plant, and equipment | 7,648 | 5,555 | 47,968 | 2,398 | 4,705 | — | 7,648 | |||||||||||||||||||||
Goodwill | 1,822 | 16,544 | 123,412 | 9,079 | 22,302 | 971 | 1,936 | |||||||||||||||||||||
Other intangibles | 1,348 | 14,682 | — | 14,048 | 33,130 | 419 | 1,348 | |||||||||||||||||||||
Current liabilities | (1,676 | ) | (707 | ) | ||||||||||||||||||||||||
Liabilities assumed | (22,341 | ) | (6,647 | ) | (6,756 | ) | (418 | ) | (1,677 | ) | ||||||||||||||||||
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Total | $ | 12,491 | $ | 37,995 | $ | 168,233 | $ | 30,835 | $ | 68,909 | $ | 1,103 | $ | 12,480 | ||||||||||||||
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The following table summarizes the estimates of the fair values and amortizable lives of the identifiable intangible assets acquired:
Intangible Asset | July 7, 2014 Carr Fair Value | November 7, 2013 Ball Winch Fair Value | ||||||
Trade name | $ | 613 | $ | 723 | ||||
Technology and customer relationships | 611 | 11,129 | ||||||
Non-competition agreements | 124 | 2,830 | ||||||
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| |||||
Total identified intangible assets | $ | 1,348 | $ | 14,682 | ||||
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The Carr purchase price allocation isallocations for Tew, Chemtec, and FWO are based upon aon preliminary valuation.valuations. 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 retrospectively adjust the amounts recognized as of the acquisition date.
The fair values of the assets acquired and liabilities assumed for the IOS acquisition have been preliminarily estimated based upon their carrying value as the Company has concluded thatnot had sufficient time to properly determine the fair values. The Company is currently working with third party valuation firms to determine fair values of acquired inventory, property, plant, and equipment, identified intangible assets, and goodwilllease obligations. Upon completion of the valuation procedures, the Company will adjust the fair values resulting fromand the transactionsrelated impact on deferred taxes. Revisions to the estimates, including the estimated earn-out consideration, will be deductiblemade as fair values are determined within the measurement period. As a result, the Company has not recorded amortization expense related to intangible assets and will adjust amortization during the second quarter 2015. The excess consideration has been preliminarily allocated to goodwill and will be adjusted as the Company finalizes its valuation process and allocates the purchase price to the various acquired assets.
Intangible asset values for tax purposes.the 2014 acquisition of Carr were finalized during 2015.
The following table summarizes the estimates of the fair values and amortizable lives of the identifiable intangible assets acquired:
Intangible Asset | January 13, 2015 - Tew | December 30, 2014 - Chemtec | October 29, 2014 - FWO | July 7, 2014 - Carr | ||||||||||||
Trade name | $ | 870 | $ | 3,149 | $ | — | $ | 613 | ||||||||
Customer relationships | 10,035 | 23,934 | 34 | 524 | ||||||||||||
Technology | 2,480 | 4,930 | 341 | 87 | ||||||||||||
Non-competition agreements | 663 | 1,117 | 44 | 124 | ||||||||||||
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Total identified intangible assets | $ | 14,048 | $ | 33,130 | $ | 419 | $ | 1,348 | ||||||||
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4.GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount offollowing table represents the goodwill at September 30, 2014 and December 31, 2013 was $59,603 and $57,781, respectively. The components of the Company’s goodwillbalance by reporting segment are as follows:reportable segment:
September 30, 2014 | December 31, 2013 | |||||||
Rail Products | $ | 38,026 | $ | 38,026 | ||||
Construction Products | 5,033 | 3,211 | ||||||
Tubular Products | 16,544 | 16,544 | ||||||
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$ | 59,603 | $ | 57,781 | |||||
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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 | 9,079 | — | 123,412 | 132,491 | ||||||||||||
Foreign currency translation impact | (310 | ) | — | — | (310 | ) | ||||||||||
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Balance at March 31, 2015 | $ | 47,725 | $ | 5,147 | $ | 162,258 | $ | 215,130 | ||||||||
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The Company performs goodwill impairment tests at least annually.annually unless it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-stepinterim goodwill impairment test on an interim measurement date.test. No goodwill impairment test was required in connection with these evaluations for the ninethree months ended September 30, 2014.March 31, 2015. The Company performs its annual evaluation of the carrying value of its goodwill during the fourth quarter.
As of September 30, 2014,The following table represents the gross identified intangible assets of $44,455 are attributable to the Company’s Rail Products segment, $3,178 are attributable to the Construction Products segment, and $14,682 are attributable to the Tubular Products segment. As of December 31, 2013, gross identified intangible assets of $44,455 are attributable to the Company’s Rail Products segment, $1,830 are attributable to the Construction Products segment, and $14,682 are attributable to the Tubular Products segment.balance by reportable segment:
2015 | 2014 | |||||||
Rail Products and Services | $ | 58,417 | $ | 44,781 | ||||
Construction Products | 3,178 | 3,178 | ||||||
Tubular and Energy Services | 47,812 | 47,812 | ||||||
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$ | 109,407 | $ | 95,771 | |||||
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The components of the Company’s intangible assets are as follows:
September 30, 2014 | ||||||||||||||||||||||||||||||
Weighted Average Amortization In Years | Gross Carrying Value | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||
Non-compete agreements | 5 | $ | 2,984 | $ | (552 | ) | $ | 2,432 | ||||||||||||||||||||||
Patents | 10 | 639 | (274 | ) | 365 | |||||||||||||||||||||||||
Customer relationships | 23 | 20,484 | (4,378 | ) | 16,106 | |||||||||||||||||||||||||
Supplier relationships | 5 | 350 | (252 | ) | 98 | |||||||||||||||||||||||||
Trademarks and trade names | 16 | 7,616 | (1,714 | ) | 5,902 | |||||||||||||||||||||||||
Technology | 15 | 30,242 | (5,356 | ) | 24,886 | |||||||||||||||||||||||||
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$ | 62,315 | $ | (12,526 | ) | $ | 49,789 | ||||||||||||||||||||||||
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| March 31, 2015 | |||||||||||||||||||||||||||
Weighted Average | Gross | Net | ||||||||||||||||||||||||||||
December 31, 2013 | Amortization | Carrying | Accumulated | Carrying | ||||||||||||||||||||||||||
Weighted Average Amortization In Years | Gross Carrying Value | Accumulated Amortization | Net Carrying Amount | In Years | Value | Amortization | Amount | |||||||||||||||||||||||
Non-compete agreements | 5 | $ | 2,860 | $ | (117 | ) | $ | 2,743 | 5 | $ | 4,786 | $ | (941 | ) | $ | 3,845 | ||||||||||||||
Patents | 10 | 639 | (201 | ) | 438 | 10 | 523 | (163 | ) | 360 | ||||||||||||||||||||
Customer relationships | 23 | 19,960 | (3,575 | ) | 16,385 | 17 | 54,247 | (5,579 | ) | 48,668 | ||||||||||||||||||||
Supplier relationships | 5 | 350 | (213 | ) | 137 | 5 | 350 | (285 | ) | 65 | ||||||||||||||||||||
Trademarks and trade names | 16 | 7,003 | (1,334 | ) | 5,669 | 14 | 11,616 | (2,093 | ) | 9,523 | ||||||||||||||||||||
Technology | 15 | 30,155 | (3,681 | ) | 26,474 | 14 | 37,885 | (6,700 | ) | 31,185 | ||||||||||||||||||||
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$ | 60,967 | $ | (9,121 | ) | $ | 51,846 | $ | 109,407 | $ | (15,761 | ) | $ | 93,646 | |||||||||||||||||
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December 31, 2014 | ||||||||||||||||
Weighted Average | Gross | Net | ||||||||||||||
Amortization | Carrying | Accumulated | Carrying | |||||||||||||
In Years | Value | Amortization | 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 | |||||||||||
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$ | 95,771 | $ | (13,637 | ) | $ | 82,134 | ||||||||||
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Intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization period of approximately 1715 years. Amortization expense from continuing operations for the three-month periods ended September 30,March 31, 2015 and 2014 was $2,157 and 2013 was $1,191 and $701,$1,141, respectively. Amortization expense from continuing operations for the nine-month periods ended September 30, 2014 and 2013 was $3,504 and $2,102, respectively.
Estimated amortization expense from continuing operations for the remainder of 20142015 and the years 20152016 and thereafter is as follows:
Amortization Expense | ||||
2014 | $ | 1,190 | ||
2015 | 4,502 | |||
2016 | 4,328 | |||
2017 | 4,329 | |||
2018 | 4,182 | |||
2019 and thereafter | 31,258 | |||
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$ | 49,789 | |||
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2015 2016 2017 2018 2019 2020 and thereafter Amortization Expense $ 6,325 8,441 8,410 8,305 7,584 54,581 $ 93,646
5.ACCOUNTS RECEIVABLE
Credit is extended based upon an evaluation of the customer’s financial condition and while collateral is not required, the Company often receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable from continuing operations at September 30, 2014March 31, 2015 and December 31, 20132014 have been reduced by an allowance for doubtful accounts of $1,125$1,215 and $1,099,$1,036, respectively.
6.INVENTORIES
Inventories of continuing operations of the Company at September 30, 2014March 31, 2015 and December 31, 20132014 are summarized in the following table:
March 31, | December 31, | |||||||||||||||
September 30, 2014 | December 31, 2013 | 2015 | 2014 | |||||||||||||
Finished goods | $ | 65,756 | $ | 55,166 | $ | 75,165 | $ | 65,335 | ||||||||
Work-in-process | 12,186 | 11,332 | 13,713 | 16,188 | ||||||||||||
Raw materials | 21,380 | 19,485 | 25,103 | 21,855 | ||||||||||||
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Total inventories at current costs | 99,322 | 85,983 | 113,981 | 103,378 | ||||||||||||
Less: LIFO reserve | (8,527 | ) | (9,027 | ) | (8,295 | ) | (8,289 | ) | ||||||||
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$ | 90,795 | $ | 76,956 | $ | 105,686 | $ | 95,089 | |||||||||
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Inventories of the Company’s continuing operations areInventory is generally valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories of the Company are valued at average cost or market, whichever is lower. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end levels and costs.
7.INVESTMENTS
The Company is a member of a joint venture, LB Pipe & Coupling Products, LLC (LB Pipe JV), in which it maintains a 45% ownership interest. The LB Pipe JV manufactures, markets, and sells various precision coupling products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019.
Under applicable guidance for variable interest entities in ASC 810, “Consolidation,” the Company determined that the LB Pipe JV is a variable interest entity. The Company concluded that it is not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly impact the economic performance of the LB Pipe JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.
As of September 30, 2014March 31, 2015 and December 31, 2013,2014, the Company had a nonconsolidated equity method investment of $5,283$5,845 and $5,090,$5,746, respectively, in the LB Pipe JV and other investments totaling $82 as of September 30, 2014.$62 and $78, respectively.
The Company recorded equity in the income of the LB Pipe JV of approximately $477$189 and $296$204 for the three months ended September 30,March 31, 2015 and 2014, and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded equity in the income of the LB Pipe JV of approximately $823 and $892, respectively. During each of the three months ended September 30,periods ending March 31, 2015 and 2014 and 2013 the Company received cash distributions of $90. Cash distributions of $630 and $558 were received for the nine months ended September 30, 2014 and 2013, respectively. There were no changes to the Company’s 45% ownership interest as a result of the proportional distribution.
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 September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively, are as follows:
September 30, 2014 | December 31, 2013 | |||||||
LB Pipe JV equity method investment | $ | 5,283 | $ | 5,090 | ||||
Net investment in direct financing lease | 1,144 | 1,224 | ||||||
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$ | 6,427 | $ | 6,314 | |||||
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LB Pipe JV equity method investment Net investment in direct financing lease March 31, December 31, 2015 2014 $ 5,845 $ 5,746 1,087 1,117 $ 6,932 $ 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. In November 2012, the Company executed the first amendment to its lease with the LB Pipe JV. The amendment included the addition of a second facility built by the Company that is now leased to the LB Pipe JV. The current monthly lease payments approximate $17, with a balloon payment of approximately $488, which is required to be paid either at the termination of the lease, allocated over the renewal period, or during the initial term of the lease. This lease qualifies as a direct financing lease under the applicable guidance in ASC 840-30, “Leases.” The Company maintained a net investment in this direct financing lease of approximately $1,144 and $1,224 at September 30, 2014 and December 31, 2013, respectively.
The following is a schedule of the direct financing minimum lease payments for the remainder of 20142015 and the years 20152016 and thereafter:
Minimum Lease Payments | Minimum Lease Payments | |||||||
2014 | $ | 34 | ||||||
2015 | 122 | $ | 92 | |||||
2016 | 131 | 131 | ||||||
2017 | 140 | 140 | ||||||
2018 | 150 | 150 | ||||||
2019 and thereafter | 567 | |||||||
2019 | 574 | |||||||
2020 and thereafter | — | |||||||
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| |||||||
$ | 1,144 | $ | 1,087 | |||||
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8.DEFERRED REVENUE
Deferred revenue of $9,810$8,010 and $5,715$8,034 as of September 30, 2014March 31, 2015 and December 31, 2013,2014, 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 that themet. The Company has significantly fulfilled its obligations under the contracts and the customers have paid, but due to the Company’s continuing involvement with the material, revenue is precluded from being recognized until title passes to the customer.
9.BORROWINGSLONG-TERM DEBT
United States
Long-term debt consists of the following:
March 31, | December 31, | |||||||
2015 | 2014 | |||||||
Revolving credit facility | $ | 216,261 | $ | 24,200 | ||||
Capital leases and financing agreements | 1,974 | 2,228 | ||||||
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| |||||
Total | 218,235 | 26,428 | ||||||
Less current maturities | 675 | 676 | ||||||
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| |||||
Long-term portion | $ | 217,560 | $ | 25,752 | ||||
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On September 23, 2014, March 13, 2015, L.B. Foster (“the Company,Company”), its domestic subsidiaries, and certain of its Canadian subsidiaries entered into an amended and restated $200,000$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., and Citizens Bank of Pennsylvania.Pennsylvania, and
Branch Banking and Trust Company. This Amended Credit Agreement modifies the prior revolving credit facility which had a maximum credit line of $125,000.$200,000. The Amended Credit Agreement provides for a five-year, unsecured revolving credit facility that permits borrowingborrowings of up to $200,000$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 also modifies the accordion feature in the prior revolving credit facility which permitted a maximum increase of $50,000. The Amended Credit Agreement’s accordion feature permits the Company to increase the available revolving borrowings under the facility by up to an additional $100,000 subject to the Company’s receipt of increased commitments from existing lenders or new commitments from new lenders and to certain conditions being satisfied. The Amended Credit Agreement also increases the sublimit for the issuance of trade and standby letters of credit from $20,000 to $30,000.
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 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 1.00%1.50% and 1.00% to 2.00%2.50%, respectively.
The Amended Credit Agreement includes two financial covenants: (a) Leverage Ratio, defined as the Company’s indebtednessIndebtedness less consolidated 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 expendituresCapital Expenditures divided by consolidated interest expense, which must be no less than 3.00 to 1.00.
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.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.
As of September 30, 2014,March 31, 2015, the Company was in compliance with the Amended Credit Agreement’s covenants.
The Company had no outstanding borrowings under the revolving credit facility at September 30, 2014 or DecemberAt March 31, 2013 and had available borrowing capacity of $199,287 at September 30, 2014.
Letters of Credit
At September 30, 2014,2015, the Company had outstanding letters of credit of approximately $713.$425 and had gross available borrowing capacity of $118,314. The maturity date of the facility is March 13, 2020.
United Kingdom
A subsidiary of the Company has a working capital facility with NatWest Bank for its United Kingdom operations which includes an overdraft availability of £1,500 pounds sterling (approximately $2,432$2,223 at September 30, 2014)March 31, 2015). This credit facility supports the subsidiary’s working capital requirements and is collateralized by substantially all of the assets of its United Kingdom operations. The interest rate on this facility is the financial institution’s base rate plus 1.50%. Outstanding performance bonds reduce availability under this credit facility. The subsidiary of the Company had no outstanding borrowings under this credit facility as of September 30, 2014.March 31, 2015. There was approximately $31 and $60$20 in outstanding guarantees (as defined in the underlying agreement) at September 30, 2014 and DecemberMarch 31, 2013, respectively.2015. This credit facility was renewed effective September 29,during the third quarter of 2014 with no significant changes to the underlying terms or conditions in the facility. It is the Company’s intention to renew this credit facility with NatWest Bank during the annual review of the credit facility in 2015.
The United Kingdom loan agreements contain certain financial covenants that require that subsidiary to maintain senior interest and cash flow coverage ratios. The subsidiary was in compliance with these financial covenants as of September 30, 2014.March 31, 2015. The subsidiary had available borrowing capacity of $2,401$2,003 at September 30, 2014.
10.DISCONTINUED OPERATIONS
The Company maintained current assets from discontinued operations of $14 and $149 as of September 30, 2014 and DecemberMarch 31, 2013, respectively. The Company also maintained current liabilities of $26 as of December 31, 2013. Sales from the discontinued businesses were not material to the three and nine months ended September 30, 2014 and 2013.2015.
11.10. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Numerator for basic and diluted earnings per common share - | ||||||||||||||||
Income available to common stockholders: | ||||||||||||||||
Income from continuing operations | $ | 9,119 | $ | 9,793 | $ | 19,616 | $ | 22,001 | ||||||||
(Loss) Income from discontinued operations | (3 | ) | — | 11 | 14 | |||||||||||
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Net income | $ | 9,116 | $ | 9,793 | $ | 19,627 | $ | 22,015 | ||||||||
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Denominator: | ||||||||||||||||
Weighted average shares | 10,239 | 10,182 | 10,220 | 10,171 | ||||||||||||
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Denominator for basic earnings per common share | 10,239 | 10,182 | 10,220 | 10,171 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options | 4 | 11 | 7 | 11 | ||||||||||||
Other stock compensation plans | 92 | 88 | 98 | 73 | ||||||||||||
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Dilutive potential common shares | 96 | 99 | 105 | 84 | ||||||||||||
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Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions | 10,335 | 10,281 | 10,325 | 10,255 | ||||||||||||
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Basic earnings per common share: | ||||||||||||||||
Continuing operations | $ | 0.89 | $ | 0.96 | $ | 1.92 | $ | 2.16 | ||||||||
Discontinued operations | (0.00 | ) | — | 0.00 | 0.00 | |||||||||||
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Basic earnings per common share | $ | 0.89 | $ | 0.96 | $ | 1.92 | $ | 2.16 | ||||||||
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Diluted earnings per common share: | ||||||||||||||||
Continuing operations | $ | 0.88 | $ | 0.95 | $ | 1.90 | $ | 2.15 | ||||||||
Discontinued operations | (0.00 | ) | — | 0.00 | 0.00 | |||||||||||
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Diluted earnings per common share | $ | 0.88 | $ | 0.95 | $ | 1.90 | $ | 2.15 | ||||||||
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Dividends paid per common share | $ | 0.03 | $ | 0.03 | $ | 0.09 | $ | 0.09 | ||||||||
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Numerator for basic and diluted earnings per common share - Income available to common stockholders: Net income Denominator: Weighted average shares Denominator for basic earnings per common share Effect of dilutive securities: Employee stock options Other stock compensation plans Dilutive potential common shares Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions Basic earnings per common share Diluted earnings per common share Dividends paid per common share March 31, 2015 2014 $ 4,285 $ 3,649 10,259 10,197 10,259 10,197 2 10 98 85 100 95 10,359 10,292 $ 0.42 $ 0.36 $ 0.41 $ 0.35 $ 0.04 $ 0.03
12.11.STOCK-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 stock compensation expense of $604$620 and $437$575 for the three-month periodsperiod ended September 30,March 31, 2015 and 2014, and 2013, respectively, related to restricted stock awards and performance unit awards. Stock compensation expense of $2,403 and $1,528 was recorded for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014,March 31, 2015, unrecognized compensation expense for awards the Company expects to vest approximated $3,469.$4,867. The Company will recognize this expense over the upcoming 3.4three year period through FebruaryMarch 2018.
Shares issued as a result of vested stock-based compensation generally will be from previously issued shares which have been reacquired by the Company and held as Treasury shares or authorized but previously unissued common stock.
The excess income tax benefit realized for the tax deduction from stock-based compensation approximated $283$310 and $192$85 for the ninethree months ended September 30,March 31, 2015 and 2014, and 2013, respectively. This excess income tax benefit is included in cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
Stock Option Awards
A summary ofDuring the current year option activity as of September 30, 2014 is presented below.
Weighted | Aggregate | |||||||||||||||
Weighted | Average | Intrinsic | ||||||||||||||
Average | Remaining | Value | ||||||||||||||
Exercise | Contractual | (Dollars in | ||||||||||||||
Shares | Price | Term | thousands) | |||||||||||||
Outstanding and Exercisable at January 1, 2014 | 18,750 | $ | 10.64 | 1.3 | ||||||||||||
Granted | — | — | — | |||||||||||||
Canceled | — | — | — | |||||||||||||
Exercised | (11,250 | ) | 11.67 | — | ||||||||||||
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Outstanding and Exercisable at September 30, 2014 | 7,500 | $ | 9.08 | 0.6 | $ | 276 | ||||||||||
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At September 30, 2014, common stock optionsthree-month period ended March 31, 2015, 7,500 outstanding and exercisable under the Company’s equity plans had option prices ranging from $8.97 to $9.29, withstock options were exercised at a weighted average exercise price of $9.08. At September 30, 2013, commonThere were no remaining stock options outstanding or exercisable as of March 31, 2015, and exercisable under the Company’s equity plans had option prices ranging from $7.81 to $14.77, with a weighted average exercise price of $10.64 per share.
The total intrinsic valueno new grants or cancellations of stock options outstanding and exercisable at September 30, 2013 was $658.
The weighted average remaining contractual life of the stock options outstanding at September 30, 2014 and 2013 was 0.6 and 1.5 years, respectively.
There were no stock options exercisedoption awards during the three-month periodperiods ended September 30,March 31, 2015 and 2014. There were 11,250 stock options with a weighted average exercise price per share of $11.67 exercised during the nine-month period ended September 30, 2014. There were 3,750 stock options exercised during the three and nine-month periods ending September 30, 2013 with an average exercise price of $9.30.
Restricted Stock Awards and Performance Unit Awards
Under the amended and restated 2006 Omnibus Stock Incentive Plan, the Company grants eligible employees Restricted Stockrestricted stock and Performance Unit Awards.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.plans. 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.plan. If the Company’s estimate of the number of Performance Stock Awardsperformance stock awards expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change future expense over the remaining vesting period.
The following table summarizes the Restricted Stock Award and Performance Unit Award activity for the period ended September 30, 2014:March 31, 2015:
Restricted Stock Units | Performance Stock Units | Weighted Average Grant Date Fair Value | Restricted Stock Units | Performance Stock Units | Weighted Average Grant Date Fair Value | |||||||||||||||||||
Outstanding at January 1, 2014 | 129,726 | 61,651 | $ | 34.00 | ||||||||||||||||||||
Outstanding at December 31, 2014 | 108,237 | 71,990 | $ | 36.25 | ||||||||||||||||||||
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Granted | 19,051 | 34,652 | 44.07 | 13,706 | 41,114 | 44.64 | ||||||||||||||||||
Vested | (36,302 | ) | (13,588 | ) | 33.96 | (24,839 | ) | (23,877 | ) | 30.27 | ||||||||||||||
Adjustment for incentive awards expected to vest | — | (7,845 | ) | 43.59 | — | 3,844 | 47.71 | |||||||||||||||||
Canceled | — | (2,880 | ) | 44.13 | (1,000 | ) | — | 38.44 | ||||||||||||||||
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Outstanding at September 30, 2014 | 112,475 | 71,990 | $ | 36.38 | ||||||||||||||||||||
Outstanding at March 31, 2015 | 96,104 | 93,071 | $ | 40.44 | ||||||||||||||||||||
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13.12.RETIREMENT PLANS
Retirement Plans
The Company has fiveseven retirement plans which cover its hourly and salaried employees in the United States: three defined benefit plans (one active / two frozen) and twofour defined contribution plans. Employees are eligible to participate in the appropriate plan based on employment classification. The Company’s funding to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), applicable plan policy and investment guidelines. The Company’s policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
The Company’s subsidiary, L.B. Foster Rail Technologies, Inc. (Rail Technologies), maintains two defined contribution plans for its employees in Canada, as well as a post-retirement benefit plan. In the United Kingdom, Rail Technologies maintains both a defined contribution plan and a defined benefit plan.
United States Defined Benefit Plans
Net periodic pension costs for the United States defined benefit pension plans for the three and nine-monththree-month periods ended September 30,March 31, 2015 and 2014 and 2013 are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Service cost | $ | 5 | $ | 8 | $ | 17 | $ | 25 | $ | 10 | $ | 6 | ||||||||||||
Interest cost | 193 | 177 | 578 | 530 | 185 | 193 | ||||||||||||||||||
Expected return on plan assets | (242 | ) | (214 | ) | (726 | ) | (642 | ) | (204 | ) | (242 | ) | ||||||||||||
Recognized net actuarial loss | 16 | 53 | 49 | 159 | 69 | 16 | ||||||||||||||||||
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Net periodic pension (income) cost | $ | (28 | ) | $ | 24 | $ | (82 | ) | $ | 72 | ||||||||||||||
Net periodic pension cost (income) | $ | 60 | $ | (27 | ) | |||||||||||||||||||
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The Company expectsdoes not expect to contribute approximately $408 to its United States defined benefit plans in 2014. Contributions of approximately $300 were made during the nine months ended September 30, 2014.2015.
United Kingdom Defined Benefit Plans
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three and nine-monththree-month periods ended September 30,March 31, 2015 and 2014 and 2013 are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2015 | 2014 | |||||||||||||||||||
Interest cost | $ | 97 | $ | 85 | $ | 297 | $ | 255 | $ | 76 | $ | 99 | ||||||||||||
Expected return on plan assets | (92 | ) | (73 | ) | (281 | ) | (219 | ) | (83 | ) | (94 | ) | ||||||||||||
Amortization of transition amount | (7 | ) | (12 | ) | (21 | ) | (36 | ) | ||||||||||||||||
Amortization of prior service costs and transition amount | 5 | (7 | ) | |||||||||||||||||||||
Recognized net actuarial loss | 49 | 57 | 149 | 171 | 58 | 50 | ||||||||||||||||||
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Net periodic pension cost | $ | 47 | $ | 57 | $ | 144 | $ | 171 | $ | 56 | $ | 48 | ||||||||||||
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United Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. Employer contributions of $292$270 are anticipated to the United Kingdom L.B. Foster Rail Technologies, Inc. pension plan during 2014.2015. For the ninethree months ended September 30, 2014,March 31, 2015, the Company contributed approximately $219$69 to the plan.
Defined Contribution Plans
The Company sponsors fiveseven defined contribution plans for hourly and salaried employees across our domestic and international facilities. The following table summarizes the expense associated with the contributions made to these plans.
Three Months Ended | Nine Months Ended | |||||||||||||||
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Salaried Plan | $ | 672 | $ | 478 | $ | 1,751 | $ | 1,422 | ||||||||
Union Plan | 20 | 18 | 59 | 53 | ||||||||||||
Montreal Plan | 20 | 28 | 65 | 88 | ||||||||||||
United Kingdom Plan | 32 | 27 | 100 | 95 | ||||||||||||
Burnaby Plan | 32 | 34 | 107 | 111 | ||||||||||||
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$ | 776 | $ | 585 | $ | 2,082 | $ | 1,769 | |||||||||
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Canada | 59 | 64 | ||||||
United Kingdom | 83 | 38 | ||||||
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14.FAIR VALUE MEASUREMENTS
The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the 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 Company has an established process for determining fair value for its financial assets and liabilities, principally cash and cash equivalents and at times foreign currency exchange contracts. Fair value is based on quoted market prices, where available. If quoted market prices are not available, fair value is based on assumptions that use as inputs market-based parameters. The following sections describe the valuation methodologies used by the Company to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified. Where appropriate the description includes details of the key inputs to the valuations and any significant assumptions.
Cash equivalents. Included within “Cash and cash equivalents” are investments in money market funds with various underlying securities all of which maintain AAA credit ratings. Also included within cash equivalents are our highly liquid investments in non-domestic bank term deposits. The Company uses quoted market prices to determine the fair value of these investments and they are classified in Level 1 of the fair value hierarchy. The carrying amounts approximate fair value because of the short maturity of the instruments.
The following assets and liabilities of the Company were measured at fair value on a recurring basis subject to the disclosure requirements of ASC Topic 820 at September 30, 2014 and December 31, 2013:
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
September 30, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | December 31, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
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Domestic money market funds | $ | 36,386 | $ | 36,386 | $ | — | $ | — | $ | 18,276 | $ | 18,276 | $ | — | $ | — | ||||||||||||||||
Non domestic bank term deposits | 29,757 | 29,757 | — | — | 32,947 | 32,947 | — | — | ||||||||||||||||||||||||
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Total Assets | $ | 66,143 | $ | 66,143 | $ | — | $ | — | $ | 51,223 | $ | 51,223 | $ | — | $ | — | ||||||||||||||||
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15.13.COMMITMENTS AND CONTINGENT LIABILITIES
Product Liability Claims
The Company is subject to product warranty claims that arise in the ordinary course of its business. For certain manufactured products, the Company maintains a product warranty accrual which is adjusted on a monthly basis as a percentage of cost of sales. The product warranty accrual is continually reviewed and periodically adjusted based on the identification or resolution of known individual product warranty claims. The following table sets forth the Company’s continuing operations product warranty accrual:
Warranty Liability | Warranty Liability | |||||||
Balance at December 31, 2013 | $ | 7,483 | ||||||
Balance at December 31, 2014 | $ | 11,500 | ||||||
Additions to warranty liability | 5,758 | 252 | ||||||
Warranty liability utilized | (4,631 | ) | (1,461 | ) | ||||
Acquisitions | 53 | |||||||
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Balance at September 30, 2014 | $ | 8,610 | ||||||
Balance at March 31, 2015 | $ | 10,344 | ||||||
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Included within the above table are concrete tie warranty reserves of approximately $7,576$9,090 and $6,462$10,331 as of September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively. Increases toThe reduction in the warranty reserve relate to the Company’s standard warranty accrual which is based upon historical claims experience, as well as an incremental $608 reserve related to a transit project warranty issue, and a $4,000 charge related to the Union Pacific Railroad (UPRR) warranty claim recorded during the 2014 second quarter. The incremental adjustment to the transit project addresses a previously established reserve that is nearing completion. Reductions to theconcrete tie reserve balance primarily relaterelates to warranty claims satisfied through the replacement of concrete ties during the nine-monththree month period ended September 30, 2014.March 31, 2015.
UPRR Warranty ClaimUnion Pacific Railroad Matter
InOn July 12, 2011, the UPRRUnion Pacific Railroad (UPRR) notified (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 the UPRR. The UPRR asserted that a significant percentage of concrete ties manufactured in 2006
through 2011 at CXT’s former Grand Island, NE facility failed to meet contract specifications, had workmanship defects, and were cracking and failing prematurely. Of the 3.0 million ties manufactured between 19991998 and 2011 from the Grand Island, NE facility, approximately 1.6 million relate to concrete ties were sold to the UPRR during the period of their claim.
During 2012, asthe UPRR had claimed nonconformance. The 2005 contract called for each concrete tie which failed to conform to the specifications or had a result of testing and analysis conducted, includingmaterial defect in workmanship to be replaced with UPRR, on1.5 new concrete ties, provided, that UPRR within five years of the sale of a concrete tie, notified CXT of such failure to conform or such defect in workmanship. The UPRR Notice did not specify how many ties manufactured atduring 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 former Grand Island, NE facility between 1998 and 2011. The Company discontinued manufacturing operations in Grand Island, NE in early 2011.
In late 2012, the Company reachedand CXT agreed to an agreement with UPRR to amendamendment of the warranty and certain related terms of the 2005 supply contract (2012 amended supply agreement) and, among other matters, reverted tocontract. Subsequently, in November 2013, the Company received notice from UPRR asserting a previously used warranty policy of a 15 year warranty with a 1:1 replacement ratio for all ties sold to UPRR (during mostmaterial breach of the period of UPRR’s original claim2005 supply contract. The Company disputed the notice and continues to replace warranty policy was a 5 year warranty with a 1.5:1 replacement ratio for any defective ties) and established a processeligible ties, but the parties have been unable to identify, prioritize, and replace tiesreach agreement on disputed UPRR claims that the Company contends do not meet the criteria for replacement.replacement per the amended 2005 supply agreement.
On January 23, 2015, the 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, 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 providedas 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 UPRR during 2013become 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 continues to provide 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 which the Company believes are for ties which UPRR removed and asserted qualified for warranty replacement. However,inaccurately rated that are not the responsibility of the Company believed a significant number of ties replaced by UPRR didand claims that do not meet the criteria of a warranty replacement criteria and so informed UPRR. UPRR has claimed that(2) UPRR’s assertion, which the Company isvigorously disputes, that UPRR in breachfuture years will be entitled to warranty replacement ties for virtually all of the 2012 amended supply agreementGrand Island ties. Many thousands of Grand Island ties have been performing in track for various reasons.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 has deniedbelieves UPRR’s claim that it is in material breach of the 2012 amended supply agreement.
As of September 30, 2014, the Companyclaims are without merit and the UPRR have not been ableintends to reconcile the disagreement related to the 2013 warranty replacement activity. The disagreement includes approximately 170,000 ties. The Company and the UPRR have also not been able to reconcile the 2014 warranty replacement activity during the current year.vigorously defend itself.
The Company continues to work with UPRR to identify, replace, and reconcile defective ties related to the warranty claimengage in accordance with the 2012 amended supply agreement. The Company and UPRR met during the third quarter of 2014 to evaluate each other’s positiondiscussions in an effort to work towards agreement onresolve this matter, however, we cannot predict that such discussions will be successful, 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. No agreement was reached and the Company continues to endeavor to reconcile the replaced warranty ties with UPRR.
In the event that the Company and UPRR do not reach agreement regarding the 2013 and 2014 replacement activity and future activity and is found to be in material breachresults of the 2012 amended supply agreement, thelitigation with UPRR, may seek damages from the Company and/or terminate the agreement.
During 2012, the Company recorded pre-tax warranty charges of $22,000 in “Cost of Goods Sold” within its Rail Products segment. The accrual was based on the Company’s estimate of the number of defective concrete ties that will ultimately require replacement during the applicable warranty periods at an average cost of fifty dollars per concrete tie. Subsequently, in the second quarter of 2014, the Company increased its accrual by an additional $4,000 based on recent estimates of ties to be replaced. The concrete tie warranty reserve is the best estimate of the expected value of defective ties thatwhether any settlement or judgment amounts will be replaced as a resultwithin the range of observation and analysis of ties in track. While the Company believes this is a reasonable estimate of these potential warranty claims, these estimates could change due to the receipt of new information and future events. The Company will continue to assess the adequacy of its product warranty reserve as additional information becomes available. There can be no assurance at this point that futureour estimated accruals for loss contingencies. Future potential costs pertaining to theseUPRR’s claims or other potential future claims will not haveand the outcome of the UPRR litigation could result in a material impactadverse effect on the Company’sour results of operations, financial condition, or results of operations.and cash flows.
Environmental and Legal Proceedings
The Company is subject to national, state, foreign, provincial, and/or local laws and regulations relating to the protection of the environment. The Company’s efforts to comply with environmental regulations may have an adverse effect on its future earnings. 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.
As of March 31, 2015 and December 31, 2014, the Company maintained environmental and litigation reserves approximating $6,773 and $3,344, respectively. The following table sets forth the Company’s environmental obligation:
Environmental liability | ||||
Balance at December 31, 2014 | $ | 3,344 | ||
Additions to environmental obligations | 2 | |||
Environmental obligations utilized | (33 | ) | ||
Acquisitions | 3,460 | |||
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Balance at March 31, 2015 | $ | 6,773 | ||
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The Company is also subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition or liquidity of the Company. The resolution, in any reporting period, of one or more of these matters could have a material effect on the Company’s results of operations for that period.
As of September 30, 2014 and December 31, 2013, the Company maintained environmental and litigation reserves approximating $3,305 and $2,192, respectively.
16.14.INCOME TAXES
The Company’s effective income tax rate from continuing operations for the three and nine monthsquarter ended September 30, 2014March 31, 2015 was 34.2% and 33.3%35.7%, respectively and 30.2% and 32.4%compared to 31.4% for the three and nine monthsquarter ended September 30, 2013, respectively.March 31, 2014. The Company’s effective income tax rate for the three and nine monthsquarter ended September 30, 2014March 31, 2015 differed from the federal statutory rate of 35% primarily due to state income taxes, nondeductible expenses, U.S. domestic production activities deductions, and operations in foreign jurisdictions with lower statutory tax rates.
17.15.SUBSEQUENT EVENTS
Management evaluated all activity of the Company and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except share data)
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Sentences containing words such as “believe,” “intend,” “may,” “expect,” “could,“should,” “should,“could,” “anticipate,” “plan,” “estimate,” “predict,” “project,” or their negatives, or other similar expressions generally should be considered forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q may concern, among other things, the Company’s expectations regarding our strategy, goals, projections and plans regarding our financial position, liquidity and capital resources, the outcome of litigation and product warranty claims, results of operations, decisions regarding our strategic growth initiatives, market position, and product development, all of which are based on current estimates that involve inherent risks and uncertainties. The Company cautions readers that various factors could cause the actual results of the Company to differ materially from those indicated by forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: general business conditions,an economic slowdown in the markets we serve, the risk of doing business in international markets, a decrease in freight or passenger rail traffic, sustained declines in energy prices, a lack of state or federal funding for new infrastructure projects, increased regulation including conflict minerals, an increase in manufacturing or material costs, our ability to effectuate our strategy including evaluation ofevaluating potential opportunities such as strategic acquisitions, joint ventures, and other initiatives, and our ability to effectively integrate new businesses and realize anticipated benefits, a decrease in freight or passenger rail traffic, a lack of state or federal funding for new infrastructure projects, the timeliness and availability of material from major suppliers, labor disputes, the impact of competition, variances in current accounting estimates and their ultimate outcomes, the seasonality of the Company’s business, the adequacy of internal and external sources of funds to meet financing needs, the Company’s ability to curb its working capital requirements and manage indebtedness, domestic and international income taxes, foreign currency fluctuations, inflation, the impact of new regulations including regarding conflict minerals, the ultimate number of concrete ties that will have to be replaced pursuant to product warranty claims, an overall resolution of the related contract claims, risksthe outcome of a lawsuit filed by Union Pacific Railroad as well as a reduction of future business with the UPRR, risk inherent in litigation, and domestic and foreign governmental regulations. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013 and our other periodic filings with the Securities and Exchange Commission.
The forward looking statements in this report are made as of the date of this report and we assume no obligation to update or revise any forward looking statement, whether as a result of new information, future developments, or otherwise, except as required by securities laws.otherwise.
General Overview
L.B. Foster Company (Company) is a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy, and utility markets. The Company is comprised of three business segments: Rail Products and Services, Construction Products, and Tubular Products.
The following discussion and analysis of financial condition and results of operations relates only to our continuing operations. More information regarding the results of discontinued operations can be found in Note 10 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.Energy Services.
Quarter-to-dateYear-to-date Results of Continuing Operations
Three Months Ended September 30, | Percent of Total Net Sales Three Months Ended September 30, | Percent Increase/ (Decrease) | Three Months Ended March 31, | Percent of Total Net Sales Three Months Ended March 31, | Percent Increase/ (Decrease) | |||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | 2015 | 2014 | 2015 | 2014 | 2015 vs. 2014 | |||||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||||||||||
Rail Products | $ | 102,105 | $ | 105,552 | 60.9 | % | 65.1 | % | (3.3 | )% | ||||||||||||||||||||||||||||||
Rail Products and Services | $ | 77,676 | $ | 73,496 | 56.3 | % | 65.9 | % | 5.7 | % | ||||||||||||||||||||||||||||||
Construction Products | 49,907 | 49,320 | 29.7 | 30.4 | 1.2 | 34,290 | 27,383 | 24.9 | 24.6 | 25.2 | ||||||||||||||||||||||||||||||
Tubular Products | 15,785 | 7,376 | 9.4 | 4.5 | 114.0 | |||||||||||||||||||||||||||||||||||
Tubular and Energy Services | 25,941 | 10,535 | 18.8 | 9.5 | 146.2 | |||||||||||||||||||||||||||||||||||
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Total net sales | $ | 167,797 | $ | 162,248 | 100.0 | % | 100.0 | % | 3.4 | % | $ | 137,907 | $ | 111,414 | 100.0 | % | 100.0 | % | 23.8 | % | ||||||||||||||||||||
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Three Months Ended September 30, | Gross Profit Percentage Three Months Ended September 30, | Percent Increase/ (Decrease) | Three Months Ended March 31, | Gross Profit Percentage Three Months Ended March 31, | Percent Increase/ (Decrease) | |||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | 2015 | 2014 | 2015 | 2014 | 2015 vs. 2014 | |||||||||||||||||||||||||||||||
Gross Profit: | ||||||||||||||||||||||||||||||||||||||||
Rail Products | $ | 23,358 | $ | 21,647 | 22.9 | % | 20.5 | % | 7.9 | % | ||||||||||||||||||||||||||||||
Rail Products and Services | $ | 18,143 | $ | 16,430 | 23.4 | % | 22.4 | % | 10.4 | % | ||||||||||||||||||||||||||||||
Construction Products | 8,421 | 7,614 | 16.9 | 15.4 | 10.6 | 6,562 | 5,712 | 19.1 | 20.9 | 14.9 | ||||||||||||||||||||||||||||||
Tubular Products | 3,220 | 1,608 | 20.4 | 21.8 | 100.2 | |||||||||||||||||||||||||||||||||||
LIFO income | 302 | 553 | 0.2 | 0.3 | (45.4 | ) | ||||||||||||||||||||||||||||||||||
Tubular and Energy Services | 6,034 | 2,130 | 23.3 | 20.2 | 183.3 | |||||||||||||||||||||||||||||||||||
LIFO expense | (6 | ) | (4 | ) | — | — | 50.0 | |||||||||||||||||||||||||||||||||
Other | (142 | ) | (117 | ) | (0.1 | ) | (0.1 | ) | 21.4 | (80 | ) | (141 | ) | (0.1 | ) | (0.1 | ) | (43.3 | ) | |||||||||||||||||||||
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Total gross profit | $ | 35,159 | $ | 31,305 | 21.0 | % | 19.3 | % | 12.3 | % | $ | 30,653 | $ | 24,127 | 22.2 | % | 21.7 | % | 27.0 | % | ||||||||||||||||||||
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Three Months Ended September 30, | Percent of Total Net Sales Three Months Ended September 30, | Percent Increase/ (Decrease) | Three Months Ended March 31, | Percent of Total Net Sales Three Months Ended March 31, | Percent Increase/ (Decrease) | |||||||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | 2015 | 2014 | 2015 | 2014 | 2015 vs. 2014 | |||||||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||||||||||
Selling and administrative expenses | $ | 20,644 | $ | 17,547 | 12.3 | % | 10.8 | % | 17.6 | % | $ | 22,251 | $ | 18,025 | 16.1 | % | 16.2 | % | 23.4 | % | ||||||||||||||||||||
Amortization expense | 1,191 | 701 | 0.7 | 0.4 | 69.9 | 2,157 | 1,141 | 1.6 | 1.0 | 89.0 | ||||||||||||||||||||||||||||||
Interest expense | 126 | 118 | 0.1 | 0.1 | 6.8 | 613 | 123 | 0.4 | 0.1 | * | * | |||||||||||||||||||||||||||||
Interest income | (140 | ) | (149 | ) | (0.1 | ) | (0.1 | ) | (6.0 | ) | (57 | ) | (144 | ) | — | (0.1 | ) | (60.4 | ) | |||||||||||||||||||||
Equity in income of nonconsolidated investments | (477 | ) | (296 | ) | (0.3 | ) | (0.2 | ) | 61.1 | (173 | ) | (204 | ) | (0.1 | ) | (0.2 | ) | (15.2 | ) | |||||||||||||||||||||
Other income | (47 | ) | (638 | ) | — | (0.4 | ) | (92.6 | ) | (803 | ) | (135 | ) | (0.6 | ) | (0.1 | ) | * | * | |||||||||||||||||||||
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Total expenses | $ | 21,297 | $ | 17,283 | 12.7 | % | 10.7 | % | 23.2 | % | $ | 23,988 | $ | 18,806 | 17.4 | % | 16.9 | % | 27.6 | % | ||||||||||||||||||||
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Income from continuing operations before income taxes | $ | 13,862 | $ | 14,022 | 8.3 | % | 8.6 | % | (1.1 | )% | ||||||||||||||||||||||||||||||
Income before income taxes | $ | 6,665 | $ | 5,321 | 4.8 | % | 4.8 | % | 25.3 | % | ||||||||||||||||||||||||||||||
Income tax expense | 4,743 | 4,229 | 2.8 | 2.6 | 12.2 | 2,380 | 1,672 | 1.7 | 1.5 | 42.3 | ||||||||||||||||||||||||||||||
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Income from continuing operations | $ | 9,119 | $ | 9,793 | 5.5 | % | 6.0 | % | (6.9 | )% | ||||||||||||||||||||||||||||||
Net income | $ | 4,285 | $ | 3,649 | 3.1 | % | 3.3 | % | 17.4 | % | ||||||||||||||||||||||||||||||
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** | Results of calculation are not considered meaningful for presentation purposes. |
ThirdFirst Quarter 20142015 Compared to ThirdFirst Quarter 20132014 – Company Analysis
Net sales of $167,797$137,907 for the quarterperiod ended September 30, 2014March 31, 2015 increased by $5,549,$26,493, or 3.4%23.8%, compared to the prior year quarter. Included within the third quarter net sales are acquisition revenues from Ball Winch and Carr Concrete. The consolidated change was attributable to increases of 114.0%146.2%, 25.2%, and 1.2%5.7% in Tubular and Energy Services, Construction Products, and ConstructionRail Products and Services segment sales, respectively, partially offset by a reduction of 3.3% in Rail Products segment sales.respectively. During the 2015 period, sales related to acquisitions were $19,996 which generated 22.9% margins.
Gross profit margin for the quarter ended September 30, 2014March 31, 2015 was 21.0%,22.2% or an increase of 16656 basis points fromhigher than the prior year period.year. The increased profitabilityincrease was primarily driven by margin improvementdue to improved margins within the Rail Products segment,Tubular and to a lesser extent the Construction ProductsEnergy Services segment.
Selling and administrative expenses increased by $3,097,$4,226 or 17.6%, over23.4% from the prior year, primarily due principally to personnel-relatedpersonnel costs as well as third party consultingof acquired businesses and to a lesser extent acquisition costs. Included within consulting costs are services related to the preparation for and identification of a new enterprise resource planning system and approximately $560 of acquisition-related costs for the three months ended September 30, 2014. Increased selling and administrative costs also relate to acquired businesses that were not included in the 2013 results.
The Company’s effective income tax rate from continuing operations in the 2014 third2015 first quarter was 34.2%35.7%, compared to 30.2%31.4% in the prior year quarter. The Company’s effective income tax rate for the quarter ended September 30, 2014March 31, 2015 differed from the federal statutory rate of 35% due to state income taxes, nondeductible expenses, U.S. domestic production activities deductions, and operations in foreign jurisdictions with lower statutory tax rates. The increase in effective tax rate compared to the prior year quarter was primarily due to the recognition of previously unrecognized uncertain state tax positions during the prior year quarter.
Net income from continuing operations for the thirdfirst quarter of 20142015 was $9,119,$4,285, or $0.88$0.41 per diluted share, compared to net income from continuing operations of $9,793,$3,649, or $0.95$0.35 per diluted share, in the prior year quarter.
Throughout the remainder of 2015, the Company anticipates potential headwinds related to a continued short-term uncertainty in certain areas of the energy markets as well as reductions in sales to the Union Pacific Railroad as our concrete tie warranty dispute continues unresolved.
Results of Continuing Operations – Segment Analysis
Rail Products and Services
Three Months Ended | (Decrease) | Percent | Three Months Ended | Percent | ||||||||||||||||||||||||||||
September 30, | /Increase | (Decrease)/Increase | March 31, | Increase | Increase | |||||||||||||||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | 2015 | 2014 | 2015 vs. 2014 | 2015 vs. 2014 | |||||||||||||||||||||||||
Net Sales | $ | 102,105 | $ | 105,552 | $ | (3,447 | ) | (3.3 | )% | $ | 77,676 | $ | 73,496 | $ | 4,180 | 5.7 | % | |||||||||||||||
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Gross Profit | $ | 23,358 | $ | 21,647 | $ | 1,711 | 7.9 | % | $ | 18,143 | $ | 16,430 | $ | 1,713 | 10.4 | % | ||||||||||||||||
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Gross Profit Percentage | 22.9 | % | 20.5 | % | 2.4 | % | 11.7 | % | 23.4 | % | 22.4 | % | 1.0 | % | 4.5 | % | ||||||||||||||||
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ThirdFirst Quarter 20142015 Compared to ThirdFirst Quarter 20132014
Rail Products and Services segment sales decreased $3,447,increased $4,180 or 3.3%,5.7% compared to the prior year period. The sales declineincrease within the Rail Products and Services segment was primarily attributable to a combined 16.6%, reduction inincrease of approximately $6,629 from the Rail Distribution, Allegheny Rail Products, and Transit product sales. The declines in Rail Distribution were attributable to operational issues that have been corrected and the Transit decline was a result of the Honolulu transit project that is nearing completion.Concrete Tie business. Partially offsetting these declines were increases of 19.0%was a $2,198 decline in Transit Products sales.
The Rail Products and 14.2% increases inServices segment increased its gross profit margin by 100 basis points. The increase was principally due to maintaining strong margins within the Rail TechnologyTechnologies and CXT concrete tie sales, respectively.Concrete Tie businesses as well as improvements within the Rail Distribution, Transit, and Allegheny Rail Products businesses.
Compared toDuring the prior year quarter, the Rail Products and Services segment generated an increasehad a reduction in new orders of 41.2%.
The Rail Products segment experienced an increase in gross profit margins of 236 basis points6.1% compared to the prior year period. The increased profit primarily relatesDuring March and April of 2015, Union Pacific Railroad (UPRR) has canceled certain purchase orders and new orders from the UPRR have declined significantly relative to favorable product mix,the prior year. We believe this is related to the concrete tie warranty litigation and toare preparing for a lesser extent, favorable cost developments on long-term projects within the Transit division.continuation of this trend.
Construction Products
Three Months Ended | Percent | Three Months Ended | Increase | Percent | ||||||||||||||||||||||||||||
September 30, | Increase | Increase | March 31, | (Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | 2015 | 2014 | 2015 vs. 2014 | 2015 vs. 2014 | |||||||||||||||||||||||||
Net Sales | $ | 49,907 | $ | 49,320 | $ | 587 | 1.2 | % | $ | 34,290 | $ | 27,383 | $ | 6,907 | 25.2 | % | ||||||||||||||||
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Gross Profit | $ | 8,421 | $ | 7,614 | $ | 807 | 10.6 | % | $ | 6,562 | $ | 5,712 | $ | 850 | 14.9 | % | ||||||||||||||||
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Gross Profit Percentage | 16.9 | % | 15.4 | % | 1.5 | % | 9.7 | % | 19.1 | % | 20.9 | % | (1.8 | )% | (8.6 | )% | ||||||||||||||||
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ThirdFirst Quarter 20142015 Compared to ThirdFirst Quarter 20132014
Construction Products segment sales increased $587,$6,907, or 1.2%,25.2% compared to the prior year period. The increase relates to revenues from the July 2014 acquisition of Carr Concrete and increased Fabricated Bridge Productsa $5,360 increase in concrete construction product sales which were largely offset by reductions within the Piling Products business due to insufficient product supply as well as declinesan improvement of $2,383 from Piling Products, partially offset by a reduction of $836 from Bridge Product sales. The increase in sales primarily relates to favorable weather conditions during the concrete buildings businesses (excluding the Carr Concrete acquisition).
Comparedfirst three months of 2015 compared to the prior year period.
During the quarter, the Construction Products segment experiencedhad a reduction in new orders of 34.0%. New orders from the recently acquired Carr Concrete business represented 11.0% of current quarter orders. Although new orders contracted during the quarter, backlog levels exceeded the prior year by 6.2%.
The gross profit percentage increased by 145 basis points. With the exception of a 100 basis point decline in the Piling business, the margin increases were due to greater profitability within all of the businesses as well as accretive margins related to the July 2014 Carr Concrete acquisition.
Tubular Products
Three Months Ended | Increase | Percent | ||||||||||||||
September 30, | /(Decrease) | Increase/(Decrease) | ||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | |||||||||||||
Net Sales | $ | 15,785 | $ | 7,376 | $ | 8,409 | 114.0 | % | ||||||||
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Gross Profit | $ | 3,220 | $ | 1,608 | $ | 1,612 | 100.2 | % | ||||||||
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Gross Profit Percentage | 20.4 | % | 21.8 | % | (1.4 | )% | (6.4 | )% | ||||||||
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Third Quarter 2014 Compared to Third Quarter 2013
Tubular Products segment sales increased $8,409, or 114.0%,30.3% compared to the prior year period. This increaseThe decline primarily relates primarily to the CoatedPiling Products business.
The favorable Coated sales were drivengross profit percentage decreased by organic sales increases of 174.8% as well as sales from our November 2013 acquisition of Ball Winch. Tubular175 basis points due to reductions within the Piling and Bridge Products gross margins declined due principallybusiness partially offset by marginal improvements within the concrete construction products business. The reduction primarily relates to lower Coated margins, which is reflective of cost overruns on a project that was substantially completed by September 30, 2014.
Compared tohigher margin projects in the prior year quarter,period relative to the Tubular Products segment experienced an increase in new orders of 43.9%. Included in the increase are orders from the acquisition of Ball Winch which represented 21.6% of current quarter orders.year project mix.
Year-to-date Results of Continuing OperationsTubular and Energy Services
Nine Months Ended September 30, | Percent of Total Net Sales Nine Months Ended September 30, | Percent Increase/(Decrease) | ||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | ||||||||||||||||
Net Sales: | ||||||||||||||||||||
Rail Products | $ | 283,085 | $ | 277,843 | 63.5 | % | 62.9 | % | 1.9 | % | ||||||||||
Construction Products | 119,100 | 129,828 | 26.7 | 29.4 | (8.3 | ) | ||||||||||||||
Tubular Products | 43,858 | 33,834 | 9.8 | 7.7 | 29.6 | |||||||||||||||
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Total net sales | $ | 446,043 | $ | 441,505 | 100.0 | % | 100.0 | % | 1.0 | % | ||||||||||
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Nine Months Ended September 30, | Gross Profit Percentage Nine Months Ended September 30, | Percent Increase/(Decrease) | ||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | ||||||||||||||||
Gross Profit: | ||||||||||||||||||||
Rail Products | $ | 58,315 | $ | 56,146 | 20.6 | % | 20.2 | % | 3.9 | % | ||||||||||
Construction Products | 21,826 | 19,251 | 18.3 | 14.8 | 13.4 | |||||||||||||||
Tubular Products | 9,741 | 10,060 | 22.2 | 29.7 | (3.2 | ) | ||||||||||||||
LIFO income | 500 | 299 | 0.1 | 0.1 | 67.2 | |||||||||||||||
Other | (396 | ) | (428 | ) | (0.1 | ) | (0.1 | ) | (7.5 | ) | ||||||||||
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Total gross profit | $ | 89,986 | $ | 85,328 | 20.2 | % | 19.3 | % | 5.5 | % | ||||||||||
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Nine Months Ended September 30, | Percent of Total Net Sales Nine Months Ended September 30, | Percent Increase/(Decrease) | ||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 vs. 2013 | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Selling and administrative expenses | $ | 58,268 | $ | 52,628 | 13.1 | % | 11.9 | % | 10.7 | % | ||||||||||
Amortization expense | 3,504 | 2,102 | 0.8 | 0.5 | 66.7 | |||||||||||||||
Interest expense | 375 | 376 | 0.1 | 0.1 | (0.3 | ) | ||||||||||||||
Interest income | (431 | ) | (494 | ) | (0.1 | ) | (0.1 | ) | (12.8 | ) | ||||||||||
Equity in income of nonconsolidated investments | (823 | ) | (892 | ) | (0.2 | ) | (0.2 | ) | (7.7 | ) | ||||||||||
Other income | (297 | ) | (953 | ) | (0.1 | ) | (0.2 | ) | (68.8 | ) | ||||||||||
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Total expenses | $ | 60,596 | $ | 52,767 | 13.6 | % | 12.0 | % | 14.8 | % | ||||||||||
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Income from continuing operations before income taxes | $ | 29,390 | $ | 32,561 | 6.6 | % | 7.4 | % | (9.7 | )% | ||||||||||
Income tax expense | 9,774 | 10,560 | 2.2 | 2.4 | (7.4 | ) | ||||||||||||||
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Income from continuing operations | $ | 19,616 | $ | 22,001 | 4.4 | % | 5.0 | % | (10.8 | )% | ||||||||||
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Net Sales Gross Profit Gross Profit Percentage Three Months Ended Percent March 31, Increase Increase 2015 2014 2015 vs. 2014 2015 vs. 2014 $ 25,941 $ 10,535 $ 15,406 146.2 % $ 6,034 $ 2,130 $ 3,904 183.3 % 23.3 % 20.2 % 3.1 % 15.3 %
First Nine Months of 2014Quarter 2015 Compared to First Nine Months of 2013 – Company AnalysisQuarter 2014
NetTubular and Energy Services segment sales of $446,043 for the nine months ended September 30, 2014 increased by $4,538,$15,406, or 146.2% compared to the prior year period. Included within the September 30, 2014 sales are acquisitionThe increase primarily related to revenues from Ball Winch and Carr Concrete. The sales increase was attributable to increases of 29.6% and 1.9% in Tubular Products and Rail Products segment sales, respectively, which were partially offset by a decrease of 8.3% in Construction Products segment sales
Gross profit margin for the nine months ended September 30, 2014 was 20.2%, or 85 basis points higher than the prior year. The margin increase was diluted due to a second quarter 2014 warranty charge of $4,608 within the Rail Products segment. Excluding the impact of the charge, the increase was due to improvements within the Rail and Construction Products segments.
Selling and administrative expenses increased by $5,640, or 10.7%, over the prior year period. The cost increases for the nine months ended September 30, 2014 were primarily attributable to personnel-related costs as well as third party consulting and acquisition costs. The consulting costs related to the preparation for and identification of a new enterprise resource planning system and approximately $680 of acquisition-related costs for the nine months ended September 30, 2014. Increased selling and administrative costs also relate to acquired businesses thatof $15,009 along with improved sales from the Company’s Coated Pipe businesses. Tubular and Energy Services gross margins were not included infavorably impacted by product mix including the 2013 results.leverage provided by recently acquired businesses.
The Company’s effective income tax rate from continuing operations for the first nine months of 2014 was 33.3%, compared to 32.4% in the prior year period. The Company’s effective income tax rate for the nine months ended September 30, 2014 differed from the federal statutory rate of 35% primarily due to the recognition of previously unrecognized state tax benefits. The increase in effective tax rate compared to the prior year period was due to the recognition of uncertain state tax positions during the prior year.
Net income from continuing operations for the first nine months of 2014 was $19,616, or $1.90 per diluted share, which compares to net income from continuing operations for the 2013 period of $22,001, or $2.15 per diluted share.
Results of Continuing Operations – Segment Analysis
Rail Products
Nine Months Ended | Percent | |||||||||||||||
September 30, | Increase | Increase | ||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | |||||||||||||
Net Sales | $ | 283,085 | $ | 277,843 | $ | 5,242 | 1.9 | % | ||||||||
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Gross Profit | $ | 58,315 | $ | 56,146 | $ | 2,169 | 3.9 | % | ||||||||
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Gross Profit Percentage | 20.6 | % | 20.2 | % | 0.4 | % | 2.0 | % | ||||||||
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First Nine Months of 2014 Compared to First Nine Months of 2013
Rail Products segment sales increased $5,242, or 1.9%, compared to the prior year period. Rail Technologies increased by 22.3%, Allegheny Rail Products increased by 25.4%,Tubular and CXT concrete ties increased by 15.8%. Partially offsetting these increases was a 13.9% combined reduction from Rail Distribution, Transit and Trackwork sales.
During the nine-month period ended September 30, 2014, the Rail ProductsEnergy Services segment generated an increase in new orders of 21.6%43.9% compared to the prior year period.
The gross profit margin increased by 39 basis points over the preceding year period. During the second quarter of 2014, the CXT concrete railroad tie business incurred a $4,608 warranty charge as further described in Note 15. With the exception of the CXT concrete tie business, profit margins across all Rail Product businesses experienced growth. Contributing New orders related to the 2014 margins were favorable sales mix within Rail Products businesses,IOS and to a lesser extent, favorable cost developments on long-term projects within the Transit Products business.
Construction Products
Nine Months Ended | (Decrease) | Percent | ||||||||||||||
September 30, | /Increase | (Decrease)/Increase | ||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | |||||||||||||
Net Sales | $ | 119,100 | $ | 129,828 | $ | (10,728 | ) | (8.3 | )% | |||||||
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Gross Profit | $ | 21,826 | $ | 19,251 | $ | 2,575 | 13.4 | % | ||||||||
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Gross Profit Percentage | 18.3 | % | 14.8 | % | 3.5 | % | 23.6 | % | ||||||||
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First Nine MonthsChemtec acquisitions represented 53.9% of 2014 Compared to First Nine Months of 2013
Construction Products segment sales decreased $10,728, or 8.3%, compared to the prior year period. The reduction relates to a 23.1% and 11.3% decline in Piling and CXT concrete buildings sales, respectively. The Piling Products decline is partially related to a shortage of product in the current year. Partially offsetting these declines was a 91.3% increase in Fabricated Bridge Products sales as well as sales from the July 2014 acquisition of Carr Concrete.
During the nine-month period ended September 30, 2014, the Construction Products segment new orders remained flat compared to the prior year. New orders from the recently acquired Carr Concrete business represented 2.9% of current year orders.
The gross profit percentage increased by 349 basis points due to gross margin improvements in all Construction Products’ businesses as well as favorable product mix.
Tubular Products
Nine Months Ended | Increase | Percent | ||||||||||||||
September 30, | /(Decrease) | Increase/(Decrease) | ||||||||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | |||||||||||||
Net Sales | $ | 43,858 | $ | 33,834 | $ | 10,024 | 29.6 | % | ||||||||
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Gross Profit | $ | 9,741 | $ | 10,060 | $ | (319 | ) | (3.2 | )% | |||||||
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Gross Profit Percentage | 22.2 | % | 29.7 | % | (7.5 | )% | (25.3 | )% | ||||||||
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First Nine Months of 2014 Compared to First Nine Months of 2013
Tubular Products segment sales increased $10,024, or 29.6%, compared to the prior year period. Approximately 80% of the increase relates to greater Coated product sales as a result of our November 2013 acquisition of Ball Winch which was enhanced by a 9.7% increase excluding the acquired business. Tubular Products gross margins were unfavorably impacted by cost overruns on a Coated project that was essentially completed by September 30, 2014.
During the nine-month period ended September 30, 2014, the Tubular Products segment generated an increase in new orders of 64.5% compared to the prior year. Included in the increase are orders from the acquisition of Ball Winch which represented 20.0% of current year2015 orders.
Other
Segment Backlog
Total Company backlog from continuing operations at September 30, 2014March 31, 2015 was approximately $223,230$217,325 and is summarized by business segment in the following table for the periods indicated:
Backlog | ||||||||||||
September 30, | December 31, | September 30, | ||||||||||
2014 | 2013 | 2013 | ||||||||||
Rail Products | $ | 127,768 | $ | 121,853 | $ | 110,910 | ||||||
Construction Products | 88,250 | 53,483 | 83,102 | |||||||||
Tubular Products | 7,212 | 7,775 | 3,529 | |||||||||
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Total Backlog from Continuing Operations | $ | 223,230 | $ | 183,111 | $ | 197,541 | ||||||
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2015 | 2014 | 2014 | ||||||||||
Rail Products and Services | $ | 124,114 | $ | 104,821 | $ | 149,221 | ||||||
Construction Products | 75,449 | 65,843 | 87,792 | |||||||||
Tubular and Energy Services | 17,762 | 13,686 | 16,276 | |||||||||
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Total Backlog | $ | 217,325 | $ | 184,350 | $ | 253,289 | ||||||
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Backlog from acquired businesses represents 9.0% of the Company’s total unfilled customer orders.
Warranty
As of September 30, 2014,March 31, 2015, the Company maintained a total product warranty reserve of approximately $8,610$10,344 for its estimate of all potential product warranty claims. Of this total, $7,576$9,090 reflects the current estimate of the Company’s exposure for potential product warranty claims related to concrete tie production. While the Company believes this is a reasonable estimate of its potential contingencies related to identified concrete tie warranty matters, the Company may incur future charges associated with new customer claims or further development of information for existing customer claims. Thus, there can be no assurance that future potential costs pertaining to warranty claims will not have a material impact on the Company’s results of operations and financial condition.
As of September 30, 2014, theThe Company and the Union Pacific Railroad (UPRR) have been unable to reconcile the disagreement related to the 2013historical warranty replacement activity. The disagreement includes approximately 170,000 ties. The Company andIt is the UPRR have also been unableCompany’s intention to reconcile all 2014 warranty replacement activity during the current year.
The Company continuescontinue to work with the UPRR to identify, replace, and reconcile defectivepreviously replaced concrete ties, related to the warranty claim in accordance with the 2012 amended 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. The Company and the UPRR also discussed the standards and practices to be implemented for future replacement activity. No agreement was reached andhowever, the Company continues to endeavor to reconcile the replaced warranty ties with the UPRR.
In the eventacknowledges that the Company and UPRR do not reach agreement regarding the 2013 and 2014 replacement activity and future activity and is found to be in material breach of the 20122005 amended supply agreement could be terminated prior to the agreement’s expiration date. On January 23, 2015, the UPRR may seek damages from thefiled a Company and/or terminate the agreement. There can be no assurance atand Demand for Jury Trial with respect to this point that future potential costs pertaining to these claims or other potential future claims will not have a material impact on the Company’s financial condition or results of operations.dispute. See Note 1513 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.
Liquidity and Capital Resources
Total debt related to capital lease obligations was $374$218,235 and $56$26,428 as of September 30, 2014March 31, 2015 and December 31, 2013,2014, respectively.
Our need for liquidity relates primarily to seasonal working capital requirements for continuing operations, capital expenditures, joint venture capital obligations, strategic investments or acquisitions, debt service obligations, share repurchases, and dividends.
The following table summarizes the year-to-date impact of these items:
September 30, | March 31, | |||||||||||||||
2014 | 2013 | 2015 | 2014 | |||||||||||||
Liquidity needs: | ||||||||||||||||
Working capital and other assets and liabilities | $ | 19,460 | $ | (27,021 | ) | $ | (16,511 | ) | $ | 25,442 | ||||||
Capital expenditures | (11,593 | ) | (5,648 | ) | (4,466 | ) | (3,499 | ) | ||||||||
Capital contributions to equity method investments | (82 | ) | — | |||||||||||||
Other long-term debt repayments | (78 | ) | (14 | ) | (28,084 | ) | (19 | ) | ||||||||
Financing costs paid | (473 | ) | — | (1,670 | ) | — | ||||||||||
Treasury stock acquisitions | (918 | ) | (633 | ) | (962 | ) | (747 | ) | ||||||||
Dividends paid to common shareholders | (931 | ) | (931 | ) | (416 | ) | (309 | ) | ||||||||
Acquisitions | (12,786 | ) | — | |||||||||||||
Acquisitions, net of cash acquired | (189,200 | ) | (495 | ) | ||||||||||||
Cash interest paid | (267 | ) | (257 | ) | (288 | ) | (87 | ) | ||||||||
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Net liquidity needs | (7,668 | ) | (34,504 | ) | (241,597 | ) | 20,286 | |||||||||
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Liquidity sources: | ||||||||||||||||
Internally generated cash flows before interest paid | 29,801 | 29,187 | 9,280 | 6,741 | ||||||||||||
Dividends from LB Pipe & Coupling Products, LLC | 630 | 558 | 90 | 90 | ||||||||||||
Proceeds from asset sales | 184 | — | 4 | 184 | ||||||||||||
Equity transactions | 414 | 227 | 378 | 85 | ||||||||||||
Other long-term debt proceeds | 316 | — | 219,891 | 316 | ||||||||||||
Foreign exchange effects | (1,898 | ) | (1,192 | ) | (2,520 | ) | (1,194 | ) | ||||||||
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Net liquidity sources | 29,447 | 28,780 | 227,123 | 6,222 | ||||||||||||
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Discontinued operations | 114 | 257 | ||||||||||||||
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Net Change in Cash | $ | 21,893 | $ | (5,467 | ) | $ | (14,474 | ) | $ | 26,508 | ||||||
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Cash Flow from Continuing Operating Activities
During the nine months ended September 2014,current 2015 period, cash flows from continuing operations provided $49,624, an increaseoperating activities used $7,429, a decrease of $47,157,$39,615, compared to the 20132014 period. For the ninethree months ended September 30, 2014,March 31, 2015, income, adjustments to income from continuing operating activities, and dividends from the LB Pipe JVjoint venture provided $30,164$9,082 compared to $29,488$6,744 in the 20132014 period. Working capital and other assets and liabilities provided $19,460used $16,511 in the current period compared to use of $27,021providing $25,442 in the prior year period. EnhancedThe reduction in cash flows from operations was largely impacted by the timing of working capital management relativemovement. As of December 31, 2014, the Company maintained a significant amount of accounts payable due to capital spending as well as favorable pricing on core product. As of December 31, 2013, the Company maintained certain large project receivables from customers with longer payment terms. Cash collections advanced billings on long-term projects, and timing of tax payments havethese receivables led to the significant increase in cash flows from continuing operationsoperating activities for the period ended September 30,March 31, 2014.
The Company’s calculation for days sales outstanding at September 30, 2014March 31, 2015 was 4849 days compared to 5250 days at December 31, 20132014 and we believe our receivable portfolio is strong.
Cash Flow from Continuing Investing Activities
CapitalThe primary investing activity during the first quarter of 2015 related to the acquisitions of Tew and IOS. The total purchase price net of cash acquired was $189,200. During the three-month period ended March 31, 2014, the Company made a post closing working capital payment of $495 related to the 2013 acquisition of Ball Winch. Other investing activities included capital expenditures were $11,593of $4,466 for the first ninethree months of 20142015 compared to $5,648$3,499 for the same 20132014 period. Current period expenditures related primarily to the finalization of the Birmingham, AL coated products facility upgrade and general plant and yard improvements across each segment. During the prior year, capital expenditures related to improvements to our Birmingham, AL coated products facility, equipment costs to expand into adjacent markets within our bridge products and Ball Winch coated products businesses, and general plant and yard improvements. During the prior year, capital expenditures related to improvements to our machinery and equipment across each segment with no individually significant additions. We anticipate total capital spending in 20142015 will range between $16,000$18,000 and $19,000 and will be funded by cash flow from continuing operations.
As of September 30, 2014, cash outflows related to acquisitions were $12,786. A cash payment of $12,291 was made on July 7, 2014 for the acquisition of Carr Concrete and a post closing working capital payment of $495 was made in the first quarter of 2014 related to our acquisition of Ball Winch.$22,000.
Cash Flow from Financing Activities
During the nine-monththree months ended March 31, 2015, the Company had an increase in outstanding debt of $191,807 primarily related to drawings against the revolving credit facility to fund domestic acquisition activity. During the periods ended September 30,March 31, 2015 and 2014, and 2013, we did not purchase any common shares of the Company under our existing share repurchase authorization. However, we withheld 20,30119,820 and 14,41717,045 shares for approximately $962 and $747 for the periods ended March 31, 2015 and 2014, respectively. These amounts were withheld from employees to pay employeetheir withholding taxes in connection with the exercise and/or vesting of options and restricted stock awards for approximately $918 and $633 for the periods ended September 30, 2014 and 2013, respectively.awards. Cash outflows related to dividends were $931 during each period. Included$416 and $309 for the periods ended March 31, 2015 and 2014, respectively. Funding for equipment debt of $316 was also included in proceeds from financing activities for the period ended September 30, 2014 were costs of $473 related to the amended credit agreement and funding for equipment debt of $316.
Cash Flow from Discontinued Operations
For the nine-month periods ended September 30, 2014 and 2013, cash flows from discontinued operations provided $114 and $257 from operating activities, respectively.March 31, 2014.
Financial Condition
As of September 30, 2014,March 31, 2015, we had $86,516$37,550 in cash and cash equivalents and a domestic credit facilitiesfacility with $201,688$118,314 of availability while carrying only $374$218,235 in total debt. As of March 31, 2015, we were in compliance with all of the Credit Agreements’ covenants. We believe this liquidity will provide the flexibility to take advantage of both organic and external investment opportunities.
Included within cash and cash equivalents are money market funds with various underlying securities. Our priority continues to be short-term maturities and the preservation of our principal balances. Approximately $50,791$29,686 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, as the Company would need to accrue and pay additional income and withholding taxes if these funds were repatriated.States.
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 1.00%1.50% and 1.00% to 2.00%2.50%, respectively.
The Amended Credit Agreement includes two financial covenants: (a) Leverage Ratio, defined as the Company’s indebtednessIndebtedness 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 expendituresCapital Expenditures divided by consolidated interest expense, which must be no less than 3.00 to 1.00.
As of March 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.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.
As of September 30, 2014, the Company was in compliance with the Amended Credit Agreement’s covenants.
Critical Accounting Policies
The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. There have been no material changes in the Company’s critical accounting policies or estimates since December 31, 2013.2014. A summary of the Company’s critical accounting policies and estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.2014.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include operating leases, purchase obligations, and standby letters of credit. A schedule of the Company’s required payments under financial instruments and other commitments as of December 31, 20132014 is included in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.2014. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources. ThereExcluding the drawings against the revolving credit facility for the acquisition of IOS, there were no material changes to these arrangements during the nine-monththree-month period ended September 30, 2014.March 31, 2015.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
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.
Foreign Currency Exchange Rate Risk
The Company is subject to exposures to changes in foreign currency exchange rates. The Company manages 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 nine-monththree-month period ended September 30, 2014.March 31, 2015.
Item 4.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 Rules 13a—15(e) under the Securities and Exchange Act of 1934, as amended) as of March 31, 2015. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2015, the Company completed the acquisitions of IOS and Tew. The Company also acquired Chemtec and FWO during the fourth quarter of 2014. We are in the process of integrating these businesses. We are analyzing, evaluating and, where necessary, implementing changes in controls and procedures relating to IOS, Tew, Chemtec, and FWO as the integration proceeds. As such, this process may result in additions or changes to our internal control over financial reporting. Otherwise, there were no changes in our “internal control over financial reporting” (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(Dollars in thousands, except share data)
See Note 15,13, “Commitments and Contingent Liabilities,” to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
In addition to the risk factors and other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013,2014, as filed with the SEC on February 27, 2014, as well as those risk factors included in our Quarterly Reports on Form 10-Q filed since that date,March 3, 2015, which could materially affect our business, financial condition, financial results, or future performance. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial may also materially affect our business, financial condition, and/or results of operations.
Our indebtedness could materially adversely affect our business, financial condition, and results of operations and prevent us from fulfilling our indebtedness obligations.
Our indebtedness could materially adversely affect our business, financial condition, and results of operations. For example, it could:
require us to dedicate a substantial portion of our cash flow from operations to payments of our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt;
and limit, among other things, our ability to borrow additional funds for working capital, capital expenditures, general corporate purposes, or acquisitions.
Our inability to comply with covenants in place or our inability to make the required principal and interest payments may cause an event of default, which could have a substantial adverse impact to our business, financial condition, and results of operation. There is no assurance that refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, particularly if credit market conditions deteriorate. Furthermore, there can be no assurance that refinancings or asset dispositions would be permitted by the terms of our credit agreements or debt instruments. Our existing credit agreements contain, and any future debt agreements we may enter into may contain, certain financial tests and other covenants that limit our ability to incur indebtedness, acquire other businesses, and impose various other restrictions. Our ability to comply with financial tests may be adversely affected by changes in economic or business conditions beyond our control, and these covenants may limit our ability to take advantage of potential business opportunities as they arise. We cannot be certain that we will be able to comply with the financial tests and other covenants, or, if we fail to do so, that we will be able to obtain waivers or amended terms from our lenders. An uncured default with respect to one or more of the covenants could result in the amounts outstanding under one or more of the agreements being declared immediately due and payable, which may also trigger an obligation to redeem our outstanding debt securities and repay all other outstanding indebtedness. Any such acceleration of our indebtedness would have a material adverse effect on our business, financial condition, and results of operations.
We are dependent upon key customers.
We could be adversely affected by changes in the business or financial condition of a customer or customers. A significant decrease in capital spending by our railroad customers could negatively impact our product revenue. Our CXT concrete rail products division and ARP division are dependent on the Union Pacific Railroad (UPRR) for a significant portion of their business. As a result of ongoing litigation with the UPRR our sales and new orders with UPRR have declined and may continue to decrease in the future. No assurances can be given that a significant downturn in the business or financial condition of a customer, or customers, would not impact our results of operations and/or financial condition.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company’s purchases of equity securities for the three-month period ended September 30, 2014March 31, 2015 were as follows:
Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (2) | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) | |||||||||||||
July 1, 2014 - July 31, 2014 | — | $ | — | — | $ | 15,000 | ||||||||||
August 1, 2014 - August 31, 2014 | — | — | — | 15,000 | ||||||||||||
September 1, 2014 - September 30, 2014 | — | — | — | 15,000 | ||||||||||||
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Total | — | $ | — | — | $ | 15,000 | ||||||||||
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Total number | dollar | |||||||||||||||
of shares | value of shares | |||||||||||||||
Average | purchased as | that may yet be | ||||||||||||||
Total number | price | part of publicly | purchased under | |||||||||||||
of shares | paid per | announced plans | the plans or programs | |||||||||||||
purchased (1) | share | or programs (2) | (in thousands) | |||||||||||||
January 1, 2015 - January 31, 2015 | 7,728 | $ | 49.01 | — | $ | 15,000 | ||||||||||
February 1, 2015 - February 28, 2015 | 8,957 | 49.33 | — | 15,000 | ||||||||||||
March 1, 2015 - March 31, 2015 | 3,135 | 44.90 | — | 15,000 | ||||||||||||
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Total | 19,820 | $ | 48.50 | — | $ | 15,000 | ||||||||||
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(1) | Reflects shares withheld by the Company to pay taxes upon vesting of restricted |
(2) | On December 4, 2013, the Board of Directors authorized the repurchase of up to $15,000 of the Company’s common shares until December 31, 2016. This authorization became effective January 1, 2014. |
While we did not purchase any common shares of the Company during the nine-monththree month period ended September 30, 2014March 31, 2015 under our existing share repurchase authorization, we did withhold 20,30119,820 shares for approximately $918$962 from employees to pay their withholding taxes in connection with the exercise and/or vesting of options and restricted stock awards.
Item 4.Mine Safety Disclosures
This item is not applicable to the Company.
All exhibits are incorporated herein by reference:
2.1 | Agreement and Plan of Merger dated March 13, 2015 among IOS Holdings, Inc., L.B. Foster Company, L.B. Foster Raven Merger Company and IOS Holding Company LLC, solely in its capacity as the representative of IOS’s shareholders incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on March 13, 2015. Exhibits to the Agreement and Plan of Merger identified in the Table of Contents to the Agreement and Plan of Merger and the following schedules are not being filed but will be furnished supplementally to the Securities and Exchange Commission upon request: | |
Schedule 2.02(e)(viii) - Consents and Approvals | ||
Schedule 2.02(e)(xi) - Termination of Agreements | ||
Schedule 3.01 - Organization and Power | ||
Schedule 3.02 - Subsidiaries | ||
Schedule 3.03(b) - Authorization; No Breach; Valid and Binding Agreement | ||
Schedule 3.04(a) - Capitalization | ||
Schedule 3.04(b) - Options Outstanding | ||
Schedule 3.06(a) - Absence of Certain Developments; Undisclosed Liabilities | ||
Schedule 3.07(a), (b) & (d) - Real Property | ||
Schedule 3.09(a) - Contracts and Commitments | ||
Schedule 3.10(a) & (b) - Intellectual Property | ||
Schedule 3.11 - Litigation | ||
Schedule 3.12 - Government Consents | ||
Schedule 3.13(a) - Employee Benefit Plans | ||
Schedule 3.13(f) - Change in Control Payments or Benefits | ||
Schedule 3.14 - Insurance | ||
Schedule 3.16(a), (b), (c) & (f) - Environmental Matters | ||
Schedule 3.17 - Affiliated Transactions | ||
Schedule 3.19 - Brokerage | ||
Schedule 3.21 - Customers and Suppliers | ||
10.1 | $ | |
*10.2 | 2015 Executive Annual Incentive Compensation Plan. | |
*10.3 | Form of 2015 Restricted Stock Award Agreement. | |
*10.4 | Form of Performance Share Unit Award Agreement (2015). | |
*31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.0 | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
*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 marked with an asterisk are filed herewith. |
Pursuant to the requirements 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: | By: /s/ David J. Russo | |||
David J. Russo | ||||
Senior Vice President, | ||||
Chief Financial Officer and Treasurer | ||||
(Duly Authorized Officer of Registrant) |
All exhibits are incorporated herein by reference:
Exhibit Number | Description | |
Agreement and Plan of Merger dated March 13, 2015 among IOS Holdings, Inc., L.B. Foster Company, L.B. Foster Raven Merger Company and IOS Holding Company LLC, solely in its capacity as the representative of IOS’s shareholders incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, File No. 0-10436, filed on March 13, 2015. Exhibits to the Agreement and Plan of Merger identified in the Table of Contents to the Agreement and Plan of Merger and the following schedules are not being filed but will be furnished supplementally to the Securities and Exchange Commission upon request: | ||
Schedule 2.02(e)(viii) - Consents and Approvals | ||
Schedule 2.02(e)(xi) - Termination of Agreements | ||
Schedule 3.01 - Organization and Power | ||
Schedule 3.02 - Subsidiaries | ||
Schedule 3.03(b) - Authorization; No Breach; Valid and Binding Agreement | ||
Schedule 3.04(a) - Capitalization | ||
Schedule 3.04(b) - Options Outstanding | ||
Schedule 3.06(a) - Absence of Certain Developments; Undisclosed Liabilities | ||
Schedule 3.07(a), (b) & (d) - Real Property | ||
Schedule 3.09(a) - Contracts and Commitments | ||
Schedule 3.10(a) & (b) - Intellectual Property | ||
Schedule 3.11 - Litigation | ||
Schedule 3.12 - Government Consents | ||
Schedule 3.13(a) - Employee Benefit Plans | ||
Schedule 3.13(f) - Change in Control Payments or Benefits | ||
Schedule 3.14 - Insurance | ||
Schedule 3.16(a), (b), (c) & (f) - Environmental Matters | ||
Schedule 3.17 - Affiliated Transactions | ||
Schedule 3.19 - Brokerage | ||
Schedule 3.21 - Customers and Suppliers | ||
10.1 | $ | |
*10.2 | 2015 Executive Annual Incentive Compensation Plan. | |
*10.3 | Form of 2015 Restricted Stock Award Agreement. | |
*10.4 | Form of Performance Share Unit Award Agreement (2015). | |
*31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
*31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
*32.0 | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
*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 marked with an asterisk are filed herewith. |
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