Foster L B Co: Form 10-Q for the period ended Sep 30, 2017

(Dollars in thousands, except share data)

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Sentences containing words such as “believe,” “intend,” “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 may concern, among other things, L.B. Foster Company’s (the “Company”) 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; all of which are based on current estimates that involve inherent risks and uncertainties. The Company has based these forward-looking statements on current expectations and assumptions about future events. 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 have experienced in the previous two 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; 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; economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union; sustained declines in energy prices; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; the ultimate number of concrete ties that will have to be replaced pursuant to the previously disclosed product warranty claim of the Union Pacific Railroad (“UPRR”) and an overall resolution of the related contract claims as well as the possible costs associated with the outcome of the lawsuit filed by the UPRR; 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 and our other periodic filings with the Securities and Exchange Commission.

The forward-looking statements in this report are made as of the date of this report and we assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by the federal securities laws.

General Overview

L.B. Foster Company (the “Company”) is a leading manufacturer and distributor of products and services for the transportation and energy infrastructure with locations in North America and Europe. The Company is comprised of three business segments: Rail Products and Services, Construction Products, and Tubular and Energy Services.

Quarter-to-Date Results

The segment gross profit measures presented within Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") tables constitute non-GAAP financial measures disclosed by management to provide investors and other users information to evaluate the performance of the Company’s segments on a more comparable basis to market trends and peers. The exclusion of significant cost allocations to the reportable segments:

• Allows users to understand the operational performance of our reportable segments;
• Provides greater comparability to other registrants with similar businesses and avoids possible non-comparability at the reportable segment pre-tax profit level resulting from our specific corporate cost allocations; and
• Facilitates a clearer, market-based perspective on the strength or weakness of our reportable segments in their markets to better aid in investment decisions.

In addition, these non-GAAP financial measures have historically been key metrics utilized by segment managers to monitor selling prices and quantities as well as production and service costs to better evaluate key profitability drivers and trends that may develop due to industry and competitive conditions.

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

Third Quarter 2017 Compared to Third Quarter 2016 – Company Analysis

Net sales of $131,492 for the period ended September 30, 2017 increased by $16,848, or 14.7%, compared to the prior year quarter. The change was attributable to increases of 32.3%, 12.2%, and 9.1%, in Tubular and Energy Services, Construction Products, and Rail Products and Services, respectively.

Gross profit margin for the quarter ended September 30, 2017 was 20.1% or 280 basis points (“bps”) higher than the prior year quarter. Each of the three segments contributed to the increase with gains of 1,830 bps, 290 bps, and 80 bps, in Tubular and Energy Services, Construction Products, and Rail Products and Services, respectively.

Selling and administrative expenses increased by $411 or 2.1% from the prior year. The increase was primarily driven by personnel related spending of $821, which was partially offset by reduced litigation costs related to the Union Pacific Railroad ("UPRR") matter of $468.

During the quarter ended September 30, 2016, the Company recorded total non-cash asset impairments of $6,946 from goodwill and definite-lived intangible assets.

Interest expense, net of interest income, increased by $500, or 34.0%, as a result of the increase in interest rates on outstanding debt. Other income decreased $534, or 49.2%, which primarily relates to losses on foreign exchange as the Canadian Dollar has strengthened compared to the United States Dollar versus the prior year period.

The Company’s effective income tax rate for the three-month period ended September 30, 2017 was (6.9)%, compared to 36.1% in the prior year quarter. For the three months ended September 30, 2017, the Company recorded a tax benefit of $208, compared to $3,379 in the three months ended September 30, 2016. The Company's income tax benefit for the three months ended September 30, 2017 was primarily related to changes in our estimated annual effective tax rate. The Company continued to maintain a full valuation allowance against its U.S. deferred tax assets.

Net income for the third quarter of 2017 was $3,222, or $0.31 per diluted share, compared to a net loss of $5,982, or $0.58 per diluted share, in the prior year quarter. The following table provides a reconciliation of the GAAP earnings per share value to the non-GAAP adjusted earnings1 per share value for the three-month periods ended September 30, 2017 and 2016:

(Unaudited)

1 All results in this Quarterly Report that exclude asset impairment charges are non-GAAP measures used for management reporting purposes. Management believes that these measures provide useful information to investors because they will assist investors in evaluating earnings performance on a comparable year-over-year basis.

Results of Operations – Segment Analysis

Rail Products and Services

Third Quarter 2017 Compared to Third Quarter 2016

Rail Products and Services segment sales increased by $5,204, or 9.1%, compared to the prior year period. The sales increase was primarily driven domestically by a $3,037 increase in our distribution business, which experienced increased demand as overall tonnage sold increased compared to the prior period, and Allegheny Rail Products, which increased by $2,017, following a 76% demand increase from Class 1 railroads.

The Rail Products and Services segment profit increased by $5,519 to 5.6% of net sales. The increase was primarily attributable to 2016 impairment charges of $4,383 related to Rail Technologies goodwill. Non-GAAP gross profit increased $1,597, or 13.1%, as a result of increased domestic distribution volumes.

During the current quarter, the Rail Products and Services segment had an increase in new orders of 44.5% compared to the prior year period, while backlog was $85,764 at September 30, 2017, an increase of 60.6%, compared to $53,392 at September 30, 2016. The Company is encouraged by continuing positive trends signaling a recovering freight rail market in North America and strength in the transit system projects globally.

Construction Products

Third Quarter 2017 Compared to Third Quarter 2016

Construction Products segment sales increased by $4,248, or 12.2%, compared to the prior year period. Fabricated Bridge and Precast Concrete Products businesses increased by $4,411 and $1,185, respectively. Fabricated Bridge generated favorable sales in the current quarter due to bridge form projects as well as the continuation of the Peace Bridge project. Precast Concrete Products was favorably impacted by increased building sales to state agencies. These increases were partially offset by a reduction in Piling sales of $1,348, primarily related to lower sheet piling volumes.

The Construction Products segment profit increased by $2,031 to 8.7% of net sales. The increase was primarily volume related, improved manufacturing efficiencies, and to a lesser extent, reduced selling and administrative expenses of $163, or 3.4%. Non-GAAP gross profit increased by $1,868, or 30.2%, which was a result of volume increases and manufacturing efficiencies reducing costs.

During the quarter, the Construction Products segment had a decrease in new orders of 11.1% compared to the prior year period. The decrease related to a 47.8% reduction Piling orders due to lower sheet piling demand. This was partially offset by increased new orders of 228.9% and 10.7% for our Fabricated Bridge and Precast Concrete Products businesses, respectively. Ending backlog in the Construction segment decreased by 1.1% to $74,910 from the prior year period.

Tubular and Energy Services

Third Quarter 2017 Compared to Third Quarter 2016

Tubular and Energy Services segment sales increased by $7,396, or 32.3%, compared to the prior year period. The increase related to strong bookings from Protective Coatings and Test and Inspection Services businesses, partially offset by a decrease in Precision Measurement Systems sales. The quarter showed continued improvement within the upstream oil and gas market. Sales in the Precision Measurement Systems business are below prior year, although order input was very strong in the quarter as backlog is now 99.7% above prior year levels.

Tubular and Energy Services segment profit increased by $9,264, or 133.0%, compared to the prior year quarter. The quarter was favorably impacted by non-GAAP gross profit of $5,767 over the prior year period, with increases from each division within the segment. The prior year was negatively affected by impairment charges of $2,563 for the three months ended September 30, 2016.

The Tubular and Energy Services segment had an increase in new orders of 97.1% compared to the prior year period. Orders for Precision Measurement Systems, Test and Inspection Services, and Protective Coatings increased 147.1%, 129.6%, and 89.2%, respectively. The upstream oil and gas market continues to show signs of recovery. We continue to be encouraged by increased order activity in the midstream market as well.

On July 31, 2017, the lease at our Birmingham, Alabama facility expired. During the third quarter ended September 30, 2017, the Company negotiated a lease renewal for this facility. The renewal is for a term of five years and is scheduled to expire July 31, 2022.

Year-to-Date Results

The segment gross profit measures presented within the MD&A tables constitute non-GAAP financial measures disclosed by management to provide investors and other users information to evaluate the performance of the Company’s segments on a more comparable basis to market trends and peers. The exclusion of significant cost allocations to the reportable segments:

• Allows users to understand the operational performance of our reportable segments;
• Provides greater comparability to other registrants with similar businesses and avoids possible non-comparability at the reportable segment pre-tax profit level resulting from our specific corporate cost allocations; and
• Facilitates a clearer, market-based perspective on the strength or weakness of our reportable segments in their markets to better aid in investment decisions.

In addition, these non-GAAP financial measures have historically been key metrics utilized by segment managers to monitor selling prices and quantities as well as production and service costs to better evaluate key profitability drivers and trends that may develop due to industry and competitive conditions.

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First Nine Months of 2017 Compared to First Nine Months of 2016 – Company Analysis

Net sales of $395,054 for the period ended September 30, 2017 increased by $18,106, or 4.8%, compared to the prior year period. The change was attributable to increases of 13.8% and 5.0% in the Construction Products and Tubular and Energy Services segments, respectively. This increase was partially offset by a decrease of 0.4% in the Rail Products and Services segment.

Gross profit margin for the nine months ended September 30, 2017 was 19.1% or 10 bps higher than the prior year period. The increase was due to a 760 bps improvement within the Tubular and Energy Services segment. The increase was partially offset by reductions of 100 bps and 30 bps, in Rail Products and Services and Construction Products, respectively.

Selling and administrative expenses decreased by $5,918 or 9.0% from the prior year. All three segments experienced decreases which were primarily driven by personnel and discretionary spending reductions of $4,021 and reduced litigation costs related to the UPRR matter of $1,419.

Amortization decreased $2,600, or 33.3%, as a result of the June 1, 2016 interim intangible asset impairment test, which was finalized during the three months ended September 30, 2016, resulting in a $59,786 impairment of definite-lived intangible assets. During the nine months ended September 30, 2016, the Company recorded total non-cash asset impairments of $135,884 from goodwill, definite-lived intangible assets, and property, plant, and equipment.

Interest expense, net of interest income, increased by $1,964, or 46.9%, as a result of the increase in interest rates on outstanding debt. Other income increased by $301, or 114.4%, which primarily related to the gain on the sale of certain assets, which was partially offset by the impact of a weaker United States Dollar relative to the Canadian Dollar in the nine months ended September 30, 2017.

The Company’s effective income tax rate for the nine months ended September 30, 2017 was 15.4%, compared to 29.5% in the prior year period. For the first nine months ended September 30, 2017, the Company recorded a tax provision of $698, compared to a tax benefit of $42,125 in the nine months ended September 30, 2016. The Company’s tax provision for the nine months ended September 30, 2017 was primarily comprised of taxes on our Canadian and United Kingdom operations. The Company continued to maintain a full valuation allowance against its U.S. deferred tax assets.

Net income for the first nine months of 2017 was $3,824, or $0.37 per diluted share, compared to a net loss of $100,810, or $9.82 per diluted share, in the prior year period. The following table provides a reconciliation of the GAAP earnings per share value to the non-GAAP adjusted earnings1 per share value for the nine-month periods ended September 30, 2017 and 2016:

(Unaudited)

1 All results in this Quarterly Report that exclude asset impairment charges are non-GAAP measures used for management reporting purposes. Management believes that these measures provide useful information to investors because they will assist investors in evaluating earnings performance on a comparable year-over-year basis.

Results of Operations – Segment Analysis

Rail Products and Services

First Nine Months of 2017 Compared to First Nine Months of 2016

Rail Products and Services segment sales decreased $764, or 0.4%, compared to the prior year period. The reduction in sales is primarily related to a decrease in our domestic businesses of $5,956, or 4.3%. The sales declines were primarily volume driven by the domestic freight rail and transit markets. Our domestic rail distribution business was unfavorably impacted by both volume and pricing compared to the prior year period. The sales decrease was partially offset by sales increases in our foreign divisions of $5,192, or 10.6%, as we saw favorable results in both our Canadian and European markets.

The Rail Products and Services segment profit increased by $35,412 to 4.8% of net sales. The increase was primarily attributable to a reduction in selling, administrative, and allocated expenses of $4,430, or 13.9%, and the 2016 impairment charges of $32,725 related to Rail Technologies goodwill. This was partially offset by a decline in non-GAAP gross profit of $2,011, or 4.9%, which was primarily related to volume reductions and product mix within domestic transit products, as well as service related cost increases in our domestic Rail Technologies business.

During the current year, the Rail Products and Services segment had an increase in new orders of 28.9% compared to the prior year period. The increase impacted each of the three business units within the segment and grew the backlog balance to $85,764 at September 30, 2017, a 60.6% increase over the prior year. The Company is also encouraged by positive signs from order activity and resulting backlog during the first nine months of 2017.

Construction Products

First Nine Months of 2017 Compared to First Nine Months of 2016

Construction Products segment sales increased by $14,807, or 13.8%, compared to the prior year period. The increase related to Fabricated Bridge and Piling businesses of $9,428 and $7,112, respectively. Fabricated Bridge continued to have favorable sales in the current year due to several projects, including the continuation of the Peace Bridge project. The increase in Piling was primarily due to demand within the sheet piling product line. These increases were offset by a reduction in Precast Concrete Products sales of $1,733.

The Construction Products segment profit increased by $3,408 to 7.5% of net sales. The increase related to reductions in selling, administrative, and allocated expenses of $947, or 6.4%. Non-GAAP gross profit increased $2,462, or 11.9%, which was primarily due to the increased volumes from the Fabricated Bridge and Piling businesses within the period.

During the period, the Construction Products segment had a decrease in new orders of 8.7% compared to the prior year period. Prior year Fabricated Bridge orders included the $15,000 Peace Bridge project. Piling saw a 6.3% reduction in new orders compared to the prior year from recent declines in sheet piling demand. The Precast Concrete Products business saw an increase in new orders of 10.7% primarily from building orders from state agencies. The Construction Products segment had backlog at September 30, 2017 of $74,910, a 1.1% decrease over the prior year.

Tubular and Energy Services

First Nine Months of 2017 Compared to First Nine Months of 2016

Tubular and Energy Services segment sales increased $4,063, or 5.0%, compared to the prior year period. The increase related to growth from Test and Inspection Services and Protective Coating businesses, partially offset by a decrease in Precision Measurement Systems. The period showed increased new well count and demand within the upstream oil and gas market, but was negatively impacted by a lag in the recovery of Precision Measurement Systems for midstream applications.

Tubular and Energy Services segment profit increases by $113,650, or 101.6%, compared to the prior year period. The period was favorably impacted by a reduction in amortization expense of $2,401 from the 2016 definite-lived intangible asset impairment. The prior period was also negatively affected by impairment charges of $103,159 for the nine months ended September 30, 2016. Segment profit was also favorably impacted by a non-GAAP gross profit increase of $6,910, or 77.4%.

The Tubular and Energy Services segment had an increase in new orders of 47.6% compared to the prior year period. Orders for Protective Coatings and Test and Inspection Services businesses increased by 151.2% and 107.5%, respectively. The upstream oil and gas market continued its recovery. We are also encouraged by positive trends in midstream order activity as we ended the nine-month period.

On July 31, 2017, the lease at our Birmingham, Alabama facility expired. During the third quarter ended September 30, 2017, the Company negotiated a lease renewal for this facility. The renewal is for a term of five years and is scheduled to expire July 31, 2022.

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 and therefore have insignificant levels throughout the year.

Warranty

As of September 30, 2017, the Company maintained a total product warranty reserve of $9,614 for its estimate of all potential product warranty claims. Of this total, $7,607 reflects the current estimate of the Company’s exposure for potential concrete tie warranty claims. While the Company believes this is a reasonable estimate of its potential exposure related to identified concrete tie warranty matters, the Company may incur future charges associated with new customer claims or further development of information of existing customer claims. Thus, there can be no assurance that future potential costs pertaining to warranty claims will not have a material impact on the Company’s results of operations and financial condition. See Note 13 Commitments and Contingent Liabilities of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.

Liquidity and Capital Resources

Total debt was $138,285 and $159,565 as of September 30, 2017 and December 31, 2016, respectively, and was primarily comprised of borrowings on our revolving credit facility and term loan.

Our need for liquidity relates primarily to working capital requirements for operations, capital expenditures, joint venture capital obligations, debt service obligations, and share repurchases as authorized by the Board of Directors and as permitted under the Second Amended and Restated Credit Agreement dated March 13, 2015.

The change in cash and cash equivalents for the periods ended September 30 are as follows:

Cash Flow from Operating Activities

During the current 2017 nine-month period, cash flows provided by operating activities were $27,516 compared to $11,876 during the prior year period. For the nine months ended September 30, 2017, income and adjustments to income from operating activities provided $18,985 compared to $15,976 in the 2016 period. Working capital and other assets and liabilities provided $8,531 in the current period compared to a use of $4,100 in the prior year period. During the nine months ended September 30, 2017, the Company received $9,946 and $1,827 from our 2016 and 2015 federal income tax refunds, respectively.

The Company’s calculation for days sales outstanding at September 30, 2017 was 50 days compared to 53 days at December 31, 2017, and we believe our receivables portfolio is strong.

Cash Flow from Investing Activities

Capital expenditures for the nine months ended September 30, 2017 and 2016 were $5,335 and $6,507, respectively. The current year expenditures relate to trackside rail lubricator units installed as part of a new multi-year service contract and general plant and operational improvements. Expenditures for the nine months ended September 30, 2016 related to the Birmingham, AL inside diameter coating line upgrade and application development of the Company’s new enterprise resource planning system. During nine months ended September 30, 2017, the Company received $1,388 in proceeds from the sale of certain property, plant, and equipment as compared to $923 in the prior year period. The Company also loaned $635 to our joint venture, L B Pipe & Coupling Products, LLC (“L B Pipe JV”), as of September 30, 2016.

Cash Flow from Financing Activities

During the nine months ended September 30, 2017, the Company had a decrease in outstanding debt of $21,281, primarily related to payments against the revolving credit facility as well as the application of the $9,946 federal income tax refund and quarterly principle payments against the term loan. During the nine months ended September 30, 2016, the Company had a decrease in outstanding debt of $33,125, primarily related to payments against the revolving credit facility. Treasury stock acquisitions represent income tax withholdings from employees in connection with the vesting of restricted stock awards. Cash outflows related to dividends were $1,244 for the nine-month periods ended September 30, 2016.

Financial Condition

As of September 30, 2017, we had $35,008 in cash and cash equivalents and a domestic credit facility with $46,081 of net availability while we had $138,285 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 and term loan.

Our cash management priority continues to be short-term maturities and the preservation of our principal balances. Approximately $33,976 of our cash and cash equivalents was held in non-domestic bank accounts, and, under current law, the foreign cash would be subject to U.S. federal income taxes less applicable foreign tax credits upon repatriation.

On November 7, 2016, the Company, its domestic subsidiaries, and certain of its Canadian subsidiaries entered into the Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as amended by the First Amendment dated June 29, 2016 (the “Amended and Restated Credit Agreement”), with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This Second Amendment modified the Amended and Restated Credit Agreement, which had a maximum revolving credit line of $275,000.

The Second Amendment reduced the permitted revolving credit borrowings to $195,000 and provided for additional term loan borrowings of $30,000 (the “Term Loan”). The Term Loan is subject to quarterly straight line amortization until fully paid off upon the final payment on January 1, 2020. Furthermore, certain matters, including excess cash flow, asset sales, and equity issuances, trigger mandatory prepayments to the Term Loan. Term Loan borrowings are not available to draw upon once they have been repaid. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Second Amendment or Amended and Restated Credit Agreement, as applicable.

The Second Amendment further provided for modifications to the financial covenants as defined in the Amended and Restated Credit Agreement. The Second Amendment calls for the elimination of the Maximum Leverage Ratio covenant through the quarter ending June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ending September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility. The Second Amendment also includes a Minimum Last Twelve Months EBITDA (as defined by the Amendment) covenant (“Minimum EBITDA”). For the quarter ended December 31, 2016 through the quarter ended June 30, 2017, the Minimum EBITDA must be at least $18,500. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement will increase by various increments. The incremental Minimum EBITDA requirement for the period ending September 30, 2017 must be at least $23,000. During the third quarter ended September 30, 2017, the rolling 12-month EBITDA calculation, as defined by the Amended and Restated Credit Agreement, was $32,063. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the Amended and Restated Credit Agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter ending December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit facility. The final financial covenant included in the Second Amendment is a Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ending June 30, 2018.

The Second Amendment includes several changes to certain non-financial covenants, as defined in the Amended and Restated Credit Agreement. Through the maturity date of the loan, the Company is now prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Company’s stock was decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000 from the prior year to $25,000 in the aggregate through the maturity date of the credit facility.

The Second Amendment provided for the elimination of the three lowest tiers of the pricing grid that had previously been defined in the First Amendment. Upon execution of the Second Amendment through the quarter ending March 31, 2018, the Company will be locked into the highest tier of the pricing grid, which provides for pricing of the prime rate plus 225 basis points on base rate loans and the applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of the credit facility, the Company’s position on the pricing grid will be governed by a Minimum Net Leverage ratio, which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018, the Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing grid, pricing will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans.

To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. At September 30, 2017, the swap liability was $323 compared to $334 as of December 31, 2016.

Cost in Excess of Net Assets Acquired

At September 30, 2017, L.B. Foster had $19,699 of goodwill on its consolidated balance sheet. Of the total, $14,552 related to the Rail Products and Services segment and $5,147 related to the Construction Products segment. Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. The Company recorded a $32,725 partial goodwill impairment related to the Rail Products and Services segment during the year ended December 31, 2016. Based on considerations of current year financial results, including consideration of macroeconomic conditions, such as performance of the Company’s stock price, we do not believe that it is more-likely-than-not that the fair values of these reporting units have decreased below their carrying values at September 30, 2017. Consequently, management concluded that none of the Company’s reporting units experienced any triggering event that would have required a step one interim goodwill impairment analysis at September 30, 2017. However, the previously recorded partial impairment included assumptions for certain market recoveries throughout the years ending December 31, 2017 and 2018, if these recoveries do not fully develop, the Rail Products and Services segment may require an incremental goodwill impairment.

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. There have been no material changes in the Company’s critical accounting policies or estimates since December 31, 2016. A summary of the Company’s critical accounting policies and estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include operating leases, purchase obligations, and standby letters of credit. A schedule of the Company’s required payments under financial instruments and other commitments as of December 31, 2016 is included in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There were no 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.

Interest Rate Risk

The Company is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward starting interest rate swap agreements which effectively convert a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. See Note 9 Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.

For the nine months ended September 30, 2017, a 1% change in the interest rate for variable rate debt as of September 30, 2017 would increase or decrease interest expense by approximately $1,069.

The Company does not purchase or hold any derivative financial instruments for trading purposes. It does enter into interest rate hedges to reduce the risk in the variability of interest rate fluctuations. 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 the value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.

As of September 30, 2017 and December 31, 2016, the Company recorded a current liability of $323 and $334, respectively, related to its LIBOR-based interest rate swap agreements.

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 nine-month periods ended September 30, 2017 and 2016.

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 September 30, 2017. 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

There were no changes in our “internal control over financial reporting” (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company is currently evaluating the impact that Accounting Standards Update 2014-09, "Revenue from Contracts with Customers (Topic 606)" will have on our internal control over financial reporting at the January 1, 2018 adoption date.

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.

PART II. OTHER INFORMATION

(Dollars in thousands, except share data)

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. You should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 8, 2017, which could materially affect our business, financial condition, financial results, or future performance. The risks described in our Annual Report on Form 10-K and quarterly reports on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial may also materially affect our business, financial condition, and/or results of operations.