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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM i10-Q
(Mark One)
i☒
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock, par value $0.01
iFSTR
iNASDAQ
Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
iAccelerated
filer ☒
Non-accelerated filer ☐
Smaller reporting company i☒
Emerging growth company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As
of July 24, 2019, there were i10,587,191 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)
Note 1. iFinancial
Statements
i
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal recurring
accruals, unless otherwise stated herein) considered necessary for a fair presentation of the financial position of L.B. Foster Company and subsidiaries as of June 30, 2019 and December 31, 2018, its Condensed Consolidated Statements of Operations and its Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2019 and 2018, and its Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, have been included. However, actual results could differ from those estimates. The results of operations for interim
periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The Condensed Consolidated Balance Sheet as of December 31, 2018 was derived from audited financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In this Quarterly Report on Form 10-Q, references to “we,”“us,”“our,” and the “Company” refer collectively to L.B. Foster Company and its consolidated subsidiaries.
i
Recently
Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software” (“ASU 2018-15”). The ASU requires capitalization of certain implementation costs incurred in a cloud computing arrangement that qualifies as a service contract. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein with early adoption permitted. The Company is currently evaluating the potential impact of the ASU on its consolidated financial statements.
Recently
Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new accounting requirements include the accounting for, presentation of, and classification of leases. The guidance resulted in most leases being capitalized as a right-of-use asset with a related balance sheet liability. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted the provisions of ASU 2016-02 on January 1, 2019, using the modified retrospective approach as of the beginning of the period of adoption. Additionally, the
Company has elected to apply the practical expedient package for leases that commenced prior to the effective date, not to apply the recognition requirements in the standard to short-term leases, and not to separate non-lease components from lease components. The Company has presented the disclosures required by ASU 2016-02 in Note 8.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income; Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows companies to reclassify stranded tax effects caused by the US Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The amendments eliminate the stranded tax effects resulting from the Tax Act and improve the
usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company adopted ASU 2018-02 during the first quarter of 2019 and has chosen to record the reclassification as of the beginning of the period of adoption. As a result of adopting this standard, we reclassified stranded tax effects of $ii633/
from Accumulated other comprehensive loss to Retained earnings.
The SEC Disclosure Update and Simplification release announces the SEC's adoption of certain amendments in August 2018. While most of the amendments eliminate outdated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes to the financial statements or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders’ equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants are required to provide the reconciliation for both the comparable quarterly and year-to-date periods in their Quarterly Reports on Form 10-Q but only for
the year-to-date periods in registration statements, beginning in the first quarter of 2019. The Company has included the reconciliation of changes in stockholders’ equity as a separate statement.
The Company is a leading manufacturer and distributor of products and services for transportation and energy infrastructure with locations in North America and Europe. The Company is organized and operates in ithree different operating segments: the Rail Products and Services segment, the Construction Products segment, and the Tubular and Energy
Services segment. The segments represent components of the Company (a) that engage in activities from which revenue is generated and expenses are incurred; (b) whose operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who makes decisions about resources to be allocated to the segments, and (c) for which discrete financial information is available. Operating segments are evaluated on their segment profit contribution to the Company's consolidated results. Other income and expenses, interest, income taxes, and certain other items are managed on a consolidated basis. The Company's segment accounting policies are the same as those described in Note 2. Business Segments of the Notes
to the Company's Consolidated Financial Statements contained in its Annual Report on Form 10-K for the year-ended December 31, 2018.
i
The following table illustrates the Company's revenues and profit from operations by segment for the periods indicated:
Segment
profit from operations, as shown above, includes allocated corporate operating expenses. Operating expenses related to corporate headquarter functions that directly support the segment activity are allocated based on segment headcount, revenue contribution, or activity of the business units within the segments, based on the corporate activity type provided to the segment. The expense allocation excludes certain corporate costs that are separately managed from the segments.
i
The following
table provides a reconciliation of segment net profit from operations to the Company’s consolidated total:
Revenue from products or services provided to customers over time accounted for i24.2%
and i23.4% of revenue for the three months ended June 30, 2019 and 2018, respectively, and i25.7%
and i24.3% of revenue for the six months ended June 30, 2019 and 2018, respectively. Revenue under these long-term agreements is generally recognized over time either using an input measure based upon the proportion of actual costs incurred to estimated total project costs or an input measure based upon actual labor costs as a percentage of estimated total labor costs, depending upon which measure the
Company believes best depicts the Company’s performance to date under the terms of the contract. Revenue recognized over time using an input measure was $i34,984 and $i29,583
for the three months ended June 30, 2019 and 2018, respectively, and $i66,821 and $i54,144
for the six months ended June 30, 2019 and 2018, respectively. A certain portion of the Company’s revenue recognized over time under these long-term agreements is recognized using an output method, specifically units delivered, based upon certain customer acceptance and delivery requirements. Revenue recognized over time using an output measure was $i13,611
and $i10,893 for the three months ended June 30, 2019 and 2018, respectively, and $i23,522
and $i17,554 for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, the Company had contract
assets of $i37,457 and $i26,692, respectively, that were recorded in “Inventories - net” within the Condensed Consolidated Balance Sheets. As of June 30,
2019 and December 31, 2018, the Company had contract liabilities of $i2,162 and $i1,505,
respectively, that were recorded in “Deferred revenue” within the Condensed Consolidated Balance Sheets.
The majority of the Company’s revenue is from products transferred and services rendered to customers at a point in time. Point in time revenue accounted for i75.8% and i76.6%
of revenue for the three months ended June 30, 2019 and 2018, respectively, and i74.3% and i75.7%
of revenue for the six months ended June 30, 2019 and 2018. The Company recognizes revenue at the point in time at which the customer obtains control of the product or service, which is generally when the product title passes to the customer upon shipment or the service has been rendered to the customer. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location.
i
The
following table summarizes the Company's net sales by major product and service category:
The
timing of revenue recognition, billings, and cash collections results in billed receivables, costs in excess of billings (contract assets, included in “Inventories - net”), and billings in excess of costs (contract liabilities, included in “Deferred revenue”) on the Condensed Consolidated Balance Sheets.
Significant changes in contract assets during the six months ended June 30, 2019 resulted from transfers to receivables from contract assets recognized at the beginning of the period of
$i19,764. Significant changes in contract liabilities during the six months ended June 30, 2019 resulted from increases of $i2,016
due to billings in excess of costs, excluding amounts recognized as revenue during the period, and reductions due to revenue recognized during the three months ended June 30, 2019 and 2018 of $i318 and $i339,
respectively, and reductions due to revenue recognized during the six months ended June 30, 2019 and 2018 of $i1,266 and $i740,
respectively, that was included in the contract liability at the beginning of each period.
As of June 30, 2019, the Company had approximately $i209,324 of remaining performance obligations, which is also referred to as backlog. Approximately i11.2%
of the June 30, 2019 backlog was related to projects that are anticipated to extend beyond June 30, 2020.
Note 4. iGoodwill and Other Intangible Assets
i
The
following table presents the goodwill balance by reportable segment:
The
Company performs goodwill impairment tests annually during the fourth quarter, and also performs interim goodwill impairment tests if it is determined that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. No interim goodwill impairment test was required in connection with the evaluation of qualitative factors as of June 30, 2019.
Intangible
assets are amortized over their useful lives, which range from i4 to i25 years, with a total weighted average amortization period of approximately i15
years as of June 30, 2019. Amortization expense was $i1,679 and $i1,775 for the three months
ended June 30, 2019 and 2018, respectively, and $i3,391 and $i3,560
for the six months ended June 30, 2019 and 2018, respectively. During the three and six months ended June 30, 2019, certain fully amortized intangible assets related to non-compete agreements of $i124 were eliminated from gross intangible assets and accumulated amortization.
i
As
of June 30, 2019, estimated amortization expense for the remainder of 2019 and thereafter was as follows:
Amortization Expense
Remainder of 2019
$
i3,215
2020
i5,856
2021
i5,821
2022
i5,738
2023
i5,242
2024
and thereafter
i20,565
$
iii46,437//
/
Note
5. iAccounts Receivable
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. The amounts of trade accounts receivable as of June 30, 2019 and December 31,
2018 have been reduced by an allowance for doubtful accounts of $i1,357 and $i932, respectively. Changes in reserves for uncollectable accounts, which are
recorded as part of “Selling and administrative expenses” in the Condensed Consolidated Statements of Operations, resulted in expense of $i4 and income of $i473 for the three months ended June
30, 2019 and 2018, respectively, and expense of $i104 and income of $i719 for the six months ended June
30, 2019 and 2018, respectively.
Machinery
and equipment, including equipment under finance leases
i122,596
i120,914
Construction
in progress
i2,692
i3,083
Gross
property, plant, and equipment
i191,785
i188,655
Less
accumulated depreciation and amortization, including accumulated amortization of finance leases
(i107,344)
(i101,798)
Property,
plant, and equipment - net
$
i84,441
$
i86,857
/
Depreciation
expense was $i2,768 and $i2,938 for the three months ended June 30, 2019 and 2018, respectively, and $i5,540
and $i5,882 for the six months ended June 30, 2019 and 2018, respectively.
We review our property, plant, and equipment for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. We recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. There were iino/
impairments of property, plant, and equipment during the six months ended June 30, 2019 and 2018.
Note 8. iiLeases/
On
January 1, 2019, the Company adopted ASU 2016-02 and all the related amendments using the modified retrospective approach, which resulted in an increase in assets of $i13,585 and an increase in current and long-term liabilities of $i3,322
and $i10,263, respectively. This adoption did not affect our results of operations, cash flows, or our compliance with the covenants of the Amended and Restated Credit Agreement dated March 13, 2015, and as amended by the Second Amendment dated November 7, 2016, or the covenants of the Third Amended and Restated Credit Agreement dated April 30, 2019.
We
determine if an arrangement is a lease at its inception. Operating leases are included in “Operating lease right-of-use assets,”“Other current liabilities,” and “Long-term operating lease liabilities” within our Condensed Consolidated Balance Sheets. Finance leases are included in “Property, plant, and equipment - net,”“Current maturities of long-term debt,” and “Long-term debt” in our Condensed Consolidated Balance Sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on
the information available at the commencement date in determining the present value of the lease payments. We use the implicit rate when readily determinable. The operating lease right-of-use asset also includes indirect costs incurred and lease payments made prior to the commencement date, less any lease incentives received. Our lease terms may include options to extend or terminate the lease and will be recognized when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components which we account for as a single lease component. Also, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities.
Finance lease and lessor accounting recognition has remained substantially unchanged under ASU 2016-02 and had no impact on the Company's balance sheet, results of operations, or cash flows as a result of the adoption of ASU 2016-02.
The Company has operating and finance leases for manufacturing facilities, corporate offices, sales offices, vehicles, and certain equipment. As of June 30, 2019, our leases had remaining lease terms of i1
to i13 years, some of which include options to extend the leases for up to i5 years, and some of which include options to terminate the leases within i1
year. As of June 30, 2019, the Company’s operating leases had a weighted average remaining lease term of i6 years and a weighted average discount rate of i4.9%.
As of June 30, 2019, the Company’s finance leases had a weighted average remaining lease term of i1 year and a weighted average discount rate of i4.3%.
On
April 30, 2019, the Company, its domestic subsidiaries, and certain of its Canadian and European subsidiaries (collectively, the “Borrowers”), entered into the Third Amended and Restated Credit Agreement (“Amended Credit Agreement”) with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank, N.A., and BMO Harris Bank, N.A. This Amended Credit Agreement modifies the prior revolving credit facility which had a maximum credit line of $i195,000
and extends the maturity date from March 13, 2020 to April 30, 2024. The Amended Credit Agreement provides for a five-year, revolving credit facility that permits aggregate borrowings of the Borrowers up to $i140,000 with a sublimit of the equivalent of $i25,000
U.S. dollars that is available to the Canadian and United Kingdom borrowers in the aggregate. The Amended Credit Agreement’s incremental loan feature permits the Company to increase the available revolving borrowings under the facility by up to an additional $i50,000 and provides for additional term loan borrowings of up to $i25,000
subject to the Company’s receipt of increased commitments from existing or new lenders and the satisfaction of certain conditions.
The Company’s and the domestic, Canadian, and United Kingdom guarantors’ (the “Guarantors”) obligations under the Amended Credit Agreement are secured by the grant of a security interest by the Borrowers and Guarantors in substantially all of the personal property owned by such entities. Additionally, the equity interests in each of the loan parties, other than the Company, and the equity interests held by each loan party in their domestic subsidiaries,
have been pledged to the lenders as collateral for the lending obligations.
Borrowings under the Amended Credit Agreement 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 total net indebtedness to the Company’s consolidated EBITDA for four trailing quarters, as defined in the Amended Credit Agreement. The base rate is the highest of (a) the Overnight Bank Funding Rate plus 50 basis points, (b) the Prime Rate, or (c) the Daily Euro-rate plus 100 basis points (each as defined in the Amended Credit Agreement). The base rate and Euro-rate spreads range from 25 to 125 basis points and 125 to 225 basis points, respectively.
The
Amended Credit Agreement includes three financial covenants: (a) Maximum Gross Leverage Ratio, defined as the Company’s consolidated Indebtedness divided by the Company’s consolidated EBITDA, which must not exceed (i) i3.25 to 1.00 for all testing periods other than during an Acquisition Period, as defined in the Amended Credit Agreement, and (ii) i3.50
to 1.00 for all testing periods occurring during an Acquisition Period; (b) Minimum Consolidated Fixed Charge Coverage Ratio, defined as the Company's consolidated EBITDA divided by the Company's Fixed Charges, as defined in the Amended Credit Agreement, which must be less than i1.25 to 1.00; and (c) Minimum Working Capital to Revolving Facility Usage Ratio, defined as the sum of the inventory and
accounts receivable of the Borrowers and certain other Guarantors divided by the Revolving Facility Usage, as defined in the Amended Credit Agreement, which must be less than i1.40 to 1.00.
The Amended Credit Agreement permits the Company to pay dividends and make distributions and 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. Additionally, the Amended Credit Agreement permits the Company to complete acquisitions so long as (a) no event of default or potential default has occurred prior to or as a result of such acquisition; (b) the liquidity of the Borrowers is not less than $i25,000 prior to giving effect to such acquisition; and (c) the aggregate consideration for the acquisition does
not exceed: (i) $i50,000 per acquisition; (ii) $i50,000 in the aggregate for multiple acquisitions entered into during
four consecutive quarters; and (iii) $i100,000 in the aggregate over the term of the Amended Credit Agreement.
Other restrictions exist at all times including, but not limited to, limitations on the Company’s sale of assets and the incurrence by either the Borrowers or the non-borrower subsidiaries of the
Company of other indebtedness, guarantees, and liens.
As of June 30, 2019, L.B. Foster was in compliance with the Amended Credit Agreement’s covenants.
As of June 30, 2019, the Company had outstanding letters of credit of approximately $i836 and had net available borrowing capacity of $i73,841.
The maturity date of the facility is April 30, 2024.
On April 29, 2019, the credit facility with NatWest Bank for the Company's United Kingdom operations was terminated.
Note 10. iFair Value Measurements
The
Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions of what market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure
fair value as described below:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash equivalents - Included within “Cash and cash equivalents” are investments in non-domestic term deposits. The carrying amounts approximate fair value because of the short maturity of the instruments.
LIBOR-based
interest rate swaps - To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $i50,000. The fair value of the interest rate swaps is based on market-observable forward interest rates and represents the estimated amount that the Company would pay to terminate the
agreements. As such, the swap agreements are classified as Level 2 within the fair value hierarchy. As of June 30, 2019, the interest rate swaps were recorded within “Other accrued liabilities.”
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Term deposits
$
i16
$
i16
$
i—
$
i—
$
i16
$
i16
$
i—
$
i—
Interest
rate swaps
i—
i—
i—
i—
i675
i—
i675
i—
Total
assets
$
i16
$
i16
$
i—
$
i—
$
i691
$
i16
$
i675
$
i—
Interest
rate swaps
$
i506
$
i—
$
i506
$
i—
$
i—
$
i—
$
i—
$
i—
Total
liabilities
$
i506
$
i—
$
i506
$
i—
$
i—
$
i—
$
i—
$
i—
/
The
interest rate swaps are accounted for as cash flow hedges and the objective of the hedges is to offset the expected interest variability on payments associated with the interest rate of our debt. The gains and losses related to the interest rate swaps are
reclassified from “Accumulated other comprehensive loss” in our Condensed Consolidated Balance Sheets and included in “Interest expense - net” in our Condensed Consolidated Statements of Operations as the interest expense from our debt is recognized. For the three months ended June 30, 2019 and 2018, we recognized interest income
of $i56 and $i1, respectively, and for the six months ended June 30, 2019 and 2018, we recognized interest income of $i121
and interest expense of $i34, respectively, from interest rate swaps.
In accordance with the provisions of ASC 820, “Fair Value Measurement,”the Company measures certain nonfinancial assets and liabilities at fair value, which are recognized or disclosed on a nonrecurring basis.
Note 11. iEarnings
Per Common Share
i
(Share amounts in thousands)
The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated:
Numerator for basic and diluted earnings per common share:
Net
income
$
i9,564
$
i5,434
$
i13,254
$
i3,576
Denominator:
Weighted
average shares outstanding
i10,420
i10,365
i10,399
i10,358
Denominator
for basic earnings per common share
i10,420
i10,365
i10,399
i10,358
Effect
of dilutive securities:
Stock compensation plans
i222
i119
i199
i119
Dilutive
potential common shares
i222
i119
i199
i119
Denominator
for diluted earnings per common share - adjusted weighted average shares outstanding
i10,642
i10,484
i10,598
i10,477
Basic
earnings per common share
$
i0.92
$
i0.52
$
i1.27
$
i0.35
Diluted
earnings per common share
$
i0.90
$
i0.52
$
i1.25
$
i0.34
/
Note
12. iStock-based Compensation
iThe
Company applies the provisions of ASC 718, “Compensation – Stock Compensation,” to account for the Company’s stock-based compensation. Stock-based compensation cost is measured at the grant date based on the calculated fair value of the award and is recognized over the employees’ requisite service periods. The Company recorded stock compensation expense related to restricted stock awards and performance share units of $i1,179
and $i822 for the three months ended June 30, 2019 and 2018, respectively, and $i2,034 and $i1,904
for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, unrecognized compensation expense for unvested awards approximated $i6,293. The Company will recognize this expense
over the upcoming i3.8 years through April 2023.
Shares issued as a result of vested stock-based compensation awards generally will be from previously issued shares that have been reacquired by the Company and held as treasury stock or authorized and previously unissued common stock.
Restricted
Stock Awards and Performance Share Units
Under the 2006 Omnibus Plan, the Company grants eligible employees restricted stock and performance share units. The forfeitable restricted stock awards granted generally time-vest ratably over a three-year period, unless indicated otherwise by the underlying restricted stock agreement. Since May 2018, awards of restricted stock are subject to a minimum one-year vesting period, including those granted to non-employee directors. Prior to May 2018, awards to non-employee directors were made in fully-vested shares. Performance share units are offered annually under separate three-year long-term incentive programs. Performance share units are subject to forfeiture and will be converted into common stock of the
Company based upon the Company’s performance relative to performance measures and conversion multiples, as defined in the underlying program. If the Company’s estimate of the number of performance share units expected to vest changes in a subsequent accounting period, cumulative compensation expense could increase or decrease. The change will be recognized in the current period for the vested shares and would change future expense over the remaining vesting period.
Since May 1, 2017, non-employee directors have been permitted to defer receipt of annual stock awards and equity elected to be received in lieu of quarterly cash compensation. If so elected, these deferred stock units will be
issued as common stock six months
after separation from their service on the Board of Directors. Since May 2018, there have been no non-employee directors who elected the option to receive deferred stock units of the Company’s common stock in lieu of director cash compensation.
In February 2019, the Compensation Committee approved the 2019 Performance Share Unit Program and the Executive Annual Incentive Compensation Plan (consisting of cash and equity components). The Compensation Committee also certified the actual Company performance achievement
in the 2016 Performance Share Unit Program, which actual performance resulted in no payout relative to the 2016 Performance Share Unit Program target performance metrics.
i
The following table summarizes the restricted stock awards, deferred stock units, and performance share units activity for the six months ended June 30, 2019:
The Company has ithree
retirement plans that cover its hourly and salaried employees in the United States: ione defined benefit plan, which is frozen, and itwo defined contribution plans.
Employees are eligible to participate in the appropriate plan based on employment classification. The Company’s contributions to the defined benefit and defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Company’s policy and investment guidelines applicable to each respective plan. The Company’s policy is to contribute at least the minimum in accordance with the funding standards of ERISA.
The Company maintains itwo
defined contribution plans for its employees in Canada, as well as one post-retirement benefit plan. The Company also maintains itwo defined contribution plans and one defined benefit plan for its employees in the United Kingdom.
United States Defined Benefit Plan
i
Net
periodic pension costs for the United States defined benefit pension plan for the three and six months ended June 30, 2019 and 2018 were as follows:
For
the six months ended June 30, 2019, the Company contributed approximately $i550 to its United States defined benefit pension plan and expects no additional contributions during the remainder of 2019.
Net periodic pension costs for the United Kingdom defined benefit pension plan for the three and six months ended June 30, 2019 and 2018 were as follows:
Amortization
of prior service costs and transition amount
i11
i5
i22
i10
Recognized
net actuarial loss
i53
i49
i106
i98
Net
periodic pension cost
$
i57
$
i35
$
i114
$
i70
/
United
Kingdom regulations require trustees to adopt a prudent approach to funding required contributions to defined benefit pension plans. The Company anticipates contributions of approximately $i249 to the United Kingdom pension plan during 2019. For the six months ended June 30, 2019, the Company contributed
approximately $i127 to the plan.
Defined Contribution Plans
The Company sponsors isix
defined contribution plans for hourly and salaried employees across our domestic and international facilities. iThe following table summarizes the expense associated with the contributions made to these plans:
The Company is subject to product warranty claims that arise in the ordinary course of its business. For certain manufactured products, the Company maintains a product warranty accrual, which is adjusted on a monthly basis as a percentage
of cost of sales. In addition, the product warranty accrual is adjusted periodically based on the identification or resolution of known individual product warranty claims.
i
The following table sets forth the Company’s product warranty accrual:
Union
Pacific Railroad (“UPRR”) Concrete Tie Matter
On March 13, 2019, the Company and its subsidiary, CXT Incorporated (“CXT”) entered into a Settlement Agreement (the “Settlement Agreement”) with UPRR to resolve the pending litigation in the matter of Union Pacific Railroad Company v. L.B. Foster Company and CXT Incorporated, Case No. CI 15-564, in the District Court for Douglas County, Nebraska.
Under the Settlement Agreement, the Company and CXT will pay UPRR the aggregate amount of $i50,000
without pre-judgment interest, which began with a $i2,000 immediate payment, and with the remaining $i48,000
paid in installments over a six-year period commencing on the effective date of the Settlement Agreement through December 2024 pursuant to a Promissory Note. Additionally, commencing in January 2019 and through December 2024, UPRR agreed to purchase from the Company and its subsidiaries and affiliates, a cumulative total amount of $i48,000
of products and services, targeting $i8,000 of annual purchases per year beginning March 13, 2019 per letters of intent under the Settlement Agreement. The Settlement Agreement also includes a mutual release of all claims and liability regarding or relating to all CXT pre-stressed concrete railroad ties with no admission of liability and dismissal of the litigation with prejudice.
The expected payments under the UPRR Settlement Agreement for the remainder of the year ending December 31, 2019 and thereafter are as follows:
Year Ending December 31,
Remainder
of 2019
$
i6,000
2020
i8,000
2021
i8,000
2022
i8,000
2023
i8,000
2024
i8,000
Total
$
i46,000
/
Environmental
and Legal Proceedings
The Company is subject to national, state, foreign, provincial, and/or local laws and regulations relating to the protection of the environment. The Company’s efforts to comply with environmental regulations may have an adverse effect on its future earnings.
On June 5, 2017, a General Notice Letter was received from the United States Environmental Protection Agency (“EPA”) indicating that the Company may be a potentially responsible party (“PRP”) regarding the Portland Harbor Superfund Site cleanup along with numerous other companies. The
Company and a predecessor owned and operated a facility near the harbor site for a period prior to 1982. By letter dated March 16, 2018, the EPA informed the Company of the proposed schedule for consent decree negotiations to implement the Portland Harbor Superfund Site Record of Decision, with negotiations scheduled to commence by the end of 2019, and the EPA also set a proposed deadline of June 2019 to conclude negotiations with PRPs for the performance of remedial design work in the harbor. The net present value and undiscounted costs of the selected remedy throughout the harbor site are estimated by the EPA to be approximately $i1.1
billion and $i1.7 billion, respectively. The Company is reviewing the basis for its identification by the EPA and the nature of the historic operations of a Company predecessor near the site. Additionally, a private allocation process among numerous PRPs in a working group is ongoing. We cannot predict the ultimate impact of these proceedings because of the large number of PRPs involved throughout the harbor site, the degree of contamination of various wastes, varying environmental impacts throughout
the harbor site, the scarcity of data related to the facility once operated by the Company and a predecessor, and the speculative nature of the remediation costs. Based upon information currently available, management does not believe that the Company’s alleged PRP status regarding the Portland Harbor Superfund Site or other compliance with the present environmental protection laws will have a material adverse effect on the financial condition, results of operations, cash flows, competitive position, or capital expenditures of the Company.
As of June 30, 2019 and December 31,
2018, the Company maintained environmental reserves approximating $i6,078 and $i6,128,
respectively. iThe following table sets forth the Company’s environmental obligation:
The
Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. Legal actions are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened legal actions. Based on available information, it is the opinion of management that the ultimate resolution of pending or threatened legal actions, both individually and in the aggregate, will not result in losses having a material adverse effect on the Company's financial position or liquidity as of June 30, 2019.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess
of any accrual) will be incurred in connection with any legal actions, the Company discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Company's assessment as of June 30, 2019, no such disclosures were considered necessary.
For the three months ended June 30, 2019 and 2018, the Company recorded an income tax provision of $i1,685
and $i728 on pre-tax income of $i11,249 and $i6,162,
respectively, for an effective income tax rate of i15.0% and i11.8%, respectively. For the six months ended June
30, 2019 and 2018, the Company recorded an income tax provision of $i2,323 and $i1,253
on pre-tax income of $i15,577 and $i4,829,
respectively, for an effective income tax rate of i14.9% and i25.9%, respectively. The
Company's effective tax rate for the three and six months ended June 30, 2019 differed from the federal statutory rate of 21% primarily due to the realization of a portion of its U.S. deferred tax assets previously offset by a valuation allowance. The Company continued to maintain a full valuation allowance against its U.S. deferred tax assets, which is likely to result in significant variability of the effective tax rate in the current year. Changes in pre-tax income projections and the mix of income across jurisdictions could also impact the effective income tax rate.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except share data)
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). Forward-looking statements provide management's 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 of a future or forward-looking nature generally should be considered forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are based on current expectations and assumptions about future events that involve inherent risks and uncertainties and may concern, among other things, L.B. Foster Company’s (the “Company’s”) expectations relating to our strategy, goals, projections, and plans regarding our financial position, liquidity, capital resources, and results of operations; the outcome of litigation and product warranty claims; decisions regarding our strategic growth initiatives, market position, and product development. While the
Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory, and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control. 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: environmental matters, including any costs associated with any remediation and monitoring; a resumption of the economic slowdown we experienced in previous years in the markets we serve; the risk of doing business in international markets; our ability to effectuate our strategy, including cost reduction initiatives, and our ability to effectively integrate acquired businesses and realize anticipated benefits; costs of and impacts associated with shareholder activism; a decrease in freight or passenger rail traffic; the timeliness and availability of materials from our major suppliers as well as the impact on our access to supplies of customer preferences as to the origin of such supplies, such as customers' concerns about conflict minerals; labor disputes; the continuing effective implementation of an enterprise resource planning system; changes in current accounting estimates and their ultimate outcomes; the adequacy of internal and external sources of funds
to meet financing needs, including our ability to negotiate any additional necessary amendments to our credit agreement or the terms of any new credit agreement, and reforms regarding the use of LIBOR as a benchmark for establishing applicable interest rates; the Company’s ability to manage its working capital requirements and indebtedness; domestic and international taxes, including estimates that may impact these amounts; foreign currency fluctuations; inflation; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union, including the possibility of a “no-deal Brexit;” sustained declines in energy prices; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; the loss of future revenues from current
customers; and risks inherent in litigation. 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. Significant 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 our Annual Report on Form 10-K for the year ended December 31, 2018, or as updated and amended by Item 1A “Risk Factors,” in Part II of our Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission.
The forward-looking statements in this report
are made as of the date of this report and we assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by the federal securities laws.
General Overview
L.B. Foster Company (the “Company”) is a leading manufacturer and distributor of products and services for transportation and energy infrastructure with locations in North America and Europe. The Company is comprised of three operating segments: Rail Products and Services, Construction Products, and Tubular and Energy Services.
Percent
of Total Net Sales Three Months Ended June 30,
2019
2018
2019 vs. 2018
2019
2018
Net Sales:
Rail
Products and Services
$
101,401
$
91,884
10.4
%
50.5
%
53.1
%
Construction Products
55,406
42,207
31.3
27.6
24.4
Tubular
and Energy Services
44,126
38,799
13.7
21.9
22.5
Total net sales
$
200,933
$
172,890
16.2
%
100.0
%
100.0
%
Three
Months Ended June 30,
Percent Increase/ (Decrease)
Gross Profit Percentage Three Months Ended June 30,
2019
2018
2019 vs. 2018
2019
2018
Gross
Profit:
Rail Products and Services
$
18,930
$
16,393
15.5
%
18.7
%
17.8
%
Construction
Products
7,895
7,042
12.1
14.2
16.7
Tubular and Energy Services
10,303
9,628
7.0
23.3
24.8
Total
gross profit
$
37,128
$
33,063
12.3
%
18.5
%
19.1
%
Three
Months Ended June 30,
Percent Increase/ (Decrease)
Percent of Total Net Sales Three Months Ended June 30,
2019
2018
2019 vs. 2018
2019
2018
Expenses:
Selling
and administrative expenses
$
22,855
$
23,368
(2.2)
%
11.4
%
13.5
%
Amortization expense
1,679
1,775
(5.4)
0.8
1.0
Interest
expense - net
1,597
1,630
(2.0)
0.8
0.9
Other
(income) expense - net
(252)
128
**
(0.1)
0.1
Total expenses
$
25,879
$
26,901
(3.8)
%
12.9
%
15.6
%
Income
before income taxes
$
11,249
$
6,162
82.6
%
5.6
%
3.6
%
Income tax expense
1,685
728
131.5
0.8
0.4
Net
income
$
9,564
$
5,434
76.0
%
4.8
%
3.1
%
** Results of the calculation are not considered meaningful for presentation purposes.
Second Quarter 2019 Compared to Second Quarter 2018 – Company Analysis
Net
sales of $200,933 for the three months ended June 30, 2019 increased by $28,043, or 16.2%, compared to the prior year quarter. The change was attributable to increases within each of our three segments. Construction Products sales increased by 31.3%, Tubular and Energy Services sales increased by 13.7%, and Rail Products and Services sales increased by 10.4%.
Gross profit increased by $4,065 compared to the prior year quarter to $37,128 for the three months ended June 30, 2019. Gross profit margin for the three months ended June 30, 2019 was 18.5%, or 60 basis points (“bps”) lower than the prior year quarter. The decrease in gross profit margin was primarily due to reductions of 250 bps and 150 bps within Construction Products and Tubular and Energy Services,
respectively. The decreases were partially offset by an increase in gross profit margin of 90 bps within Rail Products and Services.
Selling and administrative expenses decreased by $513, or 2.2%, compared to the prior year quarter. The reduction was primarily driven by decreases in legal expenses of $2,007 related to the Union Pacific Railroad concrete tie litigation, which was partially offset by an increase of an aggregate of $1,288 related to third-party services, bad debt, and insurance expenses. As a percent of sales, selling and administrative expenses declined 210 bps compared to the prior year period.
The Company’s effective income tax rate for the three months ended June 30, 2019 was 15.0%, compared to
11.8% in the prior year quarter. For the three months ended June 30, 2019, the Company recorded a tax provision of $1,685, compared to $728 in the three
months ended June 30, 2018. The Company's effective tax rate for the three months ended June 30, 2019 differed from the federal statutory rate of 21% primarily due to the realization of a portion of its U.S. deferred tax assets
previously offset by a valuation allowance.
Net income for the second quarter of 2019 was $9,564, or $0.90 per diluted share, compared to $5,434, or $0.52 per diluted share, in the prior year quarter.
Results of Operations – Segment Analysis
Rail Products and Services
Three
Months Ended June 30,
Increase
Percent Increase
2019
2018
2019 vs. 2018
2019 vs. 2018
Net sales
$
101,401
$
91,884
$
9,517
10.4
%
Gross
profit
$
18,930
$
16,393
$
2,537
15.5
%
Gross profit percentage
18.7
%
17.8
%
0.9
%
4.6
%
Segment
profit
$
7,919
$
5,308
$
2,611
49.2
%
Segment profit percentage
7.8
%
5.8
%
2.0
%
35.2
%
Second
Quarter 2019 Compared to Second Quarter 2018
The Rail Products and Services segment sales increased by $9,517, or 10.4%, compared to the prior year quarter. The sales growth was driven by volume in our Rail Products business resulting in an increase of $13,658 primarily from our new rail, insulated joint, and domestic transit products. The increase was partially offset by a reduction of $4,141 in our Rail Technologies business, primarily attributable to reduced activity levels from the London Crossrail project as it nears completion.
The Rail Products and Services gross profit increased by $2,537, or 15.5%, over the prior year quarter. The increase was driven by volume growth in our Rail Products business. Segment gross profit margin grew by 90 bps as a result of the increased product mix contribution from our higher margin manufactured and service based offerings. Segment
profit was $7,919, a $2,611 increase over the prior year quarter. Selling and administrative expenses incurred by the segment were flat to the prior year quarter and as a percent of sales were reduced 110 bps as the segment continued its focus on cost containment while increasing sales volume.
During the current quarter, the Rail Products and Services segment had a decrease in new orders of 32.9% compared to the prior year period. The decrease was primarily related to activity within our new rail distribution products.
Construction Products
Three
Months Ended June 30,
Increase/(Decrease)
Percent Increase/(Decrease)
2019
2018
2019 vs. 2018
2019 vs. 2018
Net sales
$
55,406
$
42,207
$
13,199
31.3
%
Gross
profit
$
7,895
$
7,042
$
853
12.1
%
Gross profit percentage
14.2
%
16.7
%
(2.5)
%
(14.6)
%
Segment
profit
$
3,413
$
2,857
$
556
19.5
%
Segment profit percentage
6.2
%
6.8
%
(0.6)
%
(9.0)
%
Second
Quarter 2019 Compared to Second Quarter 2018
The Construction Products segment sales increased by $13,199, or 31.3%, compared to the prior year quarter. The growth was attributable to volume increases in both Piling and Fabricated Bridge and Precast Concrete Products resulting in sales increases of $11,742 and $1,457, respectively. Piling continued product fulfillment during the current quarter attributable to a significant 2018 order, while Fabricated Bridge experienced increased volume within its steel decking and railing product lines. Our Precast Concrete Products business unit was favorably impacted by concrete building sales driven from municipalities while demand from federal and state agencies declined.
The Construction Products gross profit increased $853, or 12.1%, over the prior year quarter. The increase was primarily attributable to the sales volume growth within
our Piling division and was partially offset by a reduction in Precast Concrete Products. Segment profit increased by $556 over the prior year quarter to 6.2% of net sales. Selling and administrative expenses incurred by the segment
increased by $300 over the prior year quarter; however, the expenses were reduced by 180 bps as a percentage of segment sales compared to the prior year quarter.
During the quarter, the Construction Products segment had an increase in new orders of 13.0% compared to the prior year quarter, which was primarily related to the Piling and Precast Concrete Products divisions.
Tubular
and Energy Services
Three Months Ended June 30,
Increase/(Decrease)
Percent Increase/(Decrease)
2019
2018
2019
vs. 2018
2019 vs. 2018
Net sales
$
44,126
$
38,799
$
5,327
13.7
%
Gross profit
$
10,303
$
9,628
$
675
7.0
%
Gross
profit percentage
23.3
%
24.8
%
(1.5)
%
(5.9)
%
Segment profit
$
5,019
$
4,545
$
474
10.4
%
Segment
profit percentage
11.4
%
11.7
%
(0.3)
%
(2.9)
%
Second Quarter 2019 Compared to Second Quarter 2018
Tubular and Energy Services segment sales increased by $5,327, or 13.7%, compared to the prior year period. The increase was due to improvements primarily from Protective Coatings and Measurement Systems when compared to the prior year quarter. This was additionally
supported by strong orders within the midstream market during the current quarter.
Tubular and Energy Services segment gross profit increased by $675, or 7.0%, which was supported by the sales growth in Protective Coatings and Measurement Systems. Segment gross profit margin decreased by 150 bps over the prior year quarter which was primarily driven by reduced volume within the Test, Inspection, and Threading Services business. Segment profit increased by $474, or 10.4%, over the prior year quarter. Selling and administrative expense increased by $754, which included a bad debt charge of $381 during the second quarter of 2019.
The Tubular and Energy Services segment had an increase of 31.5% in new orders compared to the prior year quarter. Orders for Protective Coatings and Measurement Systems increased by 68.4%, which was partially offset by
a reduction in Test, Inspection, and Threading Services of 10.3%. The Company is encouraged with the continued growth of new orders within the segment, specifically related to the midstream market.
Percent of Total Net Sales Six Months Ended June 30,
2019
2018
2019 vs. 2018
2019
2018
Expenses:
Selling
and administrative expenses
$
44,772
$
43,826
2.2
%
12.7
%
14.8
%
Amortization expense
3,391
3,560
(4.7)
1.0
1.2
Interest
expense
2,952
3,517
(16.1)
0.8
1.2
Other
income - net
(402)
(477)
15.7
(0.1)
(0.2)
Total expenses
$
50,713
$
50,426
0.6
%
14.4
%
17.1
%
Income
before income taxes
$
15,577
$
4,829
222.6
%
4.4
%
1.6
%
Income tax expense
2,323
1,253
85.4
0.7
0.4
Net
income
$
13,254
$
3,576
**
3.8
%
1.2
%
** Results of the calculation are not considered meaningful for presentation purposes.
First
Six Months 2019 Compared to First Six Months 2018 – Company Analysis
Net sales of $351,402 for the six months ended June 30, 2019 increased by $56,058, or 19.0%, compared to the prior year period. The change was attributable to increases within each of our three segments. Construction Products sales increased by 30.4%, Tubular and Energy Services sales increased by 16.2%, and Rail Products and Services sales increased by 15.0%.
Gross profit increased by $11,035 compared to the prior year period to $66,290 for the six months ended June 30, 2019. Gross profit margin for the six months ended June 30, 2019 was 18.9%, or 20 bps higher than the prior year period. The rise in gross profit margin was primarily due to increases of 150
bps and 30 bps within Tubular and Energy Services and Rail Products and Services, respectively. The increase was partially offset by a decrease in gross profit margin of 110 bps within the Construction Products segment.
Selling and administrative expenses increased by $946 or 2.2% from the prior year. The escalation was primarily driven by increases in personnel-related expenses of $1,544, third-party services of $1,099, and bad debt of $823. The increase was partially offset by a reduction in legal expenses related to the Union Pacific Railroad concrete tie litigation of $3,467. As a percent of sales, selling and administrative expenses declined by 210 bps compared to the prior year period.
Interest expense, net of interest income, decreased by $565, or 16.1%, as a result of the reduction in outstanding debt compared to the prior year period.
The Company’s effective income tax rate for the six months ended June 30, 2019 was 14.9%, compared to 25.9% in the prior year period. For the six months ended June 30, 2019, the Company recorded a tax provision of $2,323, compared to $1,253 in the six months ended June 30, 2018. The Company's effective tax rate for the six months ended June 30, 2019 differed from the federal statutory rate of 21% primarily due to the realization of a portion of its U.S. deferred tax
assets previously offset by a valuation allowance.
Net income for the six months ended June 30, 2018 was $13,254, or $1.25 per diluted share, compared to $3,576, or $0.34 per diluted share, in the prior year period.
Results of Operations – Segment Analysis
Rail Products and Services
Six
Months Ended June 30,
Increase
Percent Increase
2019
2018
2019 vs. 2018
2019 vs. 2018
Net sales
$
177,095
$
154,054
$
23,041
15.0
%
Gross
profit
$
33,167
$
28,317
$
4,850
17.1
%
Gross profit percentage
18.7
%
18.4
%
0.3
%
1.9
%
Segment
profit
$
11,398
$
7,356
$
4,042
54.9
%
Segment profit percentage
6.4
%
4.8
%
1.6
%
34.8
%
First
Six Months 2019 Compared to First Six Months 2018
The Rail Products and Services segment sales increased by $23,041, or 15.0%, compared to the prior year period. The sales growth was driven by our Rail Products business unit which increased by $23,830. The Rail Products growth was primarily attributable to North American new rail distribution volume and, to a lesser extent, transit and insulated joint products. Partially offsetting the increase was a decline in sales within the European transit market as we approach the completion of the London Crossrail project.
The Rail Products and Services gross profit increased by $4,850, or 17.1%, over the prior year period. The increase was driven by volume growth in Rail Products. Segment gross profit margin increased by 30 bps as a result of the increased contribution from higher margin product mix within Rail Products. Segment profit
was $11,398, a $4,042 increase compared to the prior year period. Selling and administrative expenses incurred by the segment as a percent of sales was reduced 150 bps compared to the prior year period as the segment continued its focus on cost containment while increasing sales volume.
During the current year, the Rail Products and Services segment had a decrease in new orders of 16.9% compared to the prior year period. Backlog was $94,026 as of June 30, 2019, a decrease of 25.9%, compared to $126,856 as of June 30, 2018. The decreases were primarily related to activity within our new rail distribution products.
Construction Products
Six
Months Ended June 30,
Increase/(Decrease)
Percent Increase/(Decrease)
2019
2018
2019 vs. 2018
2019 vs. 2018
Net sales
$
92,751
$
71,107
$
21,644
30.4
%
Gross
profit
$
13,467
$
11,074
$
2,393
21.6
%
Gross profit percentage
14.5
%
15.6
%
(1.1)
%
(6.8)
%
Segment
profit
$
4,247
$
2,875
$
1,372
47.7
%
Segment profit percentage
4.6
%
4.0
%
0.6
%
13.2
%
First
Six Months 2019 Compared to First Six Months 2018
The Construction Products segment sales increased by $21,644, or 30.4%, compared to the prior year period. The increase was attributable to growth within each of the businesses with the segment. Piling sales volume increased considerably during the current year as a significant 2018 order is fulfilled, while Fabricated Bridge experienced increased sales volume within its steel decking and railing product lines which resulted in an increase of $16,613. Our Precast Concrete Products business unit was favorably impacted by concrete building sales driven from municipalities.
The Construction Products gross profit increased $2,393, or 21.6%, over the prior year period. The increase was primarily attributable to the sales volume growth in both business units within the segment. Segment profit increased by $1,372 over the prior year
period to 4.6% of net sales. Selling and administrative expenses incurred by the segment increased $1,025 over the prior year quarter; however, the expenses as a percentage of segment sales were reduced by 160 bps compared to the prior year period.
During the first half of 2019, the Construction Products segment had an increase in new orders of 1.7% compared to the prior year period, which was primarily related to Precast Concrete Products. The increase in new orders helped to provide the segment a strong backlog of $89,239 as of June 30, 2019, an 8.3% increase over the prior year period.
Tubular
and Energy Services
Six Months Ended June 30,
Increase
Percent Increase
2019
2018
2019
vs. 2018
2019 vs. 2018
Net Sales
$
81,556
$
70,183
$
11,373
16.2
%
Gross profit
$
19,656
$
15,864
$
3,792
23.9
%
Gross
profit percentage
24.1
%
22.6
%
1.5
%
6.6
%
Segment profit
$
9,707
$
6,430
$
3,277
51.0
%
Segment
profit percentage
11.9
%
9.2
%
2.7
%
29.9
%
First Six Months 2019 Compared to First Six Months 2018
Tubular and Energy Services segment sales increased by $11,373, or 16.2%, compared to the prior year period. The increase was due to significant growth from Protective
Coatings and Measurement Systems when compared to the prior year period. This was additionally supported by strong orders within the midstream market during the current year.
Tubular and Energy Services segment gross profit increased $3,792, or 23.9%, which was supported by the sales growth in Protective Coatings and Measurement Systems. Segment gross profit margin improved by 150 bps over the prior year period which was primarily driven by volume and favorable production rates in the 2019 period within Protective Coatings and Measurement Systems. Segment profit increased by $3,277, or 51.0%, over the prior year period. While selling and administrative expense increased by $1,179, management was pleased with the segment's cost containment efforts, which, as a percentage of sales, remained flat compared to the prior year period.
The
Tubular and Energy Services segment had an increase of 23.6% in new orders compared to the prior year period. Orders for Protective Coatings and Measurement Systems increased by 49.5%, which was partially offset by a reduction in Test, Inspection, and Threading Services of 7.7%. The increased order activity resulted in a backlog as of June 30, 2019 of $26,059, an 18.5% increase when compared to the prior year.
Other
Segment Backlog
Total Company backlog is summarized by business segment in the following table for the periods indicated:
While a considerable portion of our business is backlog-driven, certain product lines within the Rail Products and Services and Tubular
and Energy Services segments are not driven by backlog.
Liquidity and Capital Resources
Total debt was $91,115 and $74,982 as of June 30, 2019 and December 31, 2018, respectively, and was primarily comprised of borrowings under our revolving credit facility. Our need for liquidity relates primarily to working capital requirements for operations, capital expenditures, and debt service obligations.
Net cash (used in) provided by operating activities
$
(9,429)
$
7,902
Net
cash (used in) provided by investing activities
(3,772)
270
Net cash provided by (used in) financing activities
14,706
(31,240)
Effect of exchange rate changes on cash and cash equivalents
214
(1,339)
Net increase (decrease) in cash and cash equivalents
$
1,719
$
(24,407)
Cash
Flow from Operating Activities
During the six months ended June 30, 2019, cash flows used in operating activities were $9,429 compared to operations providing $7,902 during the prior year period. For the six months ended June 30, 2019, income and adjustments to income from operating activities provided $23,790 compared to $13,924 in the 2018 period. Working capital and other assets and liabilities used $33,219 in the current period compared to $6,022 in the prior year period. During the six months ended June 30, 2019, the Company made payments totaling $4,000 under the terms of the concrete tie settlement agreement with Union Pacific Railroad.
Capital expenditures for the six months ended June 30, 2019 and 2018 were $3,848 and $1,816, respectively. The current year expenditures relate to plant expansion and automation integration programs within our Tubular and Energy Services segment as well as general plant and operational improvements throughout the Company. Expenditures for the six months ended June
30, 2018 related to expenditures for general plant and operational improvements. During the six months ended June 30, 2019, the Company received $76 in proceeds from the sale of certain property, plant, and equipment as compared to $2,086 in the prior year period.
Cash Flow from Financing Activities
During the six months ended June 30, 2019, the Company had an increase in outstanding debt of $16,133, primarily related to the funding of working capital for operations. During the six months ended June 30, 2018, the
Company had a decrease in outstanding debt of $30,930, primarily related to payments against the revolving credit facility which was facilitated by the repatriation of $24,693 in excess cash from our international locations. Treasury stock acquisitions represent income tax withholdings from employees in connection with the vesting of restricted stock awards.
Financial Condition
As of June 30, 2019, we had $12,001 in cash and cash equivalents and a domestic credit facility with $73,841 of net availability while we had $91,115 in total debt. We believe this liquidity will provide the flexibility to operate the business in a prudent manner and enable us to continue to service our revolving credit facility.
Our cash management priority continues to be
short-term maturities and the preservation of our principal balances. As of June 30, 2019, approximately $10,532 of our cash and cash equivalents was held in non-domestic bank accounts.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. As of June 30, 2019, the
swap liability was $506 compared to an asset of $675 as of December 31, 2018.
On April 30, 2019, the Company, its domestic subsidiaries, and certain of its Canadian and European subsidiaries (collectively, the “Borrowers”), entered into the Third Amended and Restated Credit Agreement (“Amended Credit Agreement”) with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank, N.A., and BMO Harris Bank, N.A. This Amended Credit Agreement modifies the prior revolving credit facility which had a maximum credit line of
$195,000, and extends the maturity date from March 13, 2020 to April 30, 2024. The Amended Credit Agreement provides for a five-year, revolving credit facility that permits aggregate borrowings of the Borrowers up to $140,000 with a sublimit of the equivalent of $25,000 U.S. dollars that is available to the Canadian and United Kingdom borrowers in the aggregate. The Amended Credit Agreement’s incremental loan feature permits the Company to increase the available revolving borrowings under the facility by up to an additional $50,000 and provides for additional term loan borrowings of up to $25,000 subject to the Company’s receipt of increased commitments from existing or new lenders and the satisfaction
of certain conditions.
For a discussion of the terms and availability of the Company's credit facilities, please refer to Note 9 of the Notes to Condensed Consolidated Financial Statements contained in the Quarterly Report on Form 10-Q.
Critical Accounting Policies
The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application,
is generally accepted, management selects the principle or method that, in its opinion, is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to reach opinions regarding estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has reached its opinions regarding the best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. We have updated our lease policies since December 31, 2018, in conjunction with our adoption of Accounting Standards Codification 842, “Leases” (“ASC 842”) as further described in Note 8 of the Notes to Condensed Consolidated Financial Statements
contained in this Quarterly Report on Form 10-Q. A summary of the Company’s critical accounting policies and estimates is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -Critical Accounting Policies and Estimates in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include purchase obligations and standby letters of credit. A schedule of the
Company’s required payments under financial instruments and other commitments as of December 31, 2018 is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources -Tabular Disclosure of Contractual Obligations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. On January 1, 2019, the Company adopted the provisions under ASC 842. As a result of the adoption, operating leases that were previously off-balance sheet arrangements are now recognized as right-of-use assets and liabilities within the Condensed Consolidated Balance Sheets. There were
no other material changes to these off-balance sheet arrangements during the current quarter. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This item is not applicable to a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
L.B. Foster Company carried out an evaluation, under the supervision and with the participation
of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective such that the information required to be disclosed by the Company in reports filed under the Exchange Act
is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the chief executive officer, chief financial officer, or person performing such functions, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
On January 1, 2019, the Company adopted the standards of Accounting Standards Codification 842, “Leases” (“ASC 842”). The adoption of ASC 842 required the Company to implement changes to our processes related to operating lease recognition and the control
activities within them. This included the development of new policies and procedures, ongoing lease review and evaluation processes, and implementation of processes to obtain information responsive to the new disclosure requirements. There were no other changes to our “internal control over financial reporting” (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six months ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
See Note 14 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
This item is not applicable to a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s purchases of equity securities for the three months ended June
30, 2019 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
Approximate dollar value of shares that may yet be purchased under the plans or programs
XBRL Instance Document-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.