10-K 1 d73547d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

      þ Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 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)

Registrant’s telephone number, including area code:

(412) 928-3400

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange On Which Registered
Common Stock, Par Value $0.01   NASDAQ Global Select Market
Preferred Stock Purchase Rights   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes        x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    ¨  Yes        x  No

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 such 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.    x  Yes        ¨  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 shorter period that the registrant was required to submit and post such files).    x  Yes        ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.    ¨

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  ¨    Smaller reporting company  ¨
                   (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes     x  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $338,114,276.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at February 23, 2016
Common Stock, Par Value $0.01   10,232,471 shares

Documents Incorporated by Reference:

Portions of the Proxy Statement prepared for the 2016 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. The 2016 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.


Table of Contents

TABLE OF CONTENTS

 

PART I   
Item 1.  

Business

     4   
Item 1A.  

Risk Factors

     10   
Item 1B.  

Unresolved Staff Comments

     15   
Item 2.  

Properties

     16   
Item 3.  

Legal Proceedings

     16   
Item 4.  

Mine Safety Disclosures

     16   
PART II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      17   
Item 6.  

Selected Financial Data

     20   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     36   
Item 8.  

Financial Statements and Supplementary Data

     38   
Item 9.  

Change in and Disagreements with Accountants on Accounting and Financial Disclosure

     79   
Item 9A.  

Controls and Procedures

     79   
Item 9B.  

Other Information

     81   
PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     81   
Item 11.  

Executive Compensation

     81   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      81   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     81   
Item 14.  

Principal Accounting Fees and Services

     81   
PART IV   
Item 15.  

Exhibits and Financial Statement Schedules

     82   
 

Signatures

     84   

 

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Forward-Looking Statements

This Annual Report on Form 10-K 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,” “plan,” “may,” “expect,” “should,” “could,” “anticipate,” “estimate,” “predict,” “project,” or their negatives, or other similar expressions generally should be considered forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K may concern, among other things, L.B. Foster 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: an economic slowdown or a continuation of the current economic slowdown in the markets we serve, the risk of doing business in international markets, a decrease in freight or passenger rail traffic, continued and sustained declines in energy prices, a lack of state or federal funding for new infrastructure projects, an increase in manufacturing or material costs, our ability to effectuate our strategy including evaluating potential opportunities such as strategic acquisitions, joint ventures, and other initiatives, and our ability to effectively integrate new businesses and realize anticipated benefits, costs of and impacts associated with shareholder activism, the timeliness and availability of material from major suppliers, labor disputes, the impact of competition, the effective implementation of an enterprise resource planning system, variances in current accounting estimates and assumptions 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 ultimate number of concrete ties that will have to be replaced pursuant to product warranty claims, an overall resolution of the related contract claims, the costs associated with and the outcome of a lawsuit filed by Union Pacific Railroad (“UPRR”), the loss of future revenues from current customers, risks 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,” and elsewhere in this Annual Report on Form 10-K.

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.

 

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PART I

(Dollars in thousands, except share data unless otherwise noted)

 

ITEM 1. BUSINESS

Summary Description of Businesses

Formed in 1902, L.B. Foster Company is a Pennsylvania corporation with its principal office in Pittsburgh, PA. L.B. Foster Company is a leading manufacturer, fabricator, and distributor of products and services for the rail, construction, energy and utility markets. As used herein, “Foster”, the “Company”, “we”, “us”, and “our” or similar references refer collectively to L.B. Foster Company and its divisions and subsidiaries, unless the context otherwise requires.

As a result of recently completed acquisitions, during the first quarter of 2015, the Company renamed the Rail Products and Tubular Products business segments to be Rail Products and Services and Tubular and Energy Services, respectively. The name changes principally reflect the additional businesses conducted by those segments as a result of acquisitions that have enhanced our product and service offerings within the rail and energy markets.

The following table shows, for the last three fiscal years, the net sales generated by each business segment as a percentage of total net sales.

 

     Percentage of Net Sales  
     2015     2014     2013  

Rail Products and Services

     53     62     61

Construction Products

     28        29        32   

Tubular and Energy Services

     19        9        7   
  

 

 

   

 

 

   

 

 

 
     100     100     100
  

 

 

   

 

 

   

 

 

 

Financial information concerning these segments is set forth in Part II, Item 8, Note 2 to the financial statements included herein, which is incorporated by reference into this Item 1.

Rail Products and Services

L.B. Foster Company’s Rail Products and Services (“Rail”) segment is comprised of several manufacturing and distribution businesses that provide a variety of products and services for freight and passenger railroads and industrial companies throughout the world. The Rail segment has sales offices throughout the Americas and Europe, and frequently bids on rail projects where it offers products manufactured by the Company, or sourced from numerous supply chain partners, and aftermarket services. The Rail segment is comprised of the following business units: Rail Products, Rail Technologies, and CXT Concrete Ties.

Rail Products

The Rail Products business is comprised of the Company’s Rail Distribution, Allegheny Rail, Transit, and Trackwork divisions.

Rail Distribution sells new rail mainly to passenger and shortline freight railroads, industrial companies, and rail contractors for the replacement of existing lines or expansion of new lines. Rail accessories sold by the Rail Distribution division include track spikes, bolts, angle bars, and other products required to install or maintain rail lines. These products are manufactured by the Company or purchased from other manufacturers and distributed accordingly.

The Company’s Allegheny Rail Products (“ARP”) division engineers and fabricates insulated rail joints and related accessories for freight and passenger railroads and industrial customers. Insulated joints are manufactured at the Company’s facilities in Pueblo, CO and Niles, OH.

 

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The Company’s Transit Products division supplies power rail, direct fixation fasteners, coverboards, and special accessories primarily for passenger railroad systems. These products are fabricated at Company facilities or by subcontractors and are usually sold by sealed bid to passenger railroads or to rail contractors.

The Company’s Trackwork division sells trackwork products to Class II and III railroads, industrial, and export markets.

Rail Technologies

L.B. Foster Rail Technologies, Inc. (“Rail Technologies”) engineers, manufactures, and fabricates friction management products and application systems, railroad condition monitoring equipment, wheel impact load detection, railroad condition monitoring systems, rail anchors and spikes, wayside data collection and management systems, epoxy and nylon-encapsulated insulated rail joints, track fasteners, and provides aftermarket services. The Company’s friction management products control the friction at the rail/wheel interface, helping its customers to reduce fuel consumption, improve operating efficiencies, extend the life of operating assets such as rail and wheels, and reduce track stresses, and lower related maintenance and operating costs. Friction management products include mobile and wayside systems that apply lubricants and liquid or solid friction modifiers. These products and systems are designed, engineered, manufactured, and fabricated by certain wholly-owned subsidiaries located in the United States, Canada, United Kingdom, and Germany.

CXT Concrete Ties

L.B. Foster manufactures engineered concrete railroad ties at its subsidiary, CXT Incorporated, for freight and passenger railroads and industrial companies at its facility in Spokane, WA.

Construction Products

The Construction products segment is composed of the following product groups: Piling Products, Fabricated Bridge Products, and Precast Concrete Products.

Piling Products

Sheet piling products are interlocking structural steel sections that are generally used to provide lateral support at construction sites. Bearing piling products are steel H-beam sections which are driven into the ground for support of structures such as bridge piers and high-rise buildings. Piling is often used in water and land applications including cellular cofferdams and OPEN CELL® structures in inland river systems and ports.

Piling products are sourced from various manufacturers and either sold or rented to project owners and contractors. The piling division, via a sales force deployed throughout the United States, markets and sells piling domestically and internationally. This division offers its customers various types and dimensions of structural beam piling, sheet piling, and pipe piling. The Company is the primary distributor of domestic steel sheet piling for its primary supplier.

Fabricated Bridge Products

The fabricated products facility in Bedford, PA manufactures a number of fabricated steel and aluminum products primarily for the highway, bridge, and transit industries including concrete reinforced steel grid deck, open steel grid deck, aluminum bridge railing, and stay-in-place steel bridge forms.

Precast Concrete Products

The precast concrete products unit primarily manufactures concrete buildings for national, state, and municipal parks. This unit manufactures restrooms, concession stands, and other protective storage buildings available in multiple designs, textures, and colors. The Company is a leading high-end supplier in terms of volume, product options, and capabilities. The unit also manufactures various other precast products such as burial vaults, bridge beams, box culverts, septic tanks, and other custom pre-stressed and precast concrete products. The products are manufactured in Spokane, WA, Hillsboro, TX, and Waverly, WV.

 

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Tubular and Energy Services

The Tubular and Energy Services segment has four primary product or service groups: Coated Pipe, Threaded Products, precision measurement systems and upstream test and inspection services. The segment provides products and services predominantly to the mid and upstream oil and gas markets.

Coated Pipe

There are two pipeline services locations that make up the Coated Pipe business unit. The Birmingham, AL facility coats the outside diameter and, to a lesser extent, the inside diameter of pipe primarily for oil & gas transmission pipelines. This location partners with its primary customer, a pipe manufacturer, to market fusion bonded epoxy coatings, abrasion resistant coatings, and internal linings for a wide variety of pipe diameters for pipeline projects throughout North America. The second location is in Willis, TX. The Willis facility applies specialty outside and inside diameter coatings for a wide variety of pipe diameters for oil & gas transmission, mining, and waste water pipelines. This location also provides custom coatings for specialty fittings and field service connections.

Threaded Products

The Company’s Magnolia, TX facility cuts, threads, and paints pipe primarily for water well applications for the agriculture industry, municipal water authorities, and Oil Country Tubular Goods (“OCTG”) markets.

Precision Measurement Systems

The Company manufactures and provides a turnkey solution for metering and injection systems for the oil and gas industry. The Willis, TX location operates a fabrication plant that builds metering systems for custody transfer applications including crude oil and other petroleum-based products. These systems are used at well sites, pipelines, refineries, chemical plants, and loading/unloading facilities. The Willis location also manufactures and installs additive and dye injection systems. These systems are used to inject performance additives and/or dyes into petroleum products.

Upstream Test and Inspection Services

The Company provides inspection and tubular integrity management services for the upstream oil and gas industry. Services include non-destructive testing, inspection, and other asset integrity services such as repair and threading for OCTG and drill tools. Inspection and testing of these products, which includes replaceable and re-usable products such as casing, production tubing, drill pipe, directional motors, drill collars, and related equipment is a critical preventative measure to ensure personnel and well-site safety, enhance efficiency, and avoid costly equipment failures and well-site shutdowns. The Company offers these services in every major oil and gas producing region throughout the United States.

L.B. Pipe Joint Venture

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 couplings and other tubular products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019. More information concerning the LB Pipe JV is set forth in Part II, Item 8, Note 8 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.

Marketing and Competition

L.B. Foster Company generally markets its rail products directly in all major industrial areas of the United States, Canada, and Europe. The construction and energy products and services are primarily marketed domestically. The Company employs a sales force of approximately 100 people which is supplemented with a network of agents across Europe, South America, and Asia to reach current customers and cultivate potential customers in these areas. For the years ended 2015, 2014, and 2013, approximately 16%, 18%, and 17%, respectively, of the Company’s total sales were outside the United States.

 

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The major markets for the Company’s products are highly competitive. Product availability, quality, service, and price are principal factors of competition within each of these markets. No other company provides the same product mix to the various markets the Company serves. However, there are one or more companies that compete with the Company in each product line. Therefore, the Company faces significant competition from different groups of companies.

During 2015, 2014, and 2013, no single customer accounted for more than 10% of the Company’s consolidated net sales.

Raw Materials and Supplies

Most of the Company’s products are purchased in the form of finished or semi-finished products. The Company purchases the majority of its supplies from domestic and foreign steel producers. Generally, the Company has a number of vendor options. However, the Company has an arrangement with a steel mill to distribute steel sheet piling in North America. Should sheet piling from its present supplier not be available for any reason, the Company risks not being able to provide product to its customers.

The Company’s purchases from foreign suppliers are subject to the usual risks associated with changes in international conditions and to United States and international laws that could impose import restrictions on selected classes of products and for anti-dumping duties if products are sold in the United States at prices that are below specified prices.

Backlog

The dollar amount of firm, unfilled customer orders at December 31, 2015 and 2014 by business segment is as follows:

 

     December 31,  
     2015      2014  

Rail Products and Services

   $ 85,199       $ 104,821   

Construction Products

     45,371         65,843   

Tubular and Energy Services

     34,137         13,686   
  

 

 

    

 

 

 

Total

   $ 164,707       $ 184,350   
  

 

 

    

 

 

 

Approximately 4% of the December 31, 2015 backlog is related to projects that will extend beyond 2016. Backlog from businesses acquired during 2015 represented 8% of the total at December 31, 2015.

Research and Development

Expenditures for research and development approximated $3,937, $3,096, and $3,154 in 2015, 2014, and 2013, respectively. These expenditures were predominately associated with expanding product lines and capabilities within the Company’s Rail Technologies business.

Patents and Trademarks

The Company owns a number of domestic and international patents and trademarks primarily related to its Rail Technologies products. Our business segments are not dependent upon any individual patent or related group of patents, or any licenses or distribution rights. We believe that, in the aggregate, the rights under our patents, trademarks, and licenses are generally important to our operations, but we do not consider any individual patent, trademark, or any licensing or distribution rights related to a specific process or product to be of material importance in relation to our total business.

Environmental Disclosures

Information regarding environmental matters is included in Part II, Item 8, Note 19, which is incorporated by reference into this Item I.

 

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Employees and Employee Relations

At December 31, 2015, the Company had approximately 1,406 employees, 1,245 within the Americas and 161 of whom were located in Europe. There were 712 hourly production workers and 694 salaried employees. Of the hourly production workers, approximately 177 are represented by unions. The Company has not suffered any major work stoppages during the past five years and considers its relations with its employees to be satisfactory. No significant collective bargaining agreements expire prior to 2017.

Substantially all of the Company’s hourly paid employees are covered by one of the Company’s noncontributory, defined benefit plans or defined contribution plans. Substantially all of the Company’s salaried employees are covered by defined contribution plans.

Financial Information about Liquidity and Capital Resources

Information concerning the Company’s liquidity and capital resources and the Company’s working capital requirements can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Information about Geographic Areas

Financial information about geographic areas is set forth in Part II, Item 8, Note 2 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.

Financial Information about Segments

Financial information about segments is set forth in Part II, Item 8, Note 2 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.

Code of Ethics

L.B. Foster Company has a legal and ethical conduct policy applicable to all directors and employees, including its Chief Executive Officer, Chief Financial Officer, and Controller. This policy is posted on the Company’s website, www.lbfoster.com. The Company intends to satisfy the disclosure requirement regarding certain amendments to, or waivers from, provisions of its policy by posting such information on the Company’s website. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls, human resource concerns, and other reporting matters.

Available Information

The Company makes certain filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and exhibits to those reports, available free of charge through its website, www.lbfoster.com, as soon as reasonably practicable after they are filed with the SEC. These filings are also available at the SEC’s Public Reference Room at 100 F Street N.E. Washington, D.C. 20549 or by calling 1-800-SEC-0330. These filings are also available on the internet at www.sec.gov. The Company’s press releases and recent investor presentations are also available on its website.

 

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Executive Officers of the Registrant

Information concerning the executive officers of the Company is set forth below.

 

Name

  

Age

    

Position

Robert P. Bauer

     57       President and Chief Executive Officer

Merry L. Brumbaugh

     58       Vice President — Tubular Products

Samuel K. Fisher

     63       Vice President — Rail Distribution

Patrick J. Guinee

     46       Vice President, General Counsel and Secretary

John F. Kasel

     50       Senior Vice President — Rail Products and Services

Brian H. Kelly

     56       Vice President — Human Resources and Administration

Gregory W. Lippard

     47       Vice President — Rail Sales and Products

Konstantinos Papazoglou

     63       Vice President — Rail Technologies

David J. Russo

     57       Senior Vice President, Chief Financial Officer and Treasurer

David R. Sauder

     45       Vice President — Global Business Development

Christopher T. Scanlon

     40       Controller and Chief Accounting Officer

Mr. Bauer was elected President and Chief Executive Officer upon joining the Company in 2012. Prior to joining the Company, beginning in 2011, Mr. Bauer previously served as President of the Refrigeration Division of the Climate Technologies business of Emerson Electric Company, a diversified global manufacturing and technology company. From 2002 until 2011, Mr. Bauer served as President of Emerson Network Power’s Liebert Division.

Ms. Brumbaugh was elected Vice President — Tubular Products in 2004, having previously served as General Manager, Coated Products since 1996. Ms. Brumbaugh has served in various capacities with the Company since her initial employment in 1980.

Mr. Fisher’s was elected Vice President — Rail Distribution effective 2011, having previously served as Senior Vice President — Rail since 2002. Mr. Fisher has served in various capacities within the Company since his initial employment 1977.

Mr. Guinee was elected Vice President, General Counsel and Secretary in 2014. Prior to joining the Company, Mr. Guinee served as Vice President — Securities & Corporate and Assistant Secretary at Education Management Corporation from 2013 to early 2014, and was employed by H. J. Heinz Company from 1997 to 2013, last serving as Vice President — Corporate Governance & Securities and Assistant Secretary.

Mr. Kasel was elected Senior Vice President — Rail Products and Services in 2012 having previously served as Senior Vice President — Operations and Manufacturing since 2005 and Vice President — Operations and Manufacturing since 2003. Mr. Kasel served as Vice President of Operations for Mammoth, Inc., a Nortek company from 2000 to 2003.

Mr. Kelly was elected Vice President — Human Resources and Administration in 2012 having previously served as Vice President, Human Resources since 2006. Prior to joining the Company, Mr. Kelly headed Human Resources for 84 Lumber Company from 2004. Previously, he served as a Director of Human Resources for American Greetings Corp. from 1994 to 2004.

Mr. Lippard was elected Vice President — Rail Sales and Products in 2012 having previously served as Vice President — Rail Product Sales since 2000. Prior to re-joining the Company in 2000, Mr. Lippard served as Vice President — International Trading for Tube City, Inc. from 1998. Mr. Lippard served in various other capacities with the Company since his initial employment in 1991.

Mr. Papazoglou was elected Vice President — Rail Technologies in 2012 having previously served as Vice President — Friction Management since 2011. Prior to joining the Company in 2010, Mr. Papazoglou served as

 

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Executive Vice President and Chief Operating Officer for Portec Rail Products, Inc. from 2006. Mr. Papazoglou served in various other capacities with Portec since his initial employment in 1978.

Mr. Russo is the Senior Vice President, Chief Financial Officer and Treasurer having resigned as Chief Accounting Officer in 2012 upon the appointment of Mr. Scanlon as Controller and Chief Accounting Officer in 2012. Mr. Russo was previously elected Senior Vice President, Chief Financial and Accounting Officer and Treasurer in 2010 having served previously as Senior Vice President, Chief Financial Officer and Treasurer since 2002. Mr. Russo was Corporate Controller of WESCO International Inc. from 1999 until joining the Company in 2002.

Mr. Sauder was elected Vice President — Global Business Development upon joining the Company in 2008. Prior to joining the Company, Mr. Sauder was Director, Global Business Development at Joy Mining Machinery where he was responsible for leading mergers and acquisitions and new business initiatives from 2007.

Mr. Scanlon was elected Controller and Chief Accounting Officer in 2012. Prior to joining the Company, Mr. Scanlon served as the Online Higher Education Division Controller of Education Management Corporation from 2009 to 2012. Mr. Scanlon served as Manager of Central Accounting Services for Bayer Corporation, from 2007 until 2009.

Officers are elected annually at the organizational meeting of the Board of Directors following the annual meeting of stockholders.

 

ITEM 1A. RISK FACTORS

Risks and Uncertainties

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a material adverse effect on our business, financial condition, and results of operations. The following risks highlight some of the more significant factors that have affected us and could affect us in the future. We may also be affected by unknown risks or risks that we currently believe are immaterial. If any such events actually occur, our business, financial condition, and results of operations could be materially adversely affected. You should carefully consider the following factors and other information contained in this Annual Report on Form 10-K before deciding to invest in our common stock.

Our inability to successfully identify, manage and execute acquisitions, joint ventures, divestitures, and other significant transactions could harm our financial results, business, and prospects.

As part of our business strategy, we may acquire companies or businesses, divest businesses or assets, enter into strategic alliances and joint ventures, and make investments to realize anticipated benefits, which actions involve a number of inherent risks and uncertainties. We evaluate acquisition opportunities that have the potential to support and strengthen our business. We can give no assurances that the opportunities will be consummated or that financing will be available. In addition, acquisitions involve inherent risks that the acquired business will not perform in accordance with our expectations. We may not be able to achieve the synergies and other benefits we expect from the integration as successfully or rapidly as projected, if at all. Our failure to integrate newly-acquired operations could prevent us from realizing our expected rate of return on an acquired business and could have a material or adverse effect on our results of operations and financial condition.

Our future performance and market value could cause additional write-downs of long-lived and intangible assets in future periods.

We are required under U.S. generally accepted accounting principles to review intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered to be a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include, but are not limited to, a decline in stock price and market capitalization, a significant decrease in the market value of an asset, or a significant decrease in operating or cash flow projections. During the third quarter of 2015, we per-

 

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formed an interim goodwill test and concluded that the carrying amounts of the Inspection Oilfield Services, Inc. (“IOS”) and Chemtec Energy Services, L.L.C. (“Chemtec”) reporting units’ goodwill exceeded the implied fair values of that goodwill. We recognized a non-cash goodwill impairment charge of $80,337 ($63,887 net of taxes) to write down the carrying values to the implied fair values, of which $69,908 represents the full carrying value of goodwill related to the IOS acquisition and the remaining $10,429 relates to the Chemtec reporting unit. No assurances can be given that we will not be required to record future significant charges related to tangible or intangible asset impairments.

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.

Prolonged low energy prices and other unfavorable changes in U.S., global, or regional economic and market conditions could adversely affect our business.

We could be adversely impacted by prolonged negative changes in economic conditions affecting either our suppliers or customers as well as the capital markets. Negative changes in government spending may result in delayed or permanent deferrals of existing or potential projects. No assurances can be given that we will be able to successfully mitigate various prolonged uncertainties including materials cost variability, delayed or reduced customer orders and payments, and access to available capital resources outside of operations.

In addition, current volatile market conditions and significant declines in energy prices may continue for an extended period, which could continue to negatively affect our business prospects. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty, and a variety of additional factors that are beyond our control. Sustained declines, such as began to occur in 2015, in the price of oil and natural gas will likely continue to have a material adverse effect on our operations and financial condition.

 

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Our ability to maintain or improve our profitability could be adversely impacted by cost pressures.

Our profitability is dependent upon the efficient use of our resources. Rising inflation, labor costs, labor disruptions, and other increases in costs in the geographies where we operate could have a significant adverse impact on our profitability and results of operations.

Our business operates in highly competitive industries and a failure to react to changing market conditions could adversely impact our business.

We face strong competition in each of the markets in which we participate. A slow response to competitor pricing actions and new competitor entries into our product lines could negatively impact our overall pricing. Efforts to improve pricing could negatively impact our sales volume in all product categories. We may be required to invest more heavily to maintain and expand our product offerings. There can be no assurance that new product offerings will be widely accepted in the markets we serve. Significant negative developments in any of these areas could adversely affect our financial results and condition.

If we are unable to protect our intellectual property and prevent its improper use by third parties, our ability to compete may be harmed.

We own a number of patents and trademarks under the intellectual property laws of the United States, Canada, Europe, and other countries where product sales are possible. However, we have not perfected patent and trademark protection of our proprietary intellectual property for all products in all countries. The decision not to obtain patent and trademark protection in other countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property. This could impede growth into new markets where we do not have such protections and result in a greater supply of similar products in such markets, which in turn could result in a loss of pricing power and reduced revenue.

Our success is in part dependent on the accuracy and proper utilization of our management information and communications systems.

We are currently working through an enterprise resource program (“ERP”) system upgrade and certain divisions of our Company will be transitioned into the new ERP system during 2016. The system upgrade is intended to enable us to better meet the information requirements of our users, increase our integration efficiencies, and identify additional synergies in the future. The implementation of our ERP system is complex because of the wide range of processes and systems to be integrated across our business. Project delays, business interruptions, or loss of expected benefits could have a material adverse effect on our business, financial condition, or results of operations. Any disruptions, delays, or deficiencies in the design, operation, or implementation of our various systems, or in the performance of our systems, particularly any disruptions, delays, or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business, including our ability to receive, process, ship, and bill for orders in a timely manner or our ability to properly manage our inventory or accurately present our inventory availability or pricing.

We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.

Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our customers, employees, job applicants, and other parties, including financial information, intellectual property, and personal identification information. Security breaches and other disruptions could compromise our information, expose us to liability, and harm our reputation and business. The steps we take to deter and mitigate these risks may not be successful. We may not have the resources or technical sophistication to anticipate or prevent current or rapidly evolving types of cyber-attacks. Data and security breaches can also occur as a result of non-technical issues, including an intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, legal and financial exposure, negative impacts on our customers’ willingness to transact business with us, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

 

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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. As a result of the ongoing litigation and termination of the amended 2005 concrete tie supply agreement with Union Pacific Railroad (“UPRR”), our sales to, and new orders from UPRR have ceased which has adversely affected our results during 2015. No assurances can be given that a significant downturn in the business or financial condition of a current customer, or customers, or potential litigation with a current customer, would not also impact our results of operations and/or financial condition.

An adverse outcome in any pending or future litigation or pending or future warranty claims against the Company or its subsidiaries or our determination that a customer has a substantial product warranty claim could negatively impact our financial results and/or our financial condition.

We are party to various legal proceedings. In addition, from time to time our customers assert claims against us relating to the warranties which apply to products we sell. There is the potential that a result materially adverse to us or our subsidiaries in pending or future legal proceedings or pending or future product warranty claims could materially exceed any accruals we have established and adversely affect our financial results and/or financial condition. In addition, we could suffer a significant loss of business from a customer who is dissatisfied with the resolution of a warranty claim. For example, UPRR terminated our amended 2005 concrete tie supply agreement over allegedly defective ties and ceased new orders for other products which negatively impacted our 2015 results.

In January 2015, UPRR filed a lawsuit against the Company asserting that we were in material breach of our amended 2005 concrete tie supply agreement with UPRR due to claimed failures to provide warranty ties to replace alleged defective concrete ties. UPRR seeks various types of relief including incidental, consequential, and other damages in amounts to be determined at trial under various legal theories. See Part II, Item 8, Note 19 for additional information regarding UPRR’s lawsuit. We continue to work with UPRR in an attempt to reach a resolution on this matter. However, such discussions may not be successful, and the results of litigation and any settlement or judgment amounts resulting from this matter may not be within the range of our estimated accrual. Consequently, while we believe the claims in the UPRR lawsuit are without merit, and we intend to vigorously defend ourselves and have asserted a counterclaim for damages in the UPRR lawsuit, an adverse outcome could result in a substantial judgment against us that could have a material adverse effect on our financial condition, results of operations, liquidity, and capital resources. No assurances can be given that prior to any settlement or judgment, that we will not take additional material charges because our warranty reserve accrual for UPRR is based upon our current estimate of the number of defective concrete ties that need to be replaced and facts could emerge which would cause us to materially increase this estimate.

A portion of our sales are derived from our international operations, which exposes us to certain risks inherent in doing business on an international level.

Doing business outside the United States subjects the Company to various risks, including changing economic climate and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts, and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments, and taxation. Increasing sales to foreign countries exposes the Company to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles. We have little control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter its business practices in time to avoid the adverse effect of any of these possible changes.

Changes in exchange rates for foreign currencies may reduce international demand for our products or increase our labor or supply costs in non-U.S. markets. Fluctuations in the relative values of the United States dollar, Canadian dollar, British pound, and Euro will require adjustments in reported earnings and operations to reflect exchange rate translation in our Canadian and European sales and operations. If the United States dollar strengthens in value as compared to the value of the Canadian dollar, British pound, or Euro, our reported earn-

 

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ings in dollars from sales in those currencies will be unfavorable. Conversely, a favorable result will be reported if the United States dollar weakens in value as compared to the value of the Canadian dollar, British pound, or Euro.

Violations of foreign governmental regulations, including the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws could result in fines, penalties, and criminal sanctions against the Company, its officers, or both and could adversely affect our business.

Our foreign operations are subject to governmental regulations in the countries in which we operate as well as U.S. laws. These include regulations relating to currency conversion, repatriation of earnings, taxation of our earnings and the earnings of our personnel, and the increasing requirement in some countries to make greater use of local employees and suppliers, including, in some jurisdictions, mandates that provide for greater local participation in the ownership and control of certain local business assets.

The U.S. Foreign Corrupt Practices Act and similar other worldwide anti-corruption laws, such as the U.K. Bribery Act, prohibit improper payments for the purpose of obtaining or retaining business. Although we have established an internal control structure, corporate policies, compliance, and training processes to reduce the risk of violation, we cannot ensure that these procedures will protect us from violations of such policies by our employees or agents. Failure to comply with applicable laws or regulations could subject us to fines, penalties, and suspension or debarment from contracting. Events of non-compliance could harm our reputation, reduce our revenues and profits, and subject us to criminal and civil enforcement actions. Violations of such laws or allegations of violation could disrupt our business and result in material adverse results to our operating results or future profitability.

Certain divisions of our business depend on a small number of suppliers. The loss of any such supplier could have a material adverse effect on our business, financial condition, and result of operations.

In our rail products businesses, we rely on a limited number of suppliers for key products that we sell to our customers. In addition, our piling business is predominantly dependent upon one supplier for sheet piling. A significant downturn in the business of one or more of these suppliers, a disruption in their manufacturing operations, an unwillingness to continue to sell to us, or a disruption in the availability of existing and new piling and rail products may adversely impact our financial results.

Fluctuations in the price, quality, and availability of the primary raw materials used in our business could have a material adverse effect on our operations and profitability.

Most of our businesses utilize steel as a significant product component. The steel industry is cyclical and prices and availability are subject to these cycles as well as to international market forces. We also use significant amounts of cement and aggregate in our concrete railroad tie and our precast concrete products businesses. No assurances can be given that our financial results would not be adversely affected if prices or availability of these materials were to change in a significantly unfavorable manner.

Labor disputes may have a material adverse effect on our operations and profitability.

Four of our manufacturing facilities are staffed by employees represented by labor unions. Approximately 177 employees employed at these facilities are currently working under three separate collective bargaining agreements. Disputes with regard to the terms of these agreements or our potential inability to renegotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a disruption of our operations and have a material adverse effect on our results of operations, financial condition, and liquidity.

Actions of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.

In February 2016, the Company entered into an agreement with an activist investor, Legion Partners Asset Management, LLC and various of its affiliates (collectively, “Legion Partners”) that had filed a Schedule 13D

 

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with the SEC with respect to the Company. Pursuant to that agreement, the Company agreed to appoint a representative of Legion Partners to the Company’s Board of Directors and Legion Partners agreed to various standstill provisions and to vote for the Company’s director nominees at the Company’s 2016 Annual Meeting of Shareholders.

Activist investors may attempt to effect changes in the Company’s strategic direction and how the Company is governed, or to acquire control over the Company. Some investors seek to increase short-term stockholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. While the Company welcomes varying opinions from all shareholders, activist campaigns that contest or conflict with our strategic direction could have an adverse effect on the Company’s results of operations and financial condition as responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of the Company’s board and senior management from the pursuit of business strategies. In addition, perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

Our success is highly dependent on the continued service and availability of qualified personnel.

Much of our future success depends on the continued availability and service of key personnel, including our Chief Executive Officer, the executive team, and other highly skilled employees. Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to compete and lead to a reduction in our profitability.

We may not foresee or be able to control certain events that could adversely affect our business.

Unexpected events including fires or explosions at our facilities, natural disasters, armed conflicts, unplanned outages, equipment failures, failure to meet product specifications, or a disruption in certain of our operations may cause our operating costs to increase or otherwise impact our financial performance.

Shifting federal, state, local, and foreign regulatory policies impose risks to our operations.

We are subject to regulation from federal, state, local, and foreign regulatory agencies. We are required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals, and certificates from governmental agencies. Compliance with emerging regulatory initiatives, delays, discontinuations, or reversals of existing regulatory policies in the markets in which we operate could have an adverse effect on our business, results of operations, cash flows, and financial condition.

A substantial portion of our operations are heavily dependent on governmental funding of infrastructure projects. Many of these projects have “Buy America” or “Buy American” provisions. Significant changes in the level of government funding of these projects could have a favorable or unfavorable impact on our operating results. Additionally, government actions concerning “Buy America” provisions, taxation, tariffs, the environment, or other matters could impact our operating results.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The location and general description of the principal properties which are owned or leased by L.B. Foster Company, together with the segment of the Company’s business using such properties, are set forth in the following table:

 

Location

  

Function

  

Acres

    

Business Segment

  

Lease
Expiration

Bedford, PA

   Bridge component fabricating plant      16       Construction    Owned

Birmingham, AL

   Pipe coating facility      32       Tubular and Energy    2017

Burnaby, British Columbia, Canada

   Friction management products plant      N/A       Rail    2021

Channelview, TX

   Threading, test, and inspection facility      73       Tubular and Energy    Owned

Columbia City, IN

   Rail processing facility and yard storage      22       Rail    Owned

Hillsboro, TX

   Precast concrete facility      9       Construction    Owned

Kimball, NE

   Threading, test, and inspection facility      145       Tubular and Energy    Owned

Leming, TX

   Threading, test, and inspection facility      63       Tubular and Energy    Owned

Magnolia, TX

   Threading facility and joint venture manufacturing facility      35       Tubular and Energy    Owned

Morgantown, WV

   Test, and inspection facility      N/A       Tubular and Energy    2018

Niles, OH

   Rail fabrication, friction management products, and yard storage      35       Rail    Owned

Petersburg, VA

   Piling storage facility      35       Construction    Owned

Pueblo, CO

   Rail joint manufacturing      9       Rail    Owned

Saint-Jean-sur-Richelieu, Quebec, Canada

   Rail anchors and track spikes manufacturing plant      17       Rail    Owned

Sheffield, United Kingdom

   Track component and friction management products facility      N/A       Rail    2019

Spokane, WA

   CXT concrete tie plant      13       Rail    2020

Spokane, WA

   Precast concrete facility      5       Construction    2020

Waverly, WV

   Precast concrete facility      85       Construction    Owned

Willis, TX

   Pipe coating facility      16       Tubular and Energy    Owned

Willis, TX

   Measurement services facility      68       Tubular and Energy    Owned

Included in the table above are certain facilities leased by the Company for which there is no acreage included in the lease. For these properties a “N/A” has been included in the “Acres” column.

Including the properties listed above, the Company has a total of 28 sales offices, including its headquarters in Pittsburgh, PA and 36 warehouses, plant, and yard facilities located throughout the United States, Canada, and Europe. The Company’s facilities are in good condition and suitable for the Company’s business as currently conducted and as currently planned to be conducted.

 

ITEM 3. LEGAL PROCEEDINGS

Information regarding the Company’s legal proceedings and other commitments and contingencies is set forth in Part II, Item 8, Note 19 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 3.

 

ITEM 4. MINE SAFETY DISCLOSURES

This item is not applicable to the Company.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Market Information

The Company had 336 common shareholders of record on February 23, 2016. Common stock prices are quoted daily through the NASDAQ Global Select Market quotation service (Symbol: FSTR). The following table sets forth the range of high and low sales prices per share of our common stock for the periods indicated:

 

     2015      2014  

Quarter

   High      Low      Dividends      High      Low      Dividends  

First

   $ 52.00       $ 37.00       $ 0.04       $ 48.41       $ 40.09       $ 0.03   

Second

     47.97         33.96         0.04         54.68         44.82         0.03   

Third

     36.07         12.10         0.04         56.72         45.93         0.03   

Fourth

     16.66         10.10         0.04         54.41         43.81         0.04   

Dividends

There have been no changes to the October 2014 Board of Directors authorization to increase the regular quarterly dividend to $0.04 per share. The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they depend on future earnings, capital requirements, and financial condition.

The Company’s March 13, 2015 credit facility permits it to pay dividends and distributions and make redemptions with respect to its stock providing no event of default or potential default (as defined in the facility agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $25,000,000 per year when funds are drawn on the facility. If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $25,000,000 per year are subjected to a limitation of $75,000,000 in the aggregate. The $75,000,000 aggregate limitation also permits certain loans, strategic investments, and acquisitions.

 

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Performance Graph

The Company’s peer group consists of Accuride Corporation, Alamo Group, Inc., AM Castle & Co., American Railcar Industries, Inc., CIRCOR International, Inc., Columbus McKinnon Corporation, Furmanite Corporation, Gibraltar Industries, Inc., Houston Wire & Cable Company, Insteel Industries Inc., Lindsay Corporation, Lydall Inc., MYR Group, Inc., NN Inc., Northwest Pipe Co., Olympic Steel Inc., Orion Marine Group, Inc., Quanex Building Products Corporation, Raven Industries Inc., and Sterling Construction Co. Inc.

The following tables compare total shareholder returns for the Company over the last five years to the NASDAQ Composite Index and the peer groups assuming a $100 investment made on December 31, 2010. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among L.B. Foster Company, the NASDAQ Composite Index, and a Peer Group

 

LOGO

 

* $100 invested on 12/31/10 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

     12/10     12/11     12/12     12/13     12/14     12/15  

L.B. Foster Company

    $100.00        $69.33        $106.80        $116.58        $120.05        $34.02   

NASDAQ Composite

    100.00        100.53        116.92        166.19        188.78        199.95   

2015 Peer Group

    100.00        89.10        100.87        142.58        127.82        106.05   

 

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information at December 31, 2015 with respect to compensation plans under which equity securities of the Company are authorized for issuance.

 

Plan Category   Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights
    Weighted-average
exercise price of
outstanding options,
warrants, and rights
    Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities

to be issued upon exercise of
outstanding options, warrants, or rights)
 

Equity compensation plans approved by shareholders

         $        407,307   

Equity compensation plans not approved by shareholders

                    
 

 

 

   

 

 

   

 

 

 

Total

         $        407,307   
 

 

 

   

 

 

   

 

 

 

Under the 2006 Omnibus Incentive Plan, non-employee directors are automatically awarded shares of the Company’s common stock as determined by the Board of Directors at each annual shareholder meeting at which such non-employee director is elected or re-elected, commencing May 24, 2006. Through December 31, 2015, there were 124,642 fully vested shares issued under the 2006 Omnibus Incentive Plan to non-employee directors. During 2015, pursuant to the 2006 Omnibus Incentive Plan, the Company issued approximately 14,000 fully-vested shares in lieu of a cash payment earned under separate three year incentive plans.

The Company grants eligible employees restricted stock and performance unit awards under the 2006 Incentive Omnibus Plan. 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 award agreement. Performance unit awards are offered annually under separate three-year long-term incentive plans. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying plan.

The Company will withhold or employees may tender shares of restricted stock when issued to pay for withholding taxes. During 2015, 2014, and 2013, the Company withheld 25,340, 21,676, and 16,166 shares, respectively, for this purpose. The value of the shares withheld were $1,114,000, $985,000, and $708,000 in 2015, 2014, and 2013, respectively.

Issuer Purchases of Equity Securities

The Company’s purchases of equity securities for the three-month period ended December 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),(3)
     Approximate dollar
value of shares
that may yet be
purchased under
the plans or programs
(in thousands)
 

October 1, 2015 — October 31, 2015

           $               $ 13,413   

November 1, 2015 — November 30, 2015

                             13,413   

December 1, 2015 — December 31, 2015

     1,328         11.09                 13,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,328       $               $ 13,413   
  

 

 

    

 

 

    

 

 

    

 

 

 
(1) Reflects shares withheld by the Company to pay taxes upon vesting of restricted stock. These shares do not impact the remaining authorization to repurchase shares under approved plans or programs.
(2) On December 4, 2013, the Board of Directors authorized the repurchase of up to $15,000,000 of the Company’s common shares until December 31, 2016. This authorization became effective January 1, 2014.

 

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(3) On December 9, 2015, the Board of Directors authorized the repurchase of up to $30,000,000 of the Company’s common shares until December 31, 2017. This authorization became effective January 1, 2016 and replaces the prior authorization.

The Company purchased 80,512 common shares for $1,587,000 during the year ended December 31, 2015 under our previous share repurchase authorization.

 

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands, except per share data)

The following selected financial data has been derived from our audited financial statements. The financial data presented below should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Annual Report on Form 10-K.

 

    Year Ended December 31,  

Income Statement Data

  2015(1)     2014(2)     2013(3)     2012(4)     2011(5)  

Net sales

  $ 624,523      $ 607,192      $ 597,963      $ 588,541      $ 575,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

  $ 28,760      $ 37,082      $ 41,571      $ 22,657      $ 30,812   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations, net of tax

  $ (44,445   $ 25,656      $ 29,290      $ 14,764      $ 22,067   

Income from discontinued operations, net of tax

                         1,424        828   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (44,445   $ 25,656      $ 29,290      $ 16,188      $ 22,895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic (loss) earnings per common share:

         

Continuing operations

  $ (4.33   $ 2.51      $ 2.88      $ 1.46      $ 2.16   

Discontinued operations

                         0.14        0.08   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic (loss) earnings per common share

  $ (4.33   $ 2.51      $ 2.88      $ 1.60      $ 2.24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (loss) earnings per common share:

         

Continuing operations

  $ (4.33   $ 2.48      $ 2.85      $ 1.44      $ 2.14   

Discontinued operations

                         0.14        0.08   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (loss) earnings per common share

  $ (4.33   $ 2.48      $ 2.85      $ 1.58      $ 2.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per common share

  $ 0.16      $ 0.13      $ 0.12      $ 0.10      $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit represents the gross profit less selling and administrative expenses and amortization expense.

 

(1) 2015 includes the results of the acquisitions of TEW Plus, LTD (“Tew Plus”) (November 23), IOS Holdings, Inc (“IOS”) (March 13), and TEW Holdings, LTD (“Tew”) (January 13). The results also include an $80,337 ($63,887 net of taxes) impairment of goodwill related to the IOS and Chemtec reporting units. More information about the impairment can be found in Part II, Item 8, Note 4.
(2) 2014 includes CXT Concrete Tie warranty charges of $9,374 within the Rail Products and Services segment. The 2014 results also include the acquisitions of Carr Concrete Corporation (July 7), FWO (October 29), and Chemtec (December 30).
(3) 2013 includes the acquisition of Ball Winch, LLC, (November 7).
(4) 2012 includes a $22,000 warranty charge and a pre-tax gain of $3,193, from the dispositions of SSD and Precise divisions, in income from discontinued operations, net of tax.
(5) 2011 includes a pre-tax gain of $577 associated with the early termination of the operating lease associated with the Company’s sale-leaseback transaction for our threaded products facility, formerly located in Houston, TX.

 

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     December 31,  

Balance Sheet Data

   2015      2014      2013      2012      2011  

Total assets

   $ 566,660       $ 491,717       $ 413,193       $ 401,537       $ 379,894   

Working capital

     122,828         135,488         171,603         179,838         156,020   

Long-term debt

     167,419         25,752         25         27         51   

Stockholders’ equity

     282,832         335,888         316,397         287,575         269,815   

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except share data unless otherwise noted)

Executive Level Overview

Current year acquisitions

Rail Products and Services Acquisitions

On November 23, 2015, the Company acquired the 75% balance of the remaining shares of Tew Plus for $2,130, net of cash acquired. Headquartered in Nottingham, UK, Tew Plus provides telecommunications and security systems to the railway and commercial markets. Their offerings include full installation services including: design, project management, survey, and commissioning along with future maintenance.

On January 13, 2015, the Company acquired Tew for $26,467, net of cash acquired. Headquartered in Nottingham, UK, Tew provides application engineering solutions primarily to the rail market and other major industries.

The Rail Products and Services segment acquisitions in the United Kingdom have enhanced our international product and service offerings. We have consolidated our Leicester, UK facility with the acquired business to establish a center of excellence in Nottingham, UK for engineering automation.

Tubular and Energy Services Acquisition

On March 13, 2015, the Company acquired IOS for $167,404, net of cash acquired and a net working capital receivable adjustment of $2,363. 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. See Part 1, Item 8, Note 4 with respect to an impairment of the goodwill related to this acquisition.

The IOS acquisition provides the Company with a comprehensive footprint that we believe will generate significant long-term benefit to the Company. Over the course of the current year, the IOS business has been negatively impacted by a significant decline in oil prices and related drop in active rigs. Management has implemented and continues to evaluate the necessary cost reductions to weather the current downturn, however, we continue to believe that the business will generate substantial profits once the global oil and gas market stabilizes and begins to recover.

2015 Developments and 2016 Outlook

During 2015, we:

 

   

Generated adjusted EBITDA of $60,606 (a)

 

   

Sold our Tucson, AZ concrete tie manufacturing assets for $2,750

 

   

Reduced borrowings on our outstanding revolving debt facility by $51,261 from March 31, 2015

 

   

Amended our credit agreement from a maximum credit line of $200,000 with a $100,000 accordion feature to a maximum credit line of $335,000 with a $100,000 accordion feature

 

   

Repurchased $1,587 of common shares under the share repurchase authorization

 

   

Continued application development work on a new Company-wide enterprise resource planning system

 

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(a) The following table displays a reconciliation of this non-GAAP measure for the three-year periods ended December 31, 2015, 2014 and 2013. EBITDA adjusted for the current year goodwill impairment is a financial metric utilized by management to evaluate the Company’s performance on a comparable basis after excluding the non-cash impact of the 2015 impairment of goodwill.

 

     2015      2014      2013  

Adjusted EBITDA Reconciliation

        

Net (loss) income

   $ (44,445    $ 25,656       $ 29,290   

Interest expense (income), net

     4,172         (18      (174

Income tax (benefit) expense

     (6,132      13,404         14,848   

Depreciation

     14,429         7,882         6,890   

Amortization

     12,245         4,695         3,112   
  

 

 

    

 

 

    

 

 

 

Total EBITDA

   $ (19,731    $ 51,619       $ 53,966   

Impairment of goodwill

     80,337                   
  

 

 

    

 

 

    

 

 

 

EBITDA adjusted for impairment of goodwill

   $ 60,606       $ 51,619       $ 53,966   
  

 

 

    

 

 

    

 

 

 

During 2015, market conditions deteriorated as the year progressed. Our largest business segment that serves transportation infrastructure markets experienced weakness that began in the second quarter. The Rail Products and Services segment was largely impacted by reduced spending that persisted through the year in the North American freight rail market. As the overall commodities markets experienced significant weakness, this translated into declining commodity carloads for rail carriers and pressure on pricing. Rail carloads are being adversely affected by the continuing shift away from coal to natural gas, declining crude by rail shipments, and reductions in most other metals, ores, and agriculture products. Bright spots exist in intermodal freight and shipments of passenger vehicles. North American freight rail companies began curtailing spending in the second half of 2015 which impacted most of our rail divisions. Spending in 2016 by the large freight rail operators in North America is expected to continue that trend according to their announcements. The European market was also weak in 2015 as a result of reduced spending by Network Rail, our primary customer in the United Kingdom. However, the outlook in the U.K. is more favorable for 2016. In the United States, passage of a new six year transportation bill “Fixing America’s Surface Transportation (FAST) Act” will provide additional funds for U.S. transit agencies to maintain and grow their systems.

As rail market conditions declined during 2015, and we experienced the loss of sales to UPRR, the management team acted to maximize profit margins. In addition to the weakening freight rail market, we lost approximately $26,000 in sales from UPRR versus the prior year (from $41,000 to $15,000). Management took several actions to cut costs and delay capital to help offset the pressure from declining volume.

The spending that is getting priority among the freight rail operators is directed at safety improvement, operating efficiency, and other cost reductions. The Company continues to target products and solutions that help improve safety and operating efficiency as well as introduce services that help operators perform maintenance at lower costs. We believe that the freight rail operators will continue to harden their network infrastructure to handle the demanding loads and traffic expected in the coming decades. When imports and exports grow with the global economy, freight rail operators are expected to benefit from the need for intermodal networks to efficiently ship goods.

Funding for transit rail projects in North America continued at a steady pace in 2015. The Company’s revenues from this market is always affected by swings in large projects from one year to the next. Our results in 2015 were relatively strong, and we continue to believe the transit market will grow over the long run, although year to year sequential growth may not be consistent. Management believes that the global transit market represents a good opportunity for the Company. By focusing on products that can improve safety and efficiency, as well as passenger comfort, we are attempting to partner with key end users and OEM’s to serve this market. In addition, we have launched a broader set of automation solutions for passenger transit systems through our Tew business acquired in 2015. Innovative solutions from our team of engineers will be focused on helping transit system operations improve infrastructure and lower cost.

 

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Within our Construction Products segment, heavy civil construction projects remained steady through 2015. The Company performed well in our core product areas of (a) bridge decking that provides new decking surfaces intended largely for bridge rehabilitation projects, (b) sheet piling for railway, highway, bridges, and port projects, and (c) precast concrete buildings. The Company did not perform well in other piling products targeted at (or utilized in) heavy civil projects that became very price competitive due to declining steel prices. Throughout the year, lower scrap input prices and very low factory utilization rates kept steel prices very competitive. As a result, the Company did not participate in some of the typical projects we serve with pipe pile and H-pile, resulting in lower annual volumes and sales.

Factory utilization in the steel industry is expected to remain at depressed levels into 2016. There is capacity in many world areas to provide supply for projects at very competitive prices. This industry is also being affected by the significant weakness in oil and gas exploration and development as well as other industrial markets where the commodity cycle has led to pressure on costs and lower capital spending.

The precast concrete buildings business was a bright spot in 2015. The introduction of new products provided support for growth, particularly in the Southwest region of the U.S. The market for buildings typically grows at a low pace, and we expect 2016 to mirror that trend.

The energy markets where our Tubular and Energy Services segment is focused, faced rapidly changing spending patterns in 2015. This volatility could exist throughout 2016. As the upstream, and to a lesser extent, midstream operators are adjusting capital spending plans, our orders have been difficult to forecast. Market conditions deteriorated throughout 2015 as end users adjusted to fluctuating oil prices and reacted to a changing climate around liquidity needs. The majority of our business is tied to investment in midstream pipeline infrastructure. However, the Company has exposure to investment in drilling, including the need for tubulars in hydraulic fracturing applications. Energy market weakness caused us to take restructuring actions mainly in the upstream test and inspection services business. These actions included consolidation of facilities and closures in markets that did not have sustainable demand.

It is our belief that there are widespread needs across the US for pipeline infrastructure in the long term, and new demand will be driven by already developed wells, future exporting potential, and transition from coal to natural gas plants. As a result of reduced forecasted capital spending across the energy industry, U.S. crude oil production is expected to decline in 2016, setting up the potential for a market rebalance later in 2016. Therefore, it is not clear as to whether 2016 will be the year that any measureable rebound will take place. We finished 2015 with a solid backlog for the coated pipe business and precision measurement systems, both aimed at pipeline applications. The upstream test and inspection business exited the year at a recent low point in sales, and has yet to experience a quarterly sequential increase in sales.

Management intends to stay focused on cost reduction actions and ways to streamline products and plant efficiency. We will launch a new ERP system in Q2 of 2016 that will start with operations from two Rail Products and Services divisions. Our long term objective is to bring modernization needed to the entire Company and develop a platform from which we can grow and leverage best in class business processes.

UPRR Product Warranty Claim

In 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT Incorporated, asserting among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The complaint seeks to cancel all duties of UPRR under the contracts, to adjudge the Company as having no remaining rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties and for various incidental and consequential damages.

The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are not the responsibility of the Company and claims that do not meet the criteria of a

 

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warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that in future years UPRR will be entitled to warranty replacement ties for virtually all of the ties manufactured at the Company’s former Grand Island, NE tie facility. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system. The Company believes UPRR’s claims are without merit and intends to vigorously defend itself.

On June 16 and 17, 2015, UPRR issued formal notice of the termination of the concrete tie supply agreement as well as the termination of the lease agreement that the Company had with UPRR for the Tucson, AZ production facility and rejection and revocation of its prior acceptance of certain ties manufactured at the Company’s Spokane, WA production facility.

On May 29, 2015, the Company and CXT filed an Answer, Affirmative Defenses and Counterclaims in response to the Complaint, denying liability to UPRR. As a result of UPRR’s subsequent June 16-17, 2015 actions and certain related conduct, the Company on October 5, 2015 amended the pending Answer, Affirmative Defenses and Counterclaims to add, among other things, assertions that UPRR’s conduct in question was wrongful and unjustified and constituted additional grounds for the affirmative defenses to UPRR’s claims and also for the Company’s counterclaims. By Scheduling Order dated September 3, 2015, a December 30, 2016 deadline for the completion of fact discovery has been established and trial may proceed at some future date after March 3, 2017, although no trial date has been set. The parties are currently conducting discovery.

The Company continues to engage in discussions in an effort to resolve this matter, however, we cannot predict that such discussions will be successful, or that the results of the litigation with UPRR, or any settlement or judgment amounts relating to this matter will be within the range of our estimated accruals for loss contingencies. Future potential costs pertaining to UPRR’s claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows. See Part II, Item 8, Note 19, included herein, for information regarding the Company’s commitments and contingent liabilities which is incorporated by reference into this Item 7.

 

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Results of Operations

 

    Twelve Months Ended
December 31,
    Percent of Total
Net Sales

Twelve Months
Ended
December 31,
    Percent
Increase/(Decrease)
 
    2015     2014     2013     2015     2014     2013     2015 vs.
2014
    2014 vs.
2013
 

Net Sales:

               

Rail Products and Services

  $ 328,982      $ 374,615      $ 363,667        52.7     61.7     60.8     (12.2 )%      3.0

Construction Products

    176,394        178,847        191,751        28.2        29.5        32.1        (1.4     (6.7

Tubular and Energy Services

    119,147        53,730        42,545        19.1        8.8        7.1        121.8        26.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  $ 624,523      $ 607,192      $ 597,963        100.0     100.0     100.0     2.9     1.5
 

 

 

   

 

 

   

 

 

           
    Twelve Months Ended
December 31,
    Gross Profit
Percentage
Twelve Months
Ended
December 31,
    Percent
Increase/(Decrease)
 
    2015     2014     2013     2015     2014     2013     2015 vs.
2014
    2014 vs.
2013
 

Gross Profit:

               

Rail Products and Services

  $ 75,276      $ 77,235      $ 74,986        22.9     20.6     20.6     (2.5 )%      3.0

Construction Products

    34,169        32,391        29,224        19.4        18.1        15.2        5.5        10.8   

Tubular and Energy Services

    22,481        11,722        12,278        18.9        21.8        28.9        91.8        (4.5

LIFO income

    2,468        738        37        0.4        0.1               **        **   

Other

    (741     (495     (586     (0.1     (0.1     (0.1     49.7        (15.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

  $ 133,653      $ 121,591      $ 115,939        21.4     20.0     19.4     9.9     4.9
 

 

 

   

 

 

   

 

 

           
    Twelve Months Ended
December 31,
    Percent of Total
Net Sales
Twelve Months
Ended
December 31,
    Percent
Increase/(Decrease)
 
    2015     2014     2013     2015     2014     2013     2015 vs.
2014
    2014 vs.
2013
 

Expenses:

               

Selling and administrative expenses

  $ 92,648      $ 79,814      $ 71,256        14.8     13.1     11.9     16.1     12.0

Amortization expense

    12,245        4,695        3,112        2.0        0.8        0.5        160.8        50.9   

Impairment of goodwill

    80,337                      12.9                      100.0          

Interest expense

    4,378        512        485        0.7        0.1        0.1        **        5.6   

Interest income

    (206     (530     (659            (0.1     (0.1     (61.1     (19.6

Equity in loss (income) of nonconsolidated investments

    413        (1,282     (1,316     0.1        (0.2     (0.2     (132.2     (2.6)   

Other income

    (5,585     (678     (1,077     (0.9     (0.1     (0.2     **        (37.0)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  $ 184,230      $ 82,531      $ 71,801        29.5     13.6     12.0     123.2     14.9
 

 

 

   

 

 

   

 

 

           

(Loss) Income before income taxes

  $ (50,577   $ 39,060      $ 44,138        (8.1 )%      6.4     7.4     (229.5 )%      (11.5 )% 

Income tax (benefit) expense

    (6,132     13,404        14,848        (1.0     2.2        2.5        (145.7     (9.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (44,445   $ 25,656      $ 29,290        (7.1 )%      4.2     4.9     (273.2 )%      (12.4 )% 
 

 

 

   

 

 

   

 

 

           

**  Results of calculation are not considered meaningful for presentation purposes.

 

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Fiscal 2015 Compared to Fiscal 2014 — Company Analysis

Net sales of $624,523 for the year ended December 31, 2015 increased by $17,331 or 2.9% compared to the prior year period. Included within the 2015 sales are acquisition-related revenues of $93,411, which generated 20.9% margins. The sales increase was attributable to increases of 121.8% in Tubular and Energy Services, which were partially offset by decreases of 12.2% and 1.4% in Rail Products and Services and Construction Products segment sales, respectively.

Gross profit margin for 2015 was 21.4%, or 138 basis points higher than the prior year. The Rail Products and Services segment recognized warranty-related charges of $1,092 and $9,374 in 2015 and 2014, respectively. Excluding the impact of the charges1, the current year gross profit margin was consistent with the prior year at 21.6%. Included in the 2015 gross profit was $2,468 related to the LIFO income compared to $738 in the prior year. The favorable change in LIFO primarily resulted from decreasing prices across our segments, as inventory levels in the aggregate were down slightly.

Selling and administrative expenses increased by $12,834, or 16.1%, over the prior year period. The cost increases for 2015 were attributable to costs from acquired businesses. Significant components of the acquired costs are personnel-related costs and to a much lesser extent insurance and travel costs.

During the third quarter of 2015, the Company recorded a non-cash goodwill impairment charge of $80,337 ($63,887 net of taxes) related to the IOS and Chemtec reporting units within the Tubular and Energy Services segment. The charge was primarily due to the impact of the depressed energy markets on both reporting units as well as the reduction in the active U.S. land oil rig count which specifically impacted the IOS reporting unit. These businesses are being adversely affected by reduced capital spending and cost reduction priorities that oil and gas developers and pipeline companies have implemented. These factors led to a reduction in demand causing the near term financial projections of the IOS and Chemtec reporting units to deteriorate. The Company performed an interim test for impairment of goodwill, and the long-term forecast did not indicate a timely recovery to support the carrying values of the goodwill, as further described in Part II, Item 8, Note 4 of this Annual Report on Form 10-K.

Other income during the current year was favorably impacted by the sale of assets at our Tucson, AZ facility resulting in a gain of $2,279 ($1,424 net of tax), realized and unrealized foreign exchange gains totaling $1,616, and other less significant income items.

The Company’s effective income tax rate for 2015 was 12.1%, compared to 34.3% in the prior year period. The Company’s effective income tax rate for 2015 differed from the federal statutory rate of 35% primarily due to the discrete impact of the $80,337 goodwill impairment in the third quarter. The impairment related to both tax deductible and nondeductible goodwill, and resulted in an income tax benefit of $16,450 during the current year period.

Net loss for the year ended December 31, 2015 was $44,445, or $4.33 per diluted share, which compares to net income for the 2014 period of $25,656, or $2.48 per diluted share. Excluding the current year impairment charge of $63,887, net of income tax benefit, net income would have been $19,442 or $1.88 per diluted share. This non-GAAP net income measure is inclusive of approximately 75,000 shares that were anti-dilutive on a GAAP basis.

Fiscal 2014 Compared to Fiscal 2013 — Company Analysis

Net sales for the year ended December 31, 2014 increased by $9,229, or 1.5%, which was attributable to a 26.3% and 3.0% improvement in Tubular and Energy Services and Rail Products and Services segment sales, respectively, partially offset by 6.7% reduction in Construction Products sales. Approximately 1.8%, 0.8% and 0.1% of the sales related to revenues from acquired businesses within the Tubular and Energy Services, Construction and Rail Products and Services segments, respectively.

 

1 

-All results in this Form 10-K that exclude warranty charges and/or goodwill impairment are non-GAAP measures used for management reporting purposes. Management believes that these measures provide useful information to investors because it is a profitability measure used to evaluate earnings performance on a comparable year-over-year basis.

 

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The gross profit margin for 2014 was 20.0% compared to 19.4% in 2013. Excluding the 2014 warranty charges of $9,374, the Company would have generated a gross profit margin of 21.6%.

Selling and administrative costs increased $8,558, or 12.0%, compared to fiscal 2013. Increases in 2014 were due to a variety of business developments including a sizeable increase in employee headcount. Excluding 2014 acquisitions, the Company headcount increased by approximately 6.3% over the prior year. The increase impacted personnel-related costs associated with salaried headcount and travel. Additionally, the Company incurred costs in 2014 related to the preparation for and identification of a new enterprise resource planning system. Lastly, acquisition related cost increases of $2,058 as well as recurring selling and administrative costs related to businesses acquired in 2014 led to the increase.

Other income for the year ended December 31, 2014 decreased to $678 compared to $1,077 during 2013. The decrease was principally due to a recovery of escrowed funds during 2013 which related to a 2005 real estate transaction that had previously been written off as uncollectible.

The Company’s effective income tax rate for 2014 was 34.3%, compared to 33.6% in 2013. The increase in the Company’s effective tax rate was due to increased nondeductible acquisition-related expenses in 2014 and the recognition of uncertain state tax positions during fiscal 2013, offset by greater U.S. domestic production activities deductions and a more favorable global mix of income.

Net income for 2014 was $25,656, or $2.48 per diluted share, which compares to net income for 2013 of $29,290, or $2.85 per diluted share. Included in our 2014 results was $9,374 in pre-tax charges related to concrete ties manufactured at our former Grand Island, NE facility which was closed in January 2011.

Results of Operations — Segment Analysis

Rail Products and Services

 

    Twelve Months Ended
December 31,
    (Decrease)
Increase
    Increase     Percent
(Decrease)/
Increase
    Percent
Increase
 
    2015     2014     2013     2015 vs. 2014     2014 vs. 2013     2015 vs. 2014     2014 vs. 2013  

Net Sales

  $ 328,982      $ 374,615      $ 363,667      $ (45,633   $ 10,948        (12.2 )%      3.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  $ 75,276      $ 77,235      $ 74,986      $ (1,959   $ 2,249        (2.5 )%      3.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit Percentage

    22.9     20.6     20.6     2.3         11.2    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2015 Compared to Fiscal 2014

Rail Products and Services segment sales decreased $45,633, or 12.2%, compared to the prior year period. Included within the 2015 sales were revenues from acquired businesses of $16,715. During fiscal 2015, excluding an increase within the Transit Products business, all rail divisions experienced reductions in sales over the prior year period. The sales decline was attributable to the loss of sales to UPRR, lower volumes from Rail Distribution and various track component businesses, international declines in the Rail Technologies division, and, to a lesser extent, reductions in the price of steel.

During the year ended December 31, 2015, the Rail Products and Services segment had a reduction in new orders of 16.5% compared to the prior year period. Contributing to the decline was the loss of business with UPRR, which represented 55.2% of the reduction in new orders, as well as overall reductions in freight rail spending.

The Rail Products and Services segment increased its 2015 gross profit margin by 226 basis points compared to fiscal 2014. Gross profit was impacted by warranty-related charges of $1,092, and $9,374 in 2015 and 2014, respectively. Excluding the impact of the charges in 2015 and 2014, the gross profit margin was 23.2%, or 9 basis points higher than the prior year.

 

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Fiscal 2014 Compared to Fiscal 2013

Rail Products and Services sales increased $10,948, or 3.0%, compared to fiscal 2013. The 2014 performance was highlighted by significant sales growth within the Rail Technologies business and to a lesser extent increases within the Allegheny Rail Products and CXT Concrete Tie businesses. Partially offsetting these improvements were declines in the Rail Distribution and Transit Products businesses.

Compared to 2013, the Rail Products and Services segment generated a 7.1% increase in new orders.

During 2014, the Rail segment incurred $9,374 in warranty charges related to our former Grand Island, NE concrete tie facility. The charge adversely impacted our Rail Products and Services segment’s gross profit. Without the charge, Rail Products and Services’ gross profit margins would have been 23.1% for the period ended December 31, 2014. The gross profit margin increase largely relates to favorable sales mix.

Construction Products

 

    Twelve Months Ended
December 31,
    (Decrease)
Increase
    (Decrease)
Increase
    Percent
(Decrease)/

Increase
    Percent
(Decrease)/

Increase
 
    2015     2014     2013     2015 vs. 2014     2014 vs. 2013     2015 vs. 2014     2014 vs. 2013  

Net Sales

  $ 176,394      $ 178,847      $ 191,751      $ (2,453   $ (12,904     (1.4 )%      (6.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  $ 34,169      $ 32,391      $ 29,224      $ 1,778      $ 3,167        5.5     10.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit Percentage

    19.4     18.1     15.2     1.3     2.9     7.2     19.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2015 Compared to Fiscal 2014

Construction Products segment sales decreased $2,453, or 1.4%, compared to the 2014 period. The decline was primarily related to a 14.7% reduction in sales of piling products, which was partially offset by a 43.0% increase in sales of precast construction products. The precast construction products business is experiencing very strong state sales for buildings, which has helped the Construction Products segment offset the increased competition and steel pricing pressures impacting the Piling Products business.

New orders booked during 2015 were down 19.0% over the prior year period. The decline related primarily to the Piling Products business where heavy competition has led to a reduction in market share for pipe piling and H-piling.

The gross profit percentage increased by 126 basis points due to gross margin improvements in piling and fabricated bridge products divisions. The improvement was primarily driven by the sales mix caused by an increase in sheet piling sales within the piling products business.

Fiscal 2014 Compared to Fiscal 2013

Construction Products segment sales declined by $12,904, or 6.7%, compared to fiscal 2013. The reduction was driven by a 20.8% reduction in sales of piling products, which was partially offset by significant growth in the Fabricated Bridge Products business as well as revenues from the July 2014 acquisition of Carr Concrete. The piling shortfall was partially attributable to insufficient product supply, which caused the segment to be unable to meet demand levels during much of 2014. During 2014, the Fabricated Bridge business experienced a record year and generated $8,800 in revenues related to the Newburgh-Beacon bridge project compared to $4,360 during 2013. The project was completed during 2015.

Including orders from Carr Concrete, the Construction Products segment generated an increase in new orders of 3.5% during 2014.

Leverage from engineered product sales created a favorable sales mix within the segment leading to a 287 basis point improvement over 2013.

 

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Tubular and Energy Services

 

    Twelve Months Ended
December 31,
    Increase
(Decrease)
    Increase
(Decrease)
    Percent
Increase/
(Decrease)
    Percent
Increase/
(Decrease)
 
    2015     2014     2013     2015 vs. 2014     2014 vs. 2013     2015 vs. 2014     2014 vs. 2013  

Net Sales

  $ 119,147      $ 53,730      $ 42,545      $ 65,417      $ 11,185        121.8     26.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  $ 22,481      $ 11,722      $ 12,278      $ 10,759      $ (556     91.8     (4.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit Percentage

    18.9     21.8     28.9     (2.9 )%      (7.1 )%      (13.3 )%      (24.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2015 Compared to Fiscal 2014

Tubular and Energy Services segment sales increased $65,417, or 121.8%, compared to the prior year period. The increase relates to revenues from acquired businesses of $71,954, which were partially offset by reductions of $6,537 in coated and threaded product sales. The 294 basis point decline in Tubular and Energy Services gross margins was largely due to acquired businesses and the related impact on sales mix. In addition to the new product mix, the divisions serving the upstream energy market are competing in the depressed oil and gas market which is experiencing less demand leading to a more challenging pricing environment.

The Tubular and Energy Services segment generated an increase in new orders of 160.7% compared to the prior year period principally due to orders from the acquisitions of Chemtec and IOS.

Fiscal 2014 Compared to Fiscal 2013

Tubular and Energy Services segment sales increased $11,185, or 26.3% compared to fiscal 2013. The increase was principally due to a full year of sales from Ball Winch which was acquired in November 2013. Adding to the improvement was a 6.2% increase in sales from the Birmingham, AL coated products business.

Compared to 2013, the Tubular and Energy Services segment generated an increase in new orders of 31.2%. New orders from the 2013 acquisition of Ball Winch represented 23.7% of 2014 orders.

Gross profit declines of 705 basis points were attributable to cost overruns on a coated products project completed during the 2014 third quarter as well as the impact of a three-week plant shutdown in Birmingham, AL. The shutdown was completed in January 2015.

 

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Liquidity and Capital Resources

Total debt at December 31, 2015 and 2014 was $168,754 and $26,428, respectively, and was comprised of borrowings from the revolving credit facility to fund acquisitions as well as assets funded through financing agreements.

Our need for liquidity relates primarily to working capital requirements for operating activities, debt service payments, capital expenditures, JV capital obligations, share repurchases, and dividends.

The change in cash and cash equivalents for the three-year periods ended December 31 are as follows:

 

     2015      2014      2013  

Net cash provided by operating activities

   $ 56,172       $ 66,739       $ 14,155   

Net cash used by investing activities

     (205,575      (97,751      (47,174

Net cash provided (used) by financing activities

     134,289         22,055         (1,716

Effect of exchange rate changes on cash and cash equivalents

     (3,598      (3,642      (2,106
  

 

 

    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (18,712      (12,599      (36,841
  

 

 

    

 

 

    

 

 

 

Cash Flow from Operating Activities

During the current 2015 period, cash flows from operating activities provided $56,172, a decrease of $10,567, compared to the 2014 period. For the year ended December 31, 2015, income, adjustments to income from operating activities, and dividends from the LB Pipe joint venture provided $47,061 compared to $37,359 in the 2014 period. Working capital and other assets and liabilities provided $9,111 in the current period compared to providing $29,380 in the prior year period. The reduction in cash flows from operations was largely impacted by working capital movement.

During 2014, cash provided by operating activities was $66,739 compared to $14,155 in 2013. During 2014, income, adjustments to income from operating activities, and dividends from the joint venture provided $37,359 compared to providing $43,858 in 2013. Working capital and other assets and liabilities provided $29,380 in 2014 compared to working capital and other assets and liabilities use of $29,703 in 2013. The significant increase in cash flows primarily relates to additional emphasis on working capital management throughout 2014.

The Company’s calculation for days sales outstanding at December 31, 2015 was 56 days compared to 50 days at December 31, 2014. We believe our receivable portfolio continues to be of good quality.

Cash Flow from Investing Activities

Investing activities during the year ended December 31, 2015 related primarily to the acquisitions of Tew Plus, Tew, and IOS. The total purchase price, net of cash acquired and working capital adjustments, was $196,001. Other investing activities included capital expenditures of $14,913 during 2015. Current year expenditures related primarily to the Birmingham, AL coated products facility upgrades, application development of a new enterprise resource planning system, and general plant and yard improvements across each segment. We anticipate 2016 capital expenditures to be in the $6,000—$8,000 range. Other investing activities related to cash proceeds of $5,339 from the sale of assets. The sale of the Tucson, AZ concrete tie facility contributed $2,750 of the total proceeds.

The primary investing activity in 2014 related to a cash use of $80,302 for the acquisitions of Chemtec, Carr Concrete, and FWO as well a $495 working capital distribution related to the 2013 acquisition of Ball Winch. Capital expenditures of $17,056 related to improvements to our machinery and equipment across each segment, strategic land acquisitions to increase production capacity, leasehold improvements, and plant upgrades at our Birmingham, AL facility.

Investing activities during 2013 related to the $37,500 acquisition of Ball Winch as well as capital expenditures of $9,674 related to improvements to our machinery and equipment across each segment, leasehold improvements, and plant upgrades at our Birmingham, AL facility.

 

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Cash Flow from Financing Activities

During the year ended December 31, 2015, the Company had an increase in outstanding debt of $142,326 primarily related to drawings against the revolving credit facility to fund domestic acquisition activity. During 2015, the Company purchased 80,512 shares of common stock for $1,587 under our existing share repurchase authorization. Additionally, the Company withheld 25,340 shares for approximately $1,114 during 2015. These shares were withheld from employees to pay their withholding taxes in connection with the exercise and/or vesting of options and restricted stock awards. Cash outflows related to dividends during 2015 were $1,656.

The primary financing activity during 2014 related to the receipt of proceeds from our revolving credit facility of $24,200. Additionally, we paid dividends of $0.04 per share during the fourth quarter of 2014 and $0.03 per share during each of the prior three quarters of 2014. During 2013, we paid quarterly dividends of $0.03 per share. We did not purchase any common shares of the Company under the share repurchase authorization in 2014 or 2013, however, the Company withheld 21,676 and 16,166 shares to pay employee withholding taxes in connection with the vesting of restricted stock awards for approximately $985 and $708, respectively.

Financial Condition

The Company generated $56,172 from cash flows from operations during 2015 that was utilized to fund capital expenditures and make payments against our revolving credit facility. At December 31, 2015, we had $33,312 in cash and cash equivalents and credit facilities with $171,668 of availability. We believe this liquidity will provide the flexibility to operate the business in a prudent manner and weather a continued downturn in our markets.

Approximately $29,700 of our cash and cash equivalents was held in non-domestic bank accounts, and is not available to fund domestic operations unless repatriated. It is management’s intent to indefinitely reinvest such funds outside of the United States. During 2015, the Company utilized non-domestic funds totaling $28,597 for the acquisitions of Tew and Tew Plus.

Borrowings under the March 13, 2015 Amended Credit Agreement will bear interest at rates based upon either the base rate or Euro-rate plus applicable margins. Applicable margins are dictated by the ratio of the Company’s indebtedness less consolidated cash on hand to the Company’s consolidated EBITDA, as defined in the underlying Amended Credit Agreement. The base rate is the highest of (a) PNC Bank’s prime rate, (b) the Federal Funds Rate plus 0.50% or (c) the daily Euro-rate (as defined in the Amended Credit Agreement) plus 1.00%. The base rate and Euro-rate spreads range from 0.00% to 1.50% and 1.00% to 2.50%, respectively.

To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps will become effective in February 2017 at which point it will effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract.

The Amended Credit Agreement includes two financial covenants: (a) Leverage Ratio, defined as the Company’s Indebtedness less cash on hand, in excess of $15,000, divided by the Company’s consolidated EBITDA, which must not exceed 3.25 to 1.00 and (b) Minimum Interest Coverage, defined as consolidated EBITDA less Capital Expenditures divided by consolidated interest expense, which must be no less than 3.00 to 1.00.

As of December 31, 2015, the Company was in compliance with the Amended Credit Agreement’s covenants. The agreement matures on March 13, 2020.

The Amended Credit Agreement permits the Company to pay dividends, distributions, and make redemptions with respect to its stock provided no event of default or potential default (as defined in the Amended Credit Agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $25,000 per year when funds are drawn on the facility. If no drawings on the facility exist, dividends, distributions, and redemptions in excess of $25,000 per year are subjected to a limitation of $75,000 in the aggregate over the life of the facility. The $75,000 aggregate limitation also permits certain loans, investments, and acquisitions.

 

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Other restrictions exist at all times including, but not limited to, limitation of the Company’s sale of assets, other indebtedness incurred by either the borrowers or the non-borrower subsidiaries of the Company, guarantees, and liens.

Tabular Disclosure of Contractual Obligations

A summary of the Company’s required payments under financial instruments and other commitments at December 31, 2015 are presented in the following table:

 

     Total      Less than
1 year
     1-3
years
     4-5
years
     More than
5 years
 

Contractual Cash Obligations

              

Revolving credit facility (1)

   $ 165,000       $       $       $ 165,000       $   

Interest

     15,477         3,593         7,616         4,268           

Other debt

     3,754         1,335         1,679         740           

Pension plan contributions

     271         271                           

Operating leases

     20,128         4,310         6,109         3,109         6,600   

Purchase obligations not reflected in the financial statements

     40,698         40,698                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 245,328       $ 50,207       $ 15,404       $ 173,117       $ 6,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Financial Commitments

              

Standby letters of credit

   $ 526       $ 526       $       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Repayments of outstanding loan balances are disclosed in Note 10 of the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this report.

Other long-term liabilities include items such as income taxes which are not contractual obligations by nature. The Company cannot estimate the settlement years for these items and has excluded them from the above table.

Management believes its internal and external sources of funds are adequate to meet anticipated needs, including those disclosed above, for the foreseeable future.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include the operating leases, purchase obligations, and standby letters of credit disclosed within the contractual obligations table above in the “Liquidity and Capital Resources” section. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.

Backlog

Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:

 

     Backlog  
     December 31,
2015
     December 31,
2014
     December 31,
2013
 

Rail Products and Services

   $ 85,199       $ 104,821       $ 121,853   

Construction Products

     45,371         65,843         53,483   

Tubular and Energy Services

     34,137         13,686         7,775   
  

 

 

    

 

 

    

 

 

 

Total Backlog

   $ 164,707       $ 184,350       $ 183,111   
  

 

 

    

 

 

    

 

 

 

Backlog from acquired businesses represents approximately 8% of the Company’s total unfilled customer orders at December 31, 2015. While a considerable portion of our business is backlog driven, certain businesses, including the IOS acquisition in March 2015 and the Rail Technologies business, are not driven by backlog and therefore have insignificant levels throughout the year.

 

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Critical Accounting Policies and Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstance. Application of these accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies relate to the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements. There can be no assurance that actual results will not differ from those estimates. For a summary of our significant accounting policies, including those discussed below, see Part II, Item 8, Note 1 to the Consolidated Financial Statements.

Revenue Recognition — The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied; persuasive evidence of a sales arrangement exists, product delivery and transfer of title to the customer has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

Revenues for products under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products, the percentage-of-completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations.

Revenue recognition involves judgments, including assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. In determining when to recognize revenue, we analyze various factors, including the specifics of the transaction, historical experience, creditworthiness of the customer, and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income.

Business Combinations, Goodwill, and Intangible Assets — We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a business is allocated to the underlying net assets of the acquired business based on estimates of their respective fair values. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected cash flows from customer relationships, the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio, future expected cash flows from developed technology and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results.

Intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected

 

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cash flows. Because this process involves management making estimates with respect to future revenues and market conditions and because these estimates also form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates.

Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. This step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss equal to the excess is recorded as a component of operations. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair value of the reporting unit. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volume and pricing, costs to produce, and working capital changes. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.

The Company considers historical experience and available information at the time the fair values of its business are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, the Company may be exposed to impairment losses that could be material to our results of operations.

The Company recorded impairment charges of $80,337 ($63,887 net of taxes) during 2015 related to the acquisitions of IOS in March 2015 and Chemtec in December 2014. There were no goodwill impairments recorded during December 31, 2014 and 2013. Additional information concerning the impairments is set forth in Part II, Item 8, Note 4 to the financial statements included herein, which is incorporated by reference into this Item 7.

Intangible Assets, Long-Lived Assets, and Investments — The Company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The applicable guidance for assets held for uses requires that, if the sum of the future expected cash flows associated with an asset, undiscounted and without interest charges, is less than the carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. The accounting estimate related to asset impairment is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the Consolidated Statements of Operations.

The fair value of the Company’s equity investments is dependent on the performance of the investee companies as well as volatility inherent in the external markets for these investments. In assessing potential impairment of these investments, we consider these factors as well as the forecasted financial performance of the investees. If these forecasts are not met and indicate an other-than-temporary decline in value, impairment charges may be required.

There were no material impairments of intangible assets, long-lived assets, or investments for the years ended December 31, 2015, 2014, or 2013.

Product Warranty — The Company maintains a current warranty for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales. For long-term construction projects, a product warranty accrual is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or reso-

 

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lution of known individual product warranty claims. The underlying assumptions used to calculate the product warranty accrual can change from period to period and are dependent upon estimates of the amount and cost of future product repairs or replacements.

At December 31, 2015 and 2014, the product warranty reserve was $8,755 and $11,500, respectively. During the years ended December 31, 2015, 2014, and 2013, the Company recorded product warranty expense of $972, $10,957, and $1,695, respectively. For additional information regarding the Company’s product warranty, refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Commitments and Contingent Liabilities” included herein.

Contingencies and Litigation — The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period.

In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. When a probable, estimable exposure exists, the Company accrues an estimate of the probable costs for the resolution of these matters. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Future results of operations could be materially affected by changes in our assumptions or the outcome of these proceedings.

The Company’s operations are subject to national, state, foreign, and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, regulated materials and waste. These regulations impose liability for the costs of investigation, remediation, and damages resulting from, present and past spills, disposals, or other releases of hazardous substances or materials. Liabilities are recorded when remediation efforts are probable and the costs can be reasonably estimated. Estimates are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Established reserves are periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.

Refer to Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Commitments and Contingent Liabilities,” for additional information regarding the Company’s commitments and contingent liabilities.

Pension Plans — The calculation of the Company’s net periodic benefit cost (pension expense) and benefit obligation (pension liability) associated with its defined benefit pension plans (pension plans) requires the use of a number of assumptions that the Company deems to be critical accounting estimates. Changes in these assumptions can result in a different pension expense and liability amounts, and future actual experience can differ significantly from the assumptions. In 2015, the Company adjusted its mortality assumption to the Society of Actuaries RP-2015 mortality tables.

Two critical assumptions impacting the Company’s pension obligation are the expected long-term rate of return on plan assets and the assumed discount rate. The expected long-term rate of return reflects the average rate of earnings expected on funds invested or to be invested in the pension plans to provide for the benefits included in the pension liability. The Company establishes the expected long-term rate of return at the beginning of each fiscal year based upon information available to the Company at that time, including the plan’s investment mix and the forecasted rates of return on these types of securities. Any differences between actual experience and assumed experience are deferred as an unrecognized actuarial gain or loss. The unrecognized actuarial gains or losses are amortized in accordance with applicable accounting guidance.

The weighted average expected long-term rate of return determined by the Company for its 2015 domestic pension was 5.50% and the expected long-term rate of return for 2016 will be 5.20%. The weighted average expected long-term rate of return determined by the Company for its 2015 U.K. pension was 5.00% and the expected long-term rate of return for 2016 will be 5.21%. Pension expense increases as the expected long-term rate of return decreases. The long-term rates of return are reflective of the investment strategies of the underlying pension plan.

The assumed discount rate reflects the current rate at which the pension benefits could effectively be settled. In estimating that rate, applicable guidance requires the Company to utilize rates of return on high quality, fixed

 

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income investments. The Company’s pension liability increases as the discount rate is reduced. Therefore, a decline in the assumed discount rate has the effect of increasing the Company’s pension obligation and future pension expense. The weighted average assumed discount rate used by the Company was 4.30% and 4.00%, respectively, as of December 31, 2015 and 2014 for its domestic pension plans. The weighted average assumed discount rate used by the Company was 4.00% and 3.60%, as of December 31, 2015 and 2014 for its U.K. pension plan. For additional information regarding the Company’s pension obligations, refer to Part II, Item 8, Note 16 to the Consolidated Financial Statements, “Retirement Plans,” included herein.

Income Taxes — The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by FASB ASC 740, “Income Taxes,” valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. This guidance requires management to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. Determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires management to make estimates and judgments of future financial results.

The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters.

The Company’s income tax rate is significantly affected by the tax rate on global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. At this time, we do not intend to repatriate any foreign earnings to fund U.S. operations. Should we decide to repatriate the foreign earnings, the Company would have to accrue income and withholding taxes in the period in which it is determined that the earnings will no longer be indefinitely invested outside the United States.

Refer to Part II, Item 8, Note 14, “Income Taxes,” included herein for additional information regarding the Company’s deferred tax assets. The Company’s ability to realize these tax benefits may affect the Company’s reported income tax expense and net income.

New Accounting Pronouncements — See Part II, Item 8, Note 1 to the Consolidated Financial Statements for information regarding new accounting pronouncements.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(Dollars in thousands)

Interest Rate Risk

In the ordinary course of business, the Company is exposed to interest rate risks that may adversely affect funding costs associated with its variable-rate debt. The Company does not purchase or hold any derivative financial instruments for trading purposes. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.

During the year ended December 31, 2015, the Company entered into three forward starting LIBOR-based interest rate swap agreements with notional values totaling $50,000. At December 31, 2015, the Company recorded a long-term liability of $196 related to the swap agreements. The Company did not have any interest rate derivatives at December 31, 2014 or 2013.

 

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Foreign Currency Exchange Rate Risk

The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-year period ended December 31, 2015.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of L.B. Foster Company and Subsidiaries

We have audited the accompanying consolidated balance sheets of L.B. Foster Company and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of L.B. Foster Company and Subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), L.B. Foster Company and Subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2016, expressed an unqualified opinion thereon.

 

/s/    Ernst & Young LLP

Pittsburgh, Pennsylvania

March 1, 2016

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,

(In thousands, except share data)

 

     2015      2014  

ASSETS

  

Current assets:

     

Cash and cash equivalents

   $ 33,312       $ 52,024   

Accounts receivable — net

     78,487         90,178   

Inventories — net

     96,396         95,089   

Prepaid income tax

     1,131         2,790   

Other current assets

     5,148         4,101   
  

 

 

    

 

 

 

Total current assets

     214,474         244,182   

Property, plant, and equipment — net

     126,745         74,802   

Other assets:

     

Goodwill

     81,752         82,949   

Other intangibles — net

     134,927         82,134   

Deferred tax assets

     226         93   

Investments

     5,321         5,824   

Other assets

     3,215         1,733   
  

 

 

    

 

 

 

Total assets

   $ 566,660       $ 491,717   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

Current liabilities:

     

Accounts payable

   $ 55,804       $ 67,166   

Deferred revenue

     6,934         8,034   

Accrued payroll and employee benefits

     10,255         13,419   

Accrued warranty

     8,755         11,500   

Current maturities of long-term debt

     1,335         676   

Other accrued liabilities

     8,563         7,899   
  

 

 

    

 

 

 

Total current liabilities

     91,646         108,694   

Long-term debt

     167,419         25,752   

Deferred tax liabilities

     8,926         7,618   

Other long-term liabilities

     15,837         13,765   

Stockholders’ equity:

     

Common stock, par value $.01, authorized 20,000,000 shares; shares issued at December 31, 2015 and December 31, 2014, 11,115,779; shares outstanding at December 31, 2015 and December 31, 2014, 10,221,006 and 10,242,405, respectively

     111         111   

Paid-in capital

     46,681         48,115   

Retained earnings

     276,571         322,672   

Treasury stock — at cost, common stock, shares at December 31, 2015 and December 31, 2014, 894,773 and 873,374, respectively

     (22,591      (23,118

Accumulated other comprehensive loss

     (17,940      (11,892
  

 

 

    

 

 

 

Total stockholders’ equity

     282,832         335,888   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 566,660       $ 491,717   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THE THREE YEARS ENDED DECEMBER 31,

(In thousands, except share data)

 

     2015      2014      2013  

Sales of goods

   $ 537,214       $ 561,899       $ 559,846   

Sales of services

     87,309         45,293         38,117   
  

 

 

    

 

 

    

 

 

 

Total sales

     624,523         607,192         597,963   

Cost of goods sold

     420,169         449,964         458,043   

Cost of services sold

     70,701         35,637         23,981   
  

 

 

    

 

 

    

 

 

 

Total cost of sales

     490,870         485,601         482,024   
  

 

 

    

 

 

    

 

 

 

Gross profit

     133,653         121,591         115,939   
  

 

 

    

 

 

    

 

 

 

Selling and administrative expenses

     92,648         79,814         71,256   

Amortization expense

     12,245         4,695         3,112   

Impairment of goodwill

     80,337                   

Interest expense

     4,378         512         485   

Interest income

     (206      (530      (659

Equity in loss (income) of nonconsolidated investments

     413         (1,282      (1,316

Other income

     (5,585      (678      (1,077
  

 

 

    

 

 

    

 

 

 
     184,230         82,531         71,801   
  

 

 

    

 

 

    

 

 

 

(Loss) Income before income taxes

     (50,577      39,060         44,138   

Income tax (benefit) expense

     (6,132      13,404         14,848   
  

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (44,445    $ 25,656       $ 29,290   
  

 

 

    

 

 

    

 

 

 

Basic (loss) earnings per common share

   $ (4.33    $ 2.51       $ 2.88   
  

 

 

    

 

 

    

 

 

 

Diluted (loss) earnings per common share

   $ (4.33    $ 2.48       $ 2.85   
  

 

 

    

 

 

    

 

 

 

Dividends paid per common share

   $ 0.16       $ 0.13       $ 0.12   
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THE THREE YEARS ENDED DECEMBER 31,

(In thousands)

 

     2015      2014      2013  

Net (loss) income

   $ (44,445    $ 25,656       $ 29,290   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss, net of tax:

        

Foreign currency translation adjustment

     (6,947      (4,863      (3,475

Unrealized loss on cash flow hedges, net of tax benefit of $76

     (121                

Pension and post-retirement benefit plans, net of tax expense (benefit): $208, ($1,383), and $1,199

     631         (2,631      2,258   

Reclassification of pension liability adjustments to earnings, net of tax expense of $160, $63 and $134 *

     389         185         303   
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss, net of tax

     (6,048      (7,309      (914
  

 

 

    

 

 

    

 

 

 

Comprehensive (loss) income

   $ (50,493    $ 18,347       $ 28,376   
  

 

 

    

 

 

    

 

 

 

 

* Reclassifications out of accumulated other comprehensive income for pension obligations are charged to selling and administrative expense.

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THE THREE YEARS ENDED DECEMBER 31,

(In thousands)

 

     2015      2014      2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net (loss) income

   $ (44,445    $ 25,656       $ 29,290   

Adjustments to reconcile net (loss) income to cash provided by operating activities:

        

Deferred income taxes

     (14,582      (2,914      3,244   

Depreciation

     14,429         7,882         6,890   

Amortization

     12,245         4,695         3,112   

Impairment of goodwill

     80,337                   

Equity loss (income) and remeasurement gain

     (167      (1,282      (1,316

(Gain) loss on sales and disposals of property, plant, and equipment

     (2,064      21         127   

Share-based compensation

     1,471         3,007         2,156   

Excess income tax benefit from share-based compensation

     (253      (336      (203

Change in operating assets and liabilities, net of acquisitions:

        

Accounts receivable

     31,223         15,311         (36,782

Inventories

     4,331         (9,872      29,919   

Other current assets

     3,248         (1,004      (310

Prepaid income tax

     1,134         2,530         (6,882

Other noncurrent assets

     (909      (386      264   

Dividends from LB Pipe & Coupling Products, LLC

     90         630         558   

Accounts payable

     (17,204      16,285         (5,206

Deferred revenue

     (2,279      591         (1,805

Accrued payroll and employee benefits

     (5,136      2,542         (608

Other current liabilities

     (4,189      2,732         (7,561

Other liabilities

     (1,108      651         (732
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     56,172         66,739         14,155   
  

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Proceeds from the sale of property, plant, and equipment

     5,339         184           

Capital expenditures on property, plant, and equipment

     (14,913      (17,056      (9,674

Acquisitions, net of cash acquired

     (196,001      (80,797      (37,500

Capital contributions to equity method investments

             (82        
  

 

 

    

 

 

    

 

 

 

Net cash used by investing activities

     (205,575      (97,751      (47,174
  

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Repayments of debt

     (161,068      (125      (6

Proceeds from debt

     301,063         24,516           

Proceeds from exercise of stock options and stock awards

     68         131         35   

Financing fees

     (1,670      (473        

Treasury stock acquisitions

     (2,701      (985      (708

Cash dividends on common stock paid to shareholders

     (1,656      (1,345      (1,240

Excess income tax benefit from share-based compensation

     253         336         203   
  

 

 

    

 

 

    

 

 

 

Net cash provided (used) by financing activities

     134,289         22,055         (1,716
  

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3,598      (3,642      (2,106

Net decrease in cash and cash equivalents

     (18,712      (12,599      (36,841

Cash and cash equivalents at beginning of period

     52,024         64,623         101,464   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 33,312       $ 52,024       $ 64,623   
  

 

 

    

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

        

Interest paid

   $ 3,674       $ 362       $ 330   
  

 

 

    

 

 

    

 

 

 

Income taxes paid

   $ 7,835       $ 14,617       $ 18,697   
  

 

 

    

 

 

    

 

 

 

Capital expenditures funded through financing agreements

   $ 288       $ 1,981       $   
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE YEARS ENDED DECEMBER 31, 2015

 

     Common
Stock
     Paid-in
Capital
     Retained
Earnings
     Treasury
Stock
     Accumulated
Other
Comprehensive
(Loss) Income
     Total  
     (In thousands, except share data)  

Balance, January 1, 2013

   $ 111       $ 46,290       $ 270,311       $ (25,468    $ (3,669    $ 287,575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

           29,290               29,290   

Other comprehensive loss, net of tax:

                 

Pension liability adjustment

                 2,561         2,561   

Foreign currency translation adjustment

                 (3,475      (3,475

Issuance of 39,123 common shares,net of shares withheld for taxes

        (1,410         737            (673

Stock based compensation and related excess tax benefit

        2,359                  2,359   

Cash dividends on common stock paid to shareholders

           (1,240            (1,240
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2013

     111         47,239         298,361         (24,731      (4,583      316,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

           25,656               25,656   

Other comprehensive loss, net of tax:

                 

Pension liability adjustment

                 (2,446      (2,446

Foreign currency translation adjustment

                 (4,863      (4,863

Issuance of 53,884 common shares, net of shares withheld for taxes

        (2,467         1,613            (854

Stock based compensation and related excess tax benefit

        3,343                  3,343   

Cash dividends on common stock paid to shareholders

           (1,345            (1,345
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2014

     111         48,115         322,672         (23,118      (11,892      335,888   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

           (44,445            (44,445

Other comprehensive loss, net of tax:

                 

Pension liability adjustment

                 1,020         1,020   

Foreign currency translation adjustment

                 (6,947      (6,947

Unrealized derivative loss on cash flow hedges

                 (121      (121

Purchase of 80,512 common shares for treasury

              (1,587         (1,587

Issuance of 59,113 common shares, net of shares withheld for taxes

        (3,158         2,114            (1,044

Stock based compensation and related excess tax benefit

        1,724                  1,724   

Cash dividends on common stock paid to shareholders

           (1,656            (1,656
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2015

   $ 111       $ 46,681       $ 276,571       $ (22,591    $ (17,940    $ 282,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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L.B. FOSTER COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data unless otherwise noted)

Note 1.

Summary of Significant Accounting Policies

Basis of financial statement presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, ventures, and partnerships in which a controlling interest is held. Inter-company transactions and accounts have been eliminated. The Company utilizes the equity method of accounting for companies where its ownership is less than or equal to 50% and significant influence exists.

Cash and cash equivalents

The Company considers cash and other instruments with maturities of three months or less, when purchased, to be cash and cash equivalents. The Company invests available funds in a manner to maximize returns, preserve investment principal, and maintain liquidity while seeking the highest yield available.

Cash and cash equivalents held in non-domestic accounts was approximately $29,700 and $49,233 at December 31, 2015 and 2014, respectively. Included in non-domestic cash equivalents are investments in bank term deposits of approximately $1,939 and $25 at December 31, 2015 and 2014, respectively. The carrying amounts approximated fair value because of the short maturity of the instruments.

Inventories

Certain inventories are valued at the lower of the last-in, first-out (“LIFO”) cost or market. Approximately 43% in 2015 and 44% in 2014, of the Company’s inventory is valued at average cost or market, whichever is lower. Slow-moving inventory is reviewed and adjusted regularly, based upon product knowledge, physical inventory observation, and the age of the inventory.

Property, plant, and equipment

Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of 5 to 40 years for buildings and 2 to 10 years for machinery and equipment. Leasehold improvements are amortized over 3 to 13 years, which represent the lives of the respective leases or the lives of the improvements, whichever is shorter. Depreciation expense is recorded within “cost of sales” and “selling and administrative” expenses based upon the particular asset’s use. The Company reviews a long-lived asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. There were no material asset impairments recorded for the years ended December 31, 2015, 2014, or 2013.

Maintenance, repairs, and minor renewals are charged to operations as incurred. Major renewals and betterments that substantially extend the useful life of the property are capitalized at cost. Upon sale or other disposition of assets, the costs and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in income.

Allowance for doubtful accounts

The allowance for doubtful accounts is recorded to reflect the ultimate realization of the Company’s accounts receivable and includes assessment of the probability of collection and the credit-worthiness of certain customers. Reserves for uncollectible accounts are recorded as part of selling and administrative expenses on the Consolidated Statements of Operations. The Company records a monthly provision for accounts receivable that are considered to be uncollectible. In order to calculate the appropriate monthly provision, the Company reviews its accounts receivable aging and calculates an allowance through application of historic reserve factors to overdue receivables. This calculation is supplemented by specific account reviews performed by the Company’s

 

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credit department. As necessary, the application of the Company’s allowance rates to specific customers is reviewed and adjusted to more accurately reflect the credit risk inherent within that customer relationship.

Investments

Investments in companies in which the Company has the ability to exert significant influence, but not control, over operating and financial policies (generally 20% to 50% ownership) are accounted for using the equity method. Under the equity method, investments are initially recorded at cost and adjusted for dividends and undistributed earnings and losses. The equity method of accounting requires a company to recognize a loss in the value of an equity method investment that is other than a temporary decline.

Goodwill and other intangible assets

Goodwill is tested annually for impairment or more often if there are indicators of impairment. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. This step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss equal to the excess is recorded as a component of operations. The Company performs its annual impairment tests as of October 1st.

During 2015, the Company identified certain triggering events that indicated an interim impairment test was required. As a result of the interim assessment as of September 1, 2015, the Company recorded impairment charges of $80,337 ($63,887 net of taxes) during 2015 related to the acquisitions of IOS and Chemtec. The measurement of goodwill impairment is a Level 3 fair value measurement, as the primary assumptions, including estimates of future revenue growth, gross margin, and EBITDA margin, are not market observable and require management to make judgements regarding future outcomes. Additional information concerning the impairments is set forth in Note 4 to the financial statements. No additional charges were recorded as a result of the 2015 annual impairment test. No goodwill impairment was recognized during 2014 or 2013.

The Company has no indefinite-lived intangible assets. The Company reviews a long-lived intangible asset for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. All intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization period of approximately 14 years, at December 31, 2015. See Note 4 for additional information including regarding the Company’s other intangible assets.

Environmental remediation and compliance

Environmental remediation costs are accrued when the liability is probable and costs are estimable. Environmental compliance costs, which principally include the disposal of waste generated by routine operations, are expensed as incurred. Capitalized environmental costs, when appropriate, are depreciated over their useful life. Reserves are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Reserves are periodically reviewed throughout the year and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. See Note 19, “Commitments and Contingent Liabilities,” for additional information regarding the Company’s outstanding environmental and litigation reserves.

Earnings per share

Basic earnings per share is calculated by dividing net income by the weighted average of common shares outstanding during the year. Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and restricted stock utilizing the treasury stock method.

 

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Revenue recognition

The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied; persuasive evidence of a sales arrangement exists, product delivery and transfer of title to the customer has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

Revenues for products and services under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products and services, the percentage of completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations.

Revenue recognition involves judgments, including assessments of expected returns, the likelihood of nonpayment, and estimates of expected costs and profits on long-term contracts. In determining when to recognize revenue, we analyze various factors, including the specifics of the transaction, historical experience, creditworthiness of the customer, and current market and economic conditions. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income.

Costs in excess of billings are classified as work-in-process inventory. Projects with billings in excess of costs are recorded within deferred revenue.

Deferred revenue

Deferred revenue consists of customer payments received for which the revenue recognition criteria have not yet been met as well as billings in excess of costs on percentage of completion projects. Advanced payments from customers typically relate to contracts with respect to which the Company has significantly fulfilled its obligations, but due to the Company’s continuing involvement with the project, revenue is precluded from being recognized until title, ownership, and risk of loss have passed to the customer.

Fair value of financial instruments

The Company’s financial instruments consist of cash equivalents, accounts receivable, accounts payable, interest rate swap agreements, and debt.

The carrying amounts of the Company’s financial instruments at December 31, 2015 and 2014 approximate fair value. See Note 18, “Fair Value Measurements,” for additional information.

Stock-based compensation

The Company applies the provisions of FASB ASC 718, “Compensation — Stock Compensation,” to account for the Company’s share-based compensation. Under the guidance, share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the award. See Note 15, “Stare-based Compensation,” for additional information.

Product warranty

The Company maintains a current warranty liability for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales based upon

 

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historical experience. For long-lived construction products, a warranty is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims or due to changes in the Company’s historical warranty experience. At December 31, 2015 and 2014, the product warranty reserve was $8,755 and $11,500, respectively. See Note 19, “Commitments and Contingencies” for additional information regarding the product warranty.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax laws and rates expected to be in effect when such differences are recovered or settled. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date of the change.

The Company makes judgments regarding the recognition of deferred tax assets and the future realization of these assets. As prescribed by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income Taxes” and applicable guidance, valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood more than 50%) that some portion or all of the deferred tax assets will not be realized. The guidance requires the Company to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. Determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires the Company to make estimates and judgments of future financial results.

The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Foreign currency translation

The assets and liabilities of our foreign subsidiaries are measured using the local currency as the functional currency and are translated into U.S. dollars at exchange rates as of the balance sheet date. Income statement amounts are translated at the weighted-average rates of exchange during the year. The translation adjustment is accumulated as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in determining net income. Included in net income for the years ended December 31, 2015, 2014, and 2013 were foreign currency transaction gains of approximately $1,616, $422, and $433, respectively.

Research and development

The Company expenses research and development costs as costs are incurred. For the years ended December 31, 2015, 2014, and 2013, research and development expenses were $3,937, $3,096, and $3,154, respectively, and were principally related to the Company’s friction management and railroad monitoring system products.

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

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Reclassifications

Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes principally to conform to the presentation in the current year period. These reclassifications include separately presenting sales of services and cost of services sold to reflect the Company’s increased service offerings attributable to the recent acquisitions disclosed in Note 3 and a change in GAAP, as further described below.

Recently issued accounting guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating its implementation approach and assessing the impact of ASU 2014-09 on our financial position and results of operations.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on our financial position or results of operations.

Recently adopted accounting guidance

In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt issuance costs related to line of credit arrangements may continue to be reflected as an asset. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. The standard is effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods. The Company early adopted the new guidance in the fourth quarter of 2015 and there was no impact to the consolidated financial statements from the adoption of this guidance.

In September 2015, the FASB issued ASU No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard, entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1, 2016. The Company early adopted the new guidance in the fourth quarter of 2015 and there was no impact to the consolidated financial statements from the adoption of this guidance.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). This new guidance requires businesses to classify deferred tax liabilities and assets on their balance sheets as noncurrent. Under existing accounting, a business must separate deferred income tax liabilities and assets into current and noncurrent. ASU 2015-17 was issued as a way to simplify the way businesses classify deferred tax liabilities and assets on their balance sheets. Public companies must apply ASU 2015-17 to fiscal years beginning after December 15, 2016. Companies must follow the requirements for interim periods within those fiscal years, but early adoption at the beginning of an interim or annual period is allowed for all entities. The Company adopted this guidance during the fourth quarter of 2015 on a retrospective

 

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basis, which resulted in the reclassification of $3,497 current deferred tax assets and $77 current deferred tax liabilities to non-current as of December 31, 2014.

Note 2.

Business Segments

The Company is a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy, and utility markets. The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. Each segment represents a revenue-producing component of the Company for which separate financial information is produced internally that is subject to evaluation by the Company’s chief operating decision maker in deciding how to allocate resources. Each segment is evaluated based upon their segment profit contribution to the Company’s consolidated results.

As a result of recently completed acquisitions, during the first quarter of 2015, the Company renamed the Rail Products and Tubular Products business segments to be Rail Products and Services and Tubular and Energy Services, respectively. The name changes principally reflect the additional businesses conducted by those segments as a result of acquisitions that have enhanced our product and service offerings within the rail and energy markets. Excluding the addition of current year acquisitions, there were no changes to the divisions that have been aggregated within the segments nor were there changes to the historical reportable segment results.

The Company markets its products directly in all major industrial areas of the United States, Canada, and Europe, primarily through an internal sales force.

The Company’s Rail Products and Services segment provides a full line of new and used rail, trackwork, and accessories to railroads, mines, and other customers in the rail industry. The Rail segment also designs and produces insulated rail joints, power rail, track fasteners, concrete railroad ties, coverboards, and special accessories for mass transit and other rail systems. In addition, the Rail Products and Services segment engineers, manufactures, and assembles friction management products and railway wayside data collection and management systems.

The Company’s Construction Products segment sells and rents steel sheet piling, H-bearing pile, and other piling products for foundation and earth retention requirements. The Company’s Fabricated Products division sells bridge decking, bridge railing, structural steel fabrications, expansion joints, bridge forms, and other products for highway construction and repair. The concrete products businesses produce precast concrete buildings and a variety of specialty precast concrete products.

The Company’s Tubular and Energy Services segment provides pipe coatings for natural gas pipelines and utilities, upstream test and inspection services, precision measurement systems for the oil and gas market, and produces threaded pipe products for the oil and gas markets as well as industrial water well and irrigation markets.

The following table illustrates net sales, profit (loss), assets, depreciation/amortization, and expenditures for long-lived assets of the Company by segment for the years ended or at December 31, 2015, 2014, and 2013. Segment profit is the earnings from operations before income taxes and includes internal cost of capital charges for net assets used in the segment at a rate of generally 1% per month excluding recently acquired businesses. The internal cost of capital charges are eliminated during the consolidation process. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the Company accounts for inventory on a First-In, First-Out (“FIFO”) basis at the segment level compared to a Last-In, First-Out (“LIFO”) basis at the consolidated level.

 

     2015  
     Net Sales      Segment
Profit (Loss)
    Segment
Assets
     Depreciation/
Amortization
     Expenditures for
Long-Lived
Assets
 

Rail Products and Services

   $ 328,982       $ 27,037      $ 241,222       $ 8,098       $ 4,273   

Construction Products

     176,394         12,958        86,335         2,720         1,260   

Tubular and Energy Services

     119,147         (81,344 )*      216,715         14,857         4,303   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 624,523       $ (41,349   $ 544,272       $ 25,675       $ 9,836   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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     2014  
     Net Sales      Segment
Profit
     Segment
Assets
     Depreciation/
Amortization
     Expenditures for
Long-Lived
Assets
 

Rail Products and Services

   $ 374,615       $ 30,093       $ 239,951       $ 6,153       $ 5,115   

Construction Products

     178,847         13,106         102,978         2,232         3,343   

Tubular and Energy Services

     53,730         5,350         130,289         3,208         6,988   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 607,192       $ 48,549       $ 473,218       $ 11,593       $ 15,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2013  
     Net Sales      Segment
Profit
     Segment
Assets
     Depreciation/
Amortization
     Expenditures for
Long-Lived
Assets
 

Rail Products and Services

   $ 363,667       $ 28,692       $ 252,049       $ 6,505       $ 3,383   

Construction Products

     191,751         10,206         77,900         1,758         1,805   

Tubular and Energy Services

     42,545         9,208         51,497         1,054         2,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 597,963       $ 48,106       $ 381,446       $ 9,317       $ 7,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* - Segment loss includes impairment of goodwill as further described in Note 4.

During 2015, 2014, and 2013, no single customer accounted for more than 10% of the Company’s consolidated net sales. Sales between segments are immaterial.

Reconciliations of reportable segment net sales, profits, assets, depreciation/amortization, and expenditures for long-lived assets to the Company’s consolidated totals are illustrated as follows for the years ended and as of December 31:

 

     2015      2014      2013  

(Loss) income from Operations:

        

Total for reportable segments

   $ (41,349    $ 48,549       $ 48,106   

Adjustment of inventory to LIFO

     2,468         738         37   

Unallocated interest income

     206         530         659   

Unallocated equity in (loss) income of nonconsolidated investments

     (413      1,282         1,316   

Unallocated corporate amounts

     (11,489      (12,039      (5,980
  

 

 

    

 

 

    

 

 

 

(Loss) income from operations, before income taxes

   $ (50,577    $ 39,060       $ 44,138   
  

 

 

    

 

 

    

 

 

 

Assets:

        

Total for reportable segments

   $ 544,272       $ 473,218       $ 381,446   

Unallocated corporate assets

     28,209         26,788         40,774   

LIFO

     (5,821      (8,289      (9,027
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 566,660       $ 491,717       $ 413,193   
  

 

 

    

 

 

    

 

 

 

Depreciation/Amortization:

        

Total for reportable segments

   $ 25,675       $ 11,593       $ 9,317   

Other

     999         984         685   
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,674       $ 12,577       $ 10,002   
  

 

 

    

 

 

    

 

 

 

Expenditures for Long-Lived Assets:

        

Total for reportable segments

   $ 9,836       $ 15,446       $ 7,648   

Expenditures funded through financing agreements

     288         1,981           

Other expenditures

     5,077         1,610         2,026   
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,201       $ 19,037       $ 9,674   
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the Company’s sales by major geographic region in which the Company has operations for the years ended December 31:

 

     2015      2014      2013  

United States

   $ 522,404       $ 498,025       $ 495,710   

Canada

     40,545         39,375         37,290   

United Kingdom

     26,817         22,625         16,548   

Other

     34,757         47,167         48,415   
  

 

 

    

 

 

    

 

 

 
   $ 624,523       $ 607,192       $ 597,963   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s long-lived assets by geographic region at December 31:

 

     2015      2014      2013  

United States

   $ 118,053       $ 66,905       $ 40,717   

Canada

     6,186         7,440         8,833   

Other

     2,506         457         559   
  

 

 

    

 

 

    

 

 

 
   $ 126,745       $ 74,802       $ 50,109   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s sales by major product line:

 

     2015      2014      2013  

Rail distribution products

   $ 126,277       $ 139,529       $ 144,911   

Rail Technologies products

     98,237         109,053         88,670   

Piling products

     94,853         111,182         140,302   

Concrete products

     52,044         36,396         32,969   

Test and inspection services

     35,906                   

CXT concrete tie products

     35,740         52,562         44,108   

Allegheny Rail Products

     35,155         45,008         36,666   

Other products

     146,311         113,462         110,337   
  

 

 

    

 

 

    

 

 

 
   $ 624,523       $ 607,192       $ 597,963   
  

 

 

    

 

 

    

 

 

 

Note 3.

Acquisitions

TEW Plus, LTD

On November 23, 2015, the Company acquired the 75% balance of the remaining shares of TEW Plus, LTD (“Tew Plus”) for $2,130, net of cash acquired. Headquartered in Nottingham, UK, Tew Plus provides telecommunications and security systems to the railway and commercial markets. Their offerings include full installation services including: design, project management, survey, and commissioning along with future maintenance. The results of Tew Plus’ operations are included within the Rail Products and Services segment from the date of acquisition.

Inspection Oilfield Services

On March 13, 2015, the Company acquired IOS Holdings, Inc. (“IOS”) for $167,404, net of cash acquired and a net working capital receivable adjustment of $2,363. The purchase agreement includes an earn-out provision for the seller to generate an additional $60,000 of proceeds upon achieving certain levels of EBITDA during the three year period beginning on January 1, 2015. The Company has not accrued an estimated earn-out obligation based upon a probability weighted valuation model of the projected EBITDA results, which indicates that the minimum target will not be achieved. Approximately $7,600 of the purchase price relates to amounts held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Houston, TX,

 

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IOS is a leading independent provider of tubular management services with operations in every significant oil and gas producing region in the continental United States. The acquisition is included within our Tubular and Energy Services segment from the date of acquisition. See Note 4 with respect to an impairment of the goodwill related to this acquisition.

TEW Holdings, LTD

On January 13, 2015, the Company acquired TEW Holdings, LTD (“Tew”) for $26,467, net of cash acquired, working capital, and net debt adjustments totaling $4,200. The purchase price includes approximately $600 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Nottingham, UK, Tew provides application engineering solutions primarily to the rail market and other major industries. The results of Tew’s operations are included within the Rail Products and Services segment from the date of acquisition.

Chemtec Energy Services, L.L.C.

On December 30, 2014, the Company acquired Chemtec Energy Services, L.L.C. (“Chemtec”) for $66,719, net of cash received, which is inclusive of $1,867 related to working capital adjustments. The cash payment included $5,000 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. Headquartered in Willis, TX, Chemtec is a domestic manufacturer and turnkey provider of blending, injection, and metering equipment for the oil and gas industry. The acquired business is included within our Tubular and Energy Services segment. See Note 4 with respect to an impairment of the goodwill related to this acquisition.

FWO

On October 29, 2014, the Company acquired FWO, a business of Balfour Beatty Rail GmbH for $1,103, inclusive of a $161 post-closing working capital receivable adjustment. Headquartered in Germany, FWO is engaged in the electronic track lubrication and maintenance business and has been included in our Rail Products and Services segment.

Carr Concrete

On July 7, 2014, the Company acquired Carr Concrete Corporation (“Carr”) for $12,480, inclusive of a $189 post-closing purchase price adjustment. Carr is a provider of pre-stressed and precast specialty concrete products located in Waverly, WV. Included within the purchase price is $1,000 which is held in escrow to satisfy potential indemnity claims made under the purchase agreement. The results of Carr’s operations are included in our Construction Products segment.

Acquisition Summary

Each transaction was accounted for under the acquisition method of accounting under U.S. generally accepted accounting principles which requires an acquiring entity to recognize, with limited exceptions, all of the assets acquired and liabilities assumed in a transaction at fair value as of the acquisition date. Goodwill primarily represents the value paid for each acquisition’s enhancement to the Company’s product and service offerings and capabilities, as well as a premium payment related to the ability to control the acquired assets. The Company has concluded that intangible assets and goodwill values resulting from the Chemtec, FWO, and Carr transactions will be deductible for tax purposes.

The Company incurred $760 and $2,240 of acquisition-related costs which are included in the results of operations within selling and administrative costs for the years ended December 31, 2015 and 2014.

 

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The following unaudited pro forma consolidated income statement presents the Company’s results as if the acquisitions of IOS, Tew, and Chemtec had occurred on January 1, 2014. The 2015 pro forma results include the impact of the current year impairment of goodwill as further described in Note 4.

     Twelve months ended
December, 31
 
     2015      2014  

Net sales

   $ 640,596       $ 806,384   

Gross profit

     138,123         183,163   

Net (loss) income

     (44,399      41,745   

Diluted (loss) earnings per share

     

As Reported

   $ (4.33    $ 2.48   

Pro forma

   $ (4.32    $ 4.04   

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

 

Allocation of Purchase Price

  November 23,
2015 - Tew Plus
    March 13,
2015 - IOS
    January 13,
2015 - Tew
    December 30,
2014 - Chemtec
    October 29,
2014 - FWO
    July 7,
2014 - Carr
 

Current assets

  $ 4,420      $ 19,877      $ 12,125      $ 15,528      $ 131      $ 3,180   

Other assets

           708                             45   

Property, plant, and equipment

    47        51,453        2,398        4,705               7,648   

Goodwill

    822        69,908     8,772        22,302     971        1,936   

Other intangibles

    1,074        50,354        14,048        33,130        419        1,348   

Liabilities assumed

    (3,597     (23,596     (6,465     (6,756     (418     (1,677
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,766      $ 168,704      $ 30,878      $ 68,909      $ 1,103      $ 12,480   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* - See Note 4 with respect to an impairment of the goodwill related to this acquisition.

The following table summarizes the estimates of the fair values and amortizable lives of the identifiable intangible assets acquired:

 

Intangible Asset

  November 23,
2015 - Tew Plus
    March 13,
2015 - IOS
    January 13,
2015 - Tew
    December 30,
2014 - Chemtec
    October 29,
2014 - FWO
    July 7,
2014 - Carr
 

Trade name

  $      $ 2,641      $ 870      $ 3,149      $      $ 613   

Customer relationships

    817        41,171        10,035        23,934        34        524   

Technology

    203        4,364        2,480        4,930        341        87   

Non-competition agreements

    54        2,178        663        1,117        44        124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total identified intangible assets

  $ 1,074      $ 50,354      $ 14,048      $ 33,130      $ 419      $ 1,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The purchase price allocation for Tew Plus is based on a preliminary valuation. If new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement recognized for assets or liabilities assumed, the Company will recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.

 

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Note 4.

Goodwill and Other Intangible Assets

The following table represents the goodwill balance by reportable segment:

 

     Rail Products
and Services
     Construction
Products
     Tubular and Energy
Services
     Total  

Balance at December 31, 2014

   $ 38,956       $ 5,147       $ 38,846       $ 82,949   

Acquisitions

     9,594                 69,908         79,502   

Foreign currency translation impact

     (362                      (362

Impairment charges

                     (80,337      (80,337
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2015

   $ 48,188       $ 5,147       $ 28,417       $ 81,752   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. During the third quarter of 2015, the Company’s IOS and Chemtec reporting units underperformed against their projections and revised their forecasts downward. Additionally, in August 2015, the Company revised its full year outlook as a result of trends in the energy market as well as the loss of sales to Union Pacific Railroad (“UPRR”). The impact of these factors led to a decline in the Company’s market capitalization which fell below the shareholder’s equity value. The Company concluded that the aggregation of these events were indications of potential impairments.

Based upon these indicators, with the assistance of an independent valuation firm, the Company performed an interim test for impairment of goodwill as of September 1, 2015. The valuation included the use of both the income and market approach. The Company applied greater weighting to the income approach as the Company believes it is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate.

The results of the test indicated that the IOS and Chemtec reporting units’ respective fair values were less than their carrying values. The fair values of all other reporting units that maintain goodwill exceeded their respective carrying values and were not at risk of impairment. As a result of the impact of the downturn within the energy markets on both reporting units, the expectations of a prolonged period before recovery, and the reduction in active U.S. land oil rig count, which specifically impacted the IOS reporting unit, the near term projections of these reporting units have deteriorated and the expected future growth of each of these reporting units was insufficient to support the carrying values.

The Company compared the implied fair values of the IOS and Chemtec goodwill amounts to the carrying amounts of that goodwill. The fair values of the IOS and Chemtec reporting units were allocated to all of the assets and liabilities of the respective reporting unit as if IOS and Chemtec had been acquired in business combinations as of the test date and the fair value was the purchase price paid to acquire each reporting unit. As a result of this valuation, it was determined that the carrying amounts of IOS’s and Chemtec’s goodwill exceeded the implied fair values of that goodwill. The Company recognized a non-cash goodwill impairment charge of $80,337 ($63,887 net of taxes) to write down the carrying values to the implied fair values, of which $69,908 represents the full carrying value of goodwill related to the IOS acquisition and the remaining $10,429 relates to the Chemtec reporting unit. No additional impairments were triggered as a result of the Company’s 2015 annual impairment test.

The Company performed a recoverability test on the long-lived tangible and definite lived intangible assets related to the IOS and Chemtec acquisitions and concluded that no impairment existed. The Company will continue to monitor these assets, including their respectful useful lives, in future periods.

 

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The following table represents the gross intangible assets balance by reportable segment at December 31:

 

     2015      2014  

Rail Products and Services

   $ 59,226       $ 44,781   

Construction Products

     1,348         3,178   

Tubular and Energy Services

     98,166         47,812   
  

 

 

    

 

 

 
   $ 158,740       $ 95,771   
  

 

 

    

 

 

 

The components of the Company’s intangible assets are as follows at:

 

     December 31, 2015  
     Weighted Average
Amortization
In Years
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Amount
 

Non-compete agreements

     4       $ 6,984       $ (2,495    $ 4,489   

Patents

     10         378         (124      254   

Customer relationships

     16         94,338         (8,441      85,897   

Supplier relationships

     5         350         (335      15   

Trademarks and trade names

     13         14,252         (3,025      11,227   

Technology

     13         42,438         (9,393      33,045   
     

 

 

    

 

 

    

 

 

 
      $ 158,740       $ (23,813    $ 134,927   
     

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Weighted Average
Amortization
In Years
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Amount
 

Non-compete agreements

     5       $ 4,143       $ (705    $ 3,438   

Patents

     10         564         (189      375   

Customer relationships

     19         44,450         (4,679      39,771   

Supplier relationships

     5         350         (268      82   

Trademarks and trade names

     14         10,765         (1,855      8,910   

Technology

     14         35,499         (5,941      29,558   
     

 

 

    

 

 

    

 

 

 
      $ 95,771       $ (13,637    $ 82,134   
     

 

 

    

 

 

    

 

 

 

Intangible assets are amortized over their useful lives ranging from 5 to 25 years, with a total weighted average amortization period of approximately 14 years. Amortization expense for the years ended December 31, 2015, 2014, and 2013 was $12,245, $4,695, and $3,112, respectively.

Estimated amortization expense for the years 2016 and thereafter is as follows:

 

     Amortization
Expense
 

2016

   $ 13,093   

2017

     12,200   

2018

     11,868   

2019

     11,137   

2020

     10,706   

2021 and thereafter

     75,923   
  

 

 

 
   $ 134,927   
  

 

 

 

 

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Note 5.

Accounts Receivable

Accounts receivable at December 31, 2015 and 2014 are summarized as follows:

 

     2015      2014  

Trade

   $ 79,100       $ 90,494   

Allowance for doubtful accounts

     (1,485      (1,036
  

 

 

    

 

 

 
     77,615         89,458   

Other

     872         720   
  

 

 

    

 

 

 
   $ 78,487       $ 90,178   
  

 

 

    

 

 

 

The Company’s customers are principally in the rail, construction, and energy sectors. At December 31, 2015 and 2014, trade receivables, net of allowance for doubtful accounts, from customers were as follows:

 

     2015      2014  

Rail Products and Services

   $ 43,155       $ 45,931   

Construction Products

     20,489         33,760   

Tubular and Energy Services

     13,971         9,767   
  

 

 

    

 

 

 
   $ 77,615       $ 89,458   
  

 

 

    

 

 

 

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices.

Note 6.

Inventory

Inventories at December 31, 2015 and 2014 are summarized in the following table:

 

     2015      2014  

Finished goods

   $ 62,547       $ 65,335   

Work-in-process

     20,178         16,188   

Raw materials

     19,492         21,855   
  

 

 

    

 

 

 

Total inventories at current costs

     102,217         103,378   

Less: LIFO reserve

     (5,821      (8,289
  

 

 

    

 

 

 
   $ 96,396       $ 95,089   
  

 

 

    

 

 

 

At December 31, 2015 and 2014, the LIFO carrying value of inventories for book purposes exceeded the LIFO value for tax purposes by approximately $5,046 and $11,697, respectively. At December 31, 2015, 2014, and 2013 liquidation of certain LIFO inventory layers carried at costs that were higher than the costs of current purchases resulted in increases in cost of goods sold of $115, $6 and $1,128, respectively.

 

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Note 7.

Property, Plant, and Equipment

Property, plant, and equipment at December 31, 2015 and 2014 consist of the following:

 

     2015      2014  

Land

   $ 17,054       $ 9,102   

Improvements to land and leaseholds

     16,590         29,016   

Buildings

     39,366         22,807   

Machinery and equipment, including equipment under capitalized leases

     118,677         95,547   

Construction in progress

     11,844         12,033   
  

 

 

    

 

 

 
     203,531         168,505   
  

 

 

    

 

 

 

Less accumulated depreciation and amortization, including accumulated amortization of capitalized leases

     76,786         93,703   
  

 

 

    

 

 

 
   $ 126,745       $ 74,802   
  

 

 

    

 

 

 

Depreciation expense, including amortization of assets under capital leases, for the years ended December 31, 2015, 2014, and 2013 amounted to $14,429, $7,882 and $6,890, respectively.

Note 8.

Investments

The Company is a member of a joint venture, L B Pipe and Coupling Products, LLC (“LB Pipe JV”), in which it maintains a 45% ownership interest. The LB Pipe JV manufactures, markets, and sells various precision coupling products for the energy, utility, and construction markets and is scheduled to terminate on June 30, 2019.

Under applicable guidance for variable interest entities in ASC 810, “Consolidation,” the Company determined that the LB Pipe JV is a variable interest entity. The Company concluded that it is not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly impact the economic performance of the LB Pipe JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.

During the years ended December 31, 2015 and 2014, each of the LB Pipe JV members received proportional distributions from the LB Pipe JV. The Company’s 45% ownership interest resulted in cash distributions of $90 and $630 as of December 31, 2015 and 2014, respectively. There were no changes to the members’ ownership interests as a result of the distribution.

The Company recorded equity in the (loss) income of the LB Pipe JV of approximately ($410), $1,286 and $1,316 for the years ended December 31, 2015, 2014, and 2013, respectively.

As of December 31, 2015 and 2014, the Company had a nonconsolidated equity method investment of $5,246 and $5,746, respectively, in the LB Pipe JV and other investments totaling $75 and $78 as of December 31, 2015 and 2014, respectively.

The Company’s exposure to loss results from its capital contributions, net of the Company’s share of the LB Pipe JV’s income or loss, and its net investment in the direct financing lease covering the facility used by the LB Pipe JV for its operations. The carrying amounts with the maximum exposure to loss of the Company at December 31, 2015 and 2014, respectively, are as follows:

 

     2015      2014  

LB Pipe JV equity method investment

   $ 5,246       $ 5,746   

Net investment in direct financing lease

     995         1,117   
  

 

 

    

 

 

 
   $ 6,241       $ 6,863   
  

 

 

    

 

 

 

 

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The Company is leasing five acres of land and two facilities to the LB Pipe JV through June 30, 2019, with a 5.5 year renewal period. The current monthly lease payments, including interest, approximate $17, with a balloon payment of approximately $488, which is required to be paid at the termination of the lease, allocated over the renewal period, or during the initial term of the lease. This lease qualifies as a direct financing lease under the applicable guidance in ASC 840-30, Leases.

The following is a schedule of the direct financing minimum lease payments for the years 2016 and thereafter

 

     Minimum Lease Payments  

2016

   $ 131   

2017

     140   

2018

     150   

2019

     574   
  

 

 

 
   $ 995   
  

 

 

 

As a result of the November 23, 2015 acquisition of Tew Plus, the Company remeasured its 25% equity investment in Tew Plus resulting in other income of $580 for the period ended December 31, 2015. Refer to Note 20, “Other Income,” for additional information on the gain.

Note 9.

Deferred Revenue