# Foster L B Co: Form 10-K for the period ended Dec 31, 2017 - Company: [Foster L B Co](/companies/fstr.md) (CIK 352825) - Form: 10-K - Filed: 2018-02-28 - Accepted by EDGAR: Feb 28, 2018, 11:31 ET - Period: 2017-12-31 - Accession: 0000352825-18-000004 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/352825/000035282518000004/lbfosterco10-k2017.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/352825/000035282518000004/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2017-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2017-10-01 to 2017-12-31 | $141.3m | us-gaap:SalesRevenueGoodsNet | | Gross profit | 3 months, 2017-10-01 to 2017-12-31 | $27.9m | us-gaap:GrossProfit | | Gross profit | 12 months, 2017-01-01 to 2017-12-31 | $103.3m | us-gaap:GrossProfit | | Research and development | 12 months, 2017-01-01 to 2017-12-31 | $2.2m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 12 months, 2017-01-01 to 2017-12-31 | $80.5m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2017-01-01 to 2017-12-31 | $27.7m | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2017-01-01 to 2017-12-31 | $8.4m | us-gaap:InterestExpense | | Income tax | 12 months, 2017-01-01 to 2017-12-31 | $3.9m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2017-10-01 to 2017-12-31 | $289.0k | us-gaap:NetIncomeLoss | | Net income | 12 months, 2017-01-01 to 2017-12-31 | $4.1m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2017-10-01 to 2017-12-31 | $0.03 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2017-01-01 to 2017-12-31 | $0.39 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2017-10-01 to 2017-12-31 | $0.03 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2017-01-01 to 2017-12-31 | $0.40 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2017-01-01 to 2017-12-31 | 10,483,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Capital expenditure | 12 months, 2017-01-01 to 2017-12-31 | $6.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2017-01-01 to 2017-12-31 | $0 | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 12 months, 2017-01-01 to 2017-12-31 | $103.0k | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2017-12-31 | $37.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2017-12-31 | $221.1m | us-gaap:AssetsCurrent | | Total assets | at 2017-12-31 | $396.6m | us-gaap:Assets | | Current liabilities | at 2017-12-31 | $93.5m | us-gaap:LiabilitiesCurrent | | Shareholders' equity | at 2017-12-31 | $146.5m | us-gaap:StockholdersEquity | ## Business As filed, 21,469 characters. ### Summary Description of Businesses Formed in 1902, L.B. Foster Company is a Pennsylvania corporation with its principal office in Pittsburgh, PA. L.B. Foster Company is a leading manufacturer and distributor of products and services for the transportation and energy infrastructure with locations in North America and Europe. As used herein, “Foster,” the “Company,” “we,” “us,” and “our” or similar references refer collectively to L.B. Foster Company and its divisions and subsidiaries, unless the context otherwise requires. The following table shows, for the last three fiscal years, the net sales generated by each business segment as a percentage of total net sales: | | Percentage of Net Sales 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Rail Products and Services | 48% | 49% | 53% | | Construction Products | 30 | 30 | 28 | | Tubular and Energy Services | 22 | 21 | 19 | | | 100% | 100% | 100% | Financial information concerning these segments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 Business Segments, to the Consolidated Financial Statements contained in this Annual Report on Form 10-K, which is incorporated by reference into this Item 1. ### Rail Products and Services The Company’s Rail Products and Services (“Rail”) segment is comprised of several manufacturing and distribution businesses that provide a variety of products and services for freight and passenger railroads and industrial companies throughout the world. The Rail segment has sales offices throughout the Americas and Europe, and frequently bids on rail projects where it offers products manufactured by the Company, or sourced from numerous supply chain partners, and aftermarket services. The Rail segment is comprised of the following business units: Rail Products, Rail Technologies, and CXT Concrete Ties. #### Rail Products The Rail Products business is comprised of the Company’s Rail Distribution, Allegheny Rail, and Transit divisions. Rail Distribution sells new rail mainly to passenger and shortline freight railroads, industrial companies, and rail contractors for the replacement of existing lines or expansion of new lines. Rail accessories sold by the Rail Distribution division include track spikes, bolts, angle bars, and other products required to install or maintain rail lines. These products are manufactured by the Company or purchased from other manufacturers and distributed accordingly. Rail Distribution also sells trackwork products to Class II and III railroads, industrial, and export markets. The Company’s Allegheny Rail Products (“ARP”) division engineers and fabricates insulated rail joints and related accessories for freight and passenger railroads and industrial customers. Insulated joints are manufactured at the Company’s facilities in Pueblo, CO and Niles, OH. The Company’s Transit Products division supplies power rail, direct fixation fasteners, coverboards, and special accessories primarily for passenger railroad systems. These products are fabricated at Company facilities or by subcontractors and are usually sold by sealed bid to passenger railroads or to rail contractors. #### Rail Technologies The Company’s Rail Technologies business unit engineers, manufactures, and fabricates friction management products and application systems, railroad condition monitoring systems and equipment, wheel impact load detection, rail anchors and spikes, wayside data collection and management systems, epoxy and nylon-encapsulated insulated rail joints, and track fasteners, and provides aftermarket services. The Company’s friction management products control the friction at the rail/wheel interface, helping our customers reduce fuel consumption, improve operating efficiencies, extend the life of operating assets such as rail and wheels, reduce track stresses, and lower related maintenance and operating costs. Friction management products include mobile and wayside systems that apply lubricants and liquid or solid friction modifiers. These products and systems are designed, engineered, manufactured, and fabricated by certain wholly-owned subsidiaries located in the United States, Canada, United Kingdom, and Germany. #### CXT Concrete Ties L.B. Foster’s subsidiary, CXT Incorporated, manufactures engineered concrete railroad ties for freight and passenger railroads and industrial companies at its facility in Spokane, WA. ### Construction Products The Construction products segment is composed of the following business units: Piling Products, Fabricated Bridge Products, and Precast Concrete Products. #### Piling Products Sheet piling products are interlocking structural steel sections that are generally used to provide lateral support at construction sites. Bearing piling products are steel H-beam sections which are driven into the ground for support of structures such as bridge piers and high-rise buildings. Piling is often used in water and land applications including cellular cofferdams and OPEN CELL® structures in inland river systems and ports. Piling products are sourced from various manufacturers and either sold or rented to project owners and contractors. The piling division, via a sales force deployed throughout the United States, markets and sells piling domestically and internationally. This division offers its customers various types and dimensions of structural beam piling, sheet piling, and pipe piling. The Company is the primary distributor of domestic steel sheet piling for its primary supplier. #### Fabricated Bridge Products The fabricated products facility in Bedford, PA manufactures a number of fabricated steel and aluminum products primarily for the highway, bridge, and transit industries including concrete reinforced steel grid deck, open steel grid deck, aluminum bridge railing, and stay-in-place steel bridge forms. #### Precast Concrete Products The Precast Concrete Products unit primarily manufactures concrete buildings for national, state, and municipal parks. This unit manufactures restrooms, concession stands, and other protective storage buildings available in multiple designs, textures, and colors. The Company is a leading high-end supplier in terms of volume, product options, and capabilities. The unit also manufactures various other precast products such as burial vaults, bridge beams, box culverts, septic tanks, and other custom pre-stressed and precast concrete products. The products are manufactured in Spokane, WA, Hillsboro, TX, and Waverly, WV. ### Tubular and Energy Services The Tubular and Energy Services segment has four primary business units: Protective Coatings, Threaded Products, Precision Measurement Systems, and Test and Inspection Services. The segment provides products and services predominantly to the mid and upstream oil and gas markets. #### Protective Coatings There are two pipeline service locations that make up the Protective Coatings business unit. The Birmingham, AL facility coats the outside diameter and, to a lesser extent, the inside diameter of pipe primarily for oil & gas transmission pipelines. This location partners with its primary customer, a pipe manufacturer, to market fusion bonded epoxy coatings, abrasion resistant coatings, and internal linings for a wide variety of pipe diameters for pipeline projects throughout North America. The second location is in Willis, TX. The Willis facility applies specialty outside and inside diameter coatings for a wide variety of pipe diameters for oil & gas transmission, mining, and waste water pipelines. This location also provides custom coatings for specialty fittings and connections. #### Threaded Products The Company’s Magnolia, TX facility cuts, threads, and paints pipe primarily for water well applications for the agriculture industry, municipal water authorities, and Oil Country Tubular Goods (“OCTG”) markets. #### Precision Measurement Systems The Company manufactures and provides a turnkey solution for metering and injection systems for the oil and, to a lesser extent, gas industry. The Willis, TX location operates a fabrication plant that builds metering systems for custody transfer applications including crude oil and other petroleum-based products. These systems are used at well sites, pipelines, refineries, chemical plants, and loading/unloading facilities. The Willis location also manufactures and installs additive and dye injection systems. These systems are used to inject performance additives and/or dyes into petroleum products. #### Test and Inspection Services The Company provides inspection and tubular integrity management services for the upstream oil and gas industry. Services include non-destructive testing, inspection, and other asset integrity services such as repair and threading for OCTG and drill tools. Inspection and testing of these products, which include replaceable and re-usable products such as casing, production tubing, drill pipe, directional motors, drill collars, and related equipment, is a critical preventative measure to ensure personnel and well-site safety, enhance efficiency, and avoid costly equipment failures and well-site shutdowns. The Company offers these services in every major oil and gas producing region throughout the United States. ### L B Pipe Joint Venture The Company is a member of a joint venture, L B Pipe & Coupling Products, LLC (“L B Pipe JV”), in which it maintains a 45% ownership interest. L B Pipe JV manufactures, markets, and sells various machined components and precision couplings products for the energy, water well, and construction markets and is scheduled to terminate on June 30, 2019. The Company has classified its ownership interest as an asset held for sale during the current period. More information concerning L B Pipe JV is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 8 Investments, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1. ### Marketing and Competition L.B. Foster Company generally markets its Rail Products and Services directly in all major industrial areas of the United States, Canada, and Europe. The Construction Products and Tubular and Energy Services are primarily marketed domestically. The Company employs a sales force of approximately 71 people that is supplemented with a network of agents across Europe, South America, and Asia to reach current customers and cultivate potential customers in these areas. For the years ended 2017, 2016, and 2015, approximately 19%, 19%, and 16%, respectively, of the Company’s total sales were outside the United States. The major markets for the Company’s products are highly competitive. Product availability, quality, service, and price are principal factors of competition within each of these markets. No other company provides the same product mix to the various markets the Company serves. However, there are one or more companies that compete with the Company in each product line. Therefore, the Company faces significant competition from different groups of companies. During 2017, 2016, and 2015, no single customer accounted for more than 10% of the Company’s consolidated net sales. ### Raw Materials and Supplies Most of the Company’s products are purchased in the form of finished or semi-finished products. The Company purchases the majority of its supplies from domestic and foreign steel producers. Generally, the Company has a number of vendor options. However, the Company has an arrangement with a steel mill to distribute steel sheet piling in North America. Should sheet piling from its present supplier not be available for any reason, the Company risks not being able to provide such product to its customers. The Company’s purchases from foreign suppliers are subject to foreign currency exchange rate changes as well as the usual risks associated with changes in international conditions and to United States and international laws that could impose import restrictions on selected classes of products and for anti-dumping duties if products are sold in the United States at prices that are below specified prices. ### Backlog The dollar amount of firm, unfilled customer orders at December 31, 2017 and 2016 by business segment is as follows: | | December 31, 2017 | 2016 | | --- | ---: | ---: | | Rail Products and Services | $68,850 | $62,743 | | Construction Products | 71,318 | 71,954 | | Tubular and Energy Services | 26,737 | 12,759 | | Total | $166,905 | $147,456 | Approximately 5% of the December 31, 2017 backlog is related to projects that will extend beyond 2018. ### Research and Development Expenditures for research and development approximated $2,241, $3,511, and $3,937 in 2017, 2016, and 2015, respectively. These expenditures were predominately associated with expanding product lines and capabilities within the Company’s Rail Technologies business. ### Patents and Trademarks The Company owns a number of domestic and international patents and trademarks primarily related to its Rail Technologies products. Our business segments are not dependent upon any individual patent or related group of patents, or any licenses or distribution rights. We believe that, in the aggregate, the rights under our patents, trademarks, and licenses are generally important to our operations, but we do not consider any individual patent or trademark, or any licensing or distribution rights related to a specific process or product, to be of material importance in relation to our total business. ### Environmental Disclosures Information regarding environmental matters is included in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 Commitments and Contingent Liabilities, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1. ### Employees and Employee Relations At December 31, 2017, the Company had approximately 1,475 employees, 1,282 located within the Americas and 193 located in Europe. There were 819 hourly production workers and 656 salaried employees. Of the hourly production workers, approximately 146 are represented by unions. The Company has not suffered any major work stoppages during the past five years and considers its relations with its employees to be satisfactory. Two collective bargaining agreements covering approximately 41 and 77 employees were successfully renegotiated during 2017 and are now scheduled to expire in March 2020 and September 2021, respectively. Substantially all of the Company’s hourly paid employees are covered by one of the Company’s noncontributory, defined benefit plans or defined contribution plans. Substantially all of the Company’s salaried employees are covered by defined contribution plans. ### Financial Information about Liquidity and Capital Resources Information concerning the Company’s liquidity and capital resources and the Company’s working capital requirements can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included herein, which is incorporated by reference into this Item 1. ### Financial Information about Geographic Areas Financial information about geographic areas is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 Business Segments, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1. ### Financial Information about Segments Financial information about segments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 Business Segments, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1. ### Code of Ethics L.B. Foster Company has a legal and ethical conduct policy applicable to all directors and employees, including its Chief Executive Officer, Chief Financial Officer, and Controller. This policy is posted on the Company’s website, *www.lbfoster.com*. The Company intends to satisfy the disclosure requirement regarding certain amendments to, or waivers from, provisions of its policy by posting such information on the Company’s website. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls, human resource concerns, and other reporting matters. ### Available Information The Company makes certain filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and exhibits to those reports, available free of charge through its website, *www.lbfoster.com*, as soon as reasonably practicable after they are filed with the SEC. These filings are also available at the SEC’s Public Reference Room at 100 F Street N.E. Washington, D.C. 20549 or by calling 1-800-SEC-0330. These filings are also available on the internet at *www.sec.gov*. The Company’s press releases and recent investor presentations are also available on its website. ### Executive Officers of the Registrant Information concerning the executive officers of the Company is set forth below. | Name | Age | Position | | --- | ---: | --- | | Robert P. Bauer | 59 | President and Chief Executive Officer | | Patrick J. Guinee | 48 | Vice President, General Counsel and Secretary | | John F. Kasel | 52 | Senior Vice President - Rail and Construction | | Brian H. Kelly | 58 | Vice President - Human Resources and Administration | | Gregory W. Lippard | 49 | Vice President - Rail Sales and Products and Services | | James P. Maloney | 50 | Senior Vice President, Chief Financial Officer, and Treasurer | | Christopher T. Scanlon | 42 | Controller and Chief Accounting Officer | | William F. Treacy | 58 | Vice President - Tubular and Energy Services | Mr. Bauer was elected President and Chief Executive Officer upon joining the Company in 2012. Prior to joining the Company, beginning in 2011, Mr. Bauer previously served as President of the Refrigeration Division of the Climate Technologies business of Emerson Electric Company, a diversified global manufacturing and technology company. From 2002 until 2011, Mr. Bauer served as President of Emerson Network Power’s Liebert Division. Mr. Guinee was elected Vice President, General Counsel and Secretary in 2014. Prior to joining the Company, Mr. Guinee served as Vice President - Securities & Corporate and Assistant Secretary at Education Management Corporation from 2013 to early 2014, and was employed by H. J. Heinz Company from 1997 to 2013, last serving as Vice President - Corporate Governance & Securities and Assistant Secretary. Mr. Kasel was elected Senior Vice President - Rail and Construction in September 2017, having previously served as Senior Vice President - Rail Products and Services since 2012, Senior Vice President - Operations and Manufacturing since 2005, and Vice President - Operations and Manufacturing since 2003. Mr. Kasel served as Vice President of Operations for Mammoth, Inc., a Nortek company from 2000 to 2003. Mr. Kelly was elected Vice President - Human Resources and Administration in 2012, having previously served as Vice President, Human Resources since 2006. Prior to joining the Company, Mr. Kelly headed Human Resources for 84 Lumber Company from 2004. Previously, he served as a Director of Human Resources for American Greetings Corp. from 1994 to 2004. Mr. Lippard was elected Vice President - Rail Sales and Products and Services in September 2017, having previously served as Vice President - Rail Product Sales since 2000. Prior to re-joining the Company in 2000, Mr. Lippard served as Vice President - International Trading for Tube City, Inc. from 1998. Mr. Lippard served in various other capacities with the Company since his initial employment in 1991. Mr. Maloney was elected Senior Vice President, Chief Financial Officer, and Treasurer in September 2017. Prior to joining the Company, Mr. Maloney served as Chief Financial Officer of First Insight, Inc. from 2014 to 2017. Mr. Maloney served as Vice President - Global Financial Planning and Supply Chain Finance for H. J. Heinz Company from 2012 to 2014. He served as Director of Finance from 2009 to 2012 and Controller from 2005 to 2009 for Heinz North American operating unit. Mr. Scanlon was elected Controller and Chief Accounting Officer in 2012. Prior to joining the Company, Mr. Scanlon served as the Online Higher Education Division Controller of Education Management Corporation from 2009 to 2012. Mr. Scanlon served as Manager of Central Accounting Services for Bayer Corporation from 2007 until 2009. Mr. Treacy was elected Vice President - Tubular and Energy Services in September 2017, having previously served as Director of Technology and General Manager, Transit Products within the Rail Products and Services segment since 2013. Prior to joining the Company, Mr. Treacy served as Interim President of Tuthill Vacuum and Blower Systems from 2012 to 2013. Mr. Treacy previously served as General Manager, Crane Vending Solutions for Crane Co. from 2009 to 2011 and was employed by Parker Hannifin from 2000 to 2009, last serving as Vice President of Operations Development. Officers are elected annually at the organizational meeting of the Board of Directors following the annual meeting of stockholders. ## Risk factors As filed, 31,006 characters. ### Risks and Uncertainties We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a material adverse effect on our business, financial condition, and results of operations. The following risks highlight some of the more significant factors that have affected us and could affect us in the future. We may also be affected by unknown risks or risks that we currently believe are immaterial. If any such events actually occur, our business, financial condition, and results of operations could be materially adversely affected. You should carefully consider the following factors and other information contained in this Annual Report on Form 10-K before deciding to invest in our common stock. ***Our inability to successfully manage joint ventures, divestitures, and other significant transactions could harm our financial results, business, and prospects.*** As part of our business strategy, we may divest businesses or assets, enter into strategic alliances and joint ventures, and make investments to realize anticipated benefits, which actions involve a number of inherent risks and uncertainties. We can give no assurances that the opportunities will be consummated or that financing will be available. We may not be able to achieve the synergies and other benefits we expect from strategic transactions as successfully or rapidly as projected, if at all. ***Our future performance and market value could cause additional write-downs of long-lived and intangible assets in future periods.*** We are required under U.S. generally accepted accounting principles to review intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered to be a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include, but are not limited to, a decline in stock price and resulting market capitalization, a significant decrease in the market value of an asset, or a significant decrease in operating or cash flow projections. No impairments of goodwill or long-lived assets were recorded in 2017. During the third quarter of 2015, we performed an interim goodwill test and concluded that the carrying amounts of the Test and Inspection Services and Precision Measurement Systems business units’ goodwill exceeded the implied fair values of that goodwill. We recognized an aggregate non-cash goodwill impairment charge of $80,337 to write down the carrying values to the implied fair values, of which $69,908 represented the full carrying value of the goodwill related to the Test and Inspection Services business unit and the remaining $10,429 related to the Precision Measurement Systems business unit. During the second and third quarters of 2016, we performed an interim goodwill test and concluded that the carrying amounts of the Rail Technologies, Protective Coatings, and Precision Measurement Systems business units’ goodwill exceeded the implied fair values of the respective goodwill. We recognized an aggregate non-cash goodwill impairment charges of $61,142 to write down the carrying values to the implied fair values, of which $16,560 represented the full carrying value of goodwill related to the 2013 Ball Winch acquisition and $11,873 represented the remaining carrying value related to the Precision Measurement Systems business unit. We also performed interim long-lived asset recoverability tests during the second and third quarters of 2016 and concluded that the long-lived assets related to the Test and Inspection Services and Precision Measurement Systems business units had carrying values in excess of the asset groups’ fair value. We recognized non-cash definite-lived intangible asset impairment charges of $59,786 to write down the carrying values to the implied fair values, of which $42,982 related to Test and Inspection Services and $16,804 related to Precision Measurement Systems. Finally, in 2016, we recognized $14,956 non-cash tangible long-lived impairment charges related to the carrying value of certain long-lived tangible assets exceeding their fair value, all of which related to Test and Inspection Services. No assurances can be given that we will not be required to record future significant charges related to tangible or intangible asset impairments. ***Our indebtedness could materially adversely affect our business, financial condition, and results of operations and prevent us from fulfilling our obligations.*** Our indebtedness could materially adversely affect our business, financial condition, and results of operations. For example, it could: - require us to dedicate a substantial portion of our cash flows to payments of our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - place us at a competitive disadvantage compared to our competitors that have less debt; and - limit, among other things, our ability to borrow additional funds for working capital, capital expenditures, or general corporate purposes. Our inability to comply with covenants in place or our inability to make the required principal and interest payments may cause an event of default, which could have a substantial adverse impact to our business, financial condition, and results of operations. There is no assurance that refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, particularly if credit market conditions deteriorate. Furthermore, there can be no assurance that refinancings or asset dispositions would be permitted by the terms of our credit agreements or debt instruments. Our existing credit agreements contain, and any future debt agreements we may enter into may contain, certain financial tests and other covenants that limit our ability to incur indebtedness, acquire other businesses, and may impose various other restrictions. Our ability to comply with financial tests may be adversely affected by changes in economic or business conditions beyond our control, and these covenants may limit our ability to take advantage of potential business opportunities as they arise. We cannot be certain that we will be able to comply with the financial tests and other covenants, or, if we fail to do so, that we will be able to obtain waivers or amended terms from our lenders. An uncured default with respect to one or more of the covenants could result in the amounts outstanding being declared immediately due and payable, which may also trigger an obligation to redeem our outstanding debt securities and repay all other outstanding indebtedness. Any such acceleration of our indebtedness would have a material adverse effect on our business, financial condition, and results of operations. ***Prolonged low energy prices and other unfavorable changes in U.S., global, or regional economic and market conditions could adversely affect our business.*** We could be adversely impacted by prolonged negative changes in economic conditions affecting either our suppliers or customers as well as the capital markets. Negative changes in government spending may result in delayed or permanent deferrals of existing or potential projects. No assurances can be given that we will be able to successfully mitigate various prolonged uncertainties including materials cost variability, delayed or reduced customer orders and payments, and access to available capital resources outside of operations. In addition, volatile market conditions and low energy prices could continue for an extended period, which would negatively affect our business prospects. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty, and a variety of additional factors that are beyond our control. Sustained declines or significant and frequent fluctuations in the price of oil and natural gas may have a material adverse effect on our operations and financial condition. ***Our ability to maintain or improve our profitability could be adversely impacted by cost pressures.*** Our profitability is dependent upon the efficient use of our resources. Rising inflation, labor costs, labor disruptions, and other increases in costs in the geographic areas in which we operate could have a significant adverse impact on our profitability and results of operations. ***Management projections, estimates, and judgments may not be indicative of our future performance.*** Our management is required to use certain estimates in preparing our financial statements, including accounting estimates to determine reserves related to litigation, deferred tax assets, and the fair market value of certain assets and liabilities. Certain asset and liability valuations are subject to management’s judgment and actual results are influenced by factors outside our control. We are required to maintain a valuation allowance for deferred tax assets and record a charge to income and equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14 Income Taxes, to the Consolidated Financial Statements included herein, for additional discussion of our deferred taxes. ***Our business operates in highly competitive markets and a failure to react to changing market conditions could adversely impact our business.*** We face strong competition in each of the markets in which we participate. A slow response to competitor pricing actions and new competitor entries into our product lines could negatively impact our overall pricing. Efforts to improve pricing could negatively impact our sales volume in all product categories. We may be required to invest more heavily to maintain and expand our product offerings. There can be no assurance that new product offerings will be widely accepted in the markets we serve. Significant negative developments in any of these areas could adversely affect our financial results and condition. ***If we are unable to protect our intellectual property and prevent its improper use by third parties, our ability to compete may be harmed.*** We own a number of patents and trademarks under the intellectual property laws of the United States, Canada, Europe, and other countries where product sales are possible. However, we have not perfected patent and trademark protection of our proprietary intellectual property for all products in all countries. The decision not to obtain patent and trademark protection in other countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property. This could impede growth into new markets where we do not have such protections and result in a greater supply of similar products in such markets, which in turn could result in a loss of pricing power and reduced revenue. ***Our success is in part dependent on the accuracy and proper utilization of our management information and communications systems.*** We are currently working through an enterprise resource program (“ERP”) system transition. Certain divisions of our Company migrated into the new ERP system during 2016 while certain other divisions may be transitioned during 2018 and subsequent years. The system implementation is intended to enable us to better meet the information requirements of our users, increase our integration efficiencies, and identify additional synergies in the future. The implementation of our ERP system is complex because of the wide range of processes and systems to be integrated across our business. Project delays, business interruptions, or loss of expected benefits could have a material adverse effect on our business, financial condition, or results of operations. Any disruptions, delays, or deficiencies in the design, operation, or implementation of our various systems, or in the performance of our systems, particularly any disruptions, delays, or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business, including our ability to receive, process, ship, and bill for orders in a timely manner or our ability to properly manage our inventory or accurately present our inventory availability or pricing. ***We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.*** Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our customers, employees, job applicants, and other parties, including financial information, intellectual property, and personal identification information. Security breaches and other disruptions could compromise our information, expose us to liability, and harm our reputation and business. The steps we take to deter and mitigate these risks may not be successful. We may not have the resources or technical sophistication to anticipate or prevent current or rapidly evolving types of cyber-attacks. Data and security breaches can also occur as a result of non-technical issues, including an intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, legal and financial exposure, negative impacts on our customers’ willingness to transact business with us, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation. ### We are dependent upon key customers. We could be adversely affected by changes in the business or financial condition of a customer or customers. A prolonged decrease in capital spending by our railroad customers could negatively impact our sales and profitability. As a result of the ongoing litigation and termination of the amended 2005 concrete tie supply agreement with Union Pacific Railroad (“UPRR”), our CXT Concrete Tie sales to, and new orders from, UPRR have ceased which adversely affected our results beginning in 2015. No assurances can be given that a significant downturn in the business or financial condition of a current customer, or customers, or potential litigation with a current customer, would not also impact our results of operations and/or financial condition. ***An adverse outcome in any pending or future litigation or pending or future warranty claims against the Company or its subsidiaries or our determination that a customer has a substantial product warranty claim could negatively impact our financial results and/or our financial condition.*** We are party to various legal proceedings. In addition, from time to time our customers assert claims against us relating to the warranties which apply to products we sell. There is the potential that a result materially adverse to us or our subsidiaries in pending or future legal proceedings or pending or future product warranty claims could materially exceed any accruals we have established and adversely affect our financial results and/or financial condition. In addition, we could suffer a significant loss of business from a customer who is dissatisfied with the resolution of a warranty claim. For example, UPRR terminated our amended 2005 concrete tie supply agreement over allegedly defective ties and reduced new orders for other products which negatively affected our results beginning in 2015. In January 2015, UPRR filed a lawsuit against the Company asserting that we were in material breach of our amended 2005 concrete tie supply agreement with UPRR due to claimed failures to provide warranty ties to replace alleged defective concrete ties. UPRR seeks various types of relief including incidental, consequential, and other damages in amounts to be determined at trial under various legal theories. See Part II, Item 8, Financial Statements and Supplementary Data, Note 19 Commitments and Contingent Liabilities, to the Consolidated Financial Statements included herein, for additional information regarding UPRR’s lawsuit. We continue to work with UPRR in an attempt to reach a resolution on this matter. However, such discussions may not be successful, and the results of litigation and any settlement or judgment amounts resulting from this matter may not be within the range of our estimated accrual. Consequently, while we believe the claims in the UPRR lawsuit are without merit, and we intend to vigorously defend ourselves and have asserted a counterclaim for damages in the UPRR lawsuit, an adverse outcome could result in a substantial judgment against us that could have a material adverse effect on our financial condition, results of operations, liquidity, and capital resources. No assurances can be given that prior to any settlement or judgment, we will not recognize additional material charges because our warranty reserve accrual for UPRR is based upon our current estimate of the number of defective concrete ties that need to be replaced and facts could emerge which would cause us to materially increase this estimate. ***A portion of our sales are derived from our international operations, which expose us to certain risks inherent in doing business on an international level.*** Doing business outside the United States subjects the Company to various risks, including changing economic and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts, and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments, and taxation. Increasing sales to foreign countries exposes the Company to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles. We have little control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practices in time to avoid the adverse effect of any of these possible changes. Changes in exchange rates for foreign currencies may reduce international demand for our products or increase our labor or supply costs in non-U.S. markets. Fluctuations in the relative values of the United States dollar, Canadian dollar, British pound, and Euro may result in volatile earnings to reflect exchange rate translation in our Canadian and European sales and operations. If the United States dollar strengthens in value as compared to the value of the Canadian dollar, British pound, or Euro, our reported earnings in dollars from sales in those currencies will be unfavorable. Conversely, a favorable result will be reported if the United States dollar weakens in value as compared to the value of the Canadian dollar, British pound, or Euro. ***Economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union could adversely affect our business.*** In June 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit”. The U.K. government has initiated a process to withdraw from the E.U. and has begun negotiating the terms of its separation. Since the announcement of Brexit, there has been volatility in currency exchange rate fluctuations between the U.S. dollar relative to the U.K. pound. The announcement of Brexit and pending withdrawal of the U.K. from the E.U. may also create market volatility and could continue to contribute to instability in global financial and foreign exchange markets, political institutions, and regulatory agencies. The majority of our U.K. operations are heavily concentrated within the U.K. borders; however, this could adversely affect the future growth of our U.K. operations into other European locations. Our U.K. operations represented approximately 10% of our total revenue for the twelve-month periods ended December 31, 2017, 2016, and 2015. ***Material modification to NAFTA and certain other international trade agreements could affect our business, financial condition, and results of operations.*** The current Presidential administration has made comments suggesting it is not supportive of certain international trade agreements, including the North American Free Trade Agreement (“NAFTA”). At this time, it remains unclear what the current administration and Congress would or would not do with respect to these international trade agreements. While the Company is a net exporter out of the United States, potential material modifications to NAFTA, or certain other international trade agreements, may adversely impact our business, financial condition, and results of operations. ***Violations of foreign governmental regulations, including the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws, could result in fines, penalties, and criminal sanctions against the Company, its officers, or both and could adversely affect our business.*** Our foreign operations are subject to governmental regulations in the countries in which we operate as well as U.S. laws. These include regulations relating to currency conversion, repatriation of earnings, taxation of our earnings and the earnings of our personnel, and the increasing requirement in some countries to make greater use of local employees and suppliers, including, in some jurisdictions, mandates that provide for greater local participation in the ownership and control of certain local business assets. The U.S. Foreign Corrupt Practices Act and similar other worldwide anti-corruption laws, such as the U.K. Bribery Act, prohibit improper payments for the purpose of obtaining or retaining business. Although we have established an internal control structure, corporate policies, compliance, and training processes to reduce the risk of violation, we cannot ensure that these procedures protect us from violations of such policies by our employees or agents. Failure to comply with applicable laws or regulations could subject us to fines, penalties, and suspension or debarment from contracting. Events of non-compliance could harm our reputation, reduce our revenues and profits, and subject us to criminal and civil enforcement actions. Violations of such laws or allegations of violation could disrupt our business and result in material adverse results to our operating results or future profitability. ***Certain divisions of our business depend on a small number of suppliers. The loss of any such supplier could have a material adverse effect on our business, financial condition, and result of operations.*** In our Rail Products businesses, we rely on a limited number of suppliers for key products that we sell to our customers. In addition, our Piling business is predominantly dependent upon one supplier for sheet piling while our Protective Coatings business is predominately dependent on two suppliers of epoxy coating. A significant downturn in the business of one or more of these suppliers, a disruption in their manufacturing operations, an unwillingness to continue to sell to us, or a disruption in the availability of existing and new piling and rail products may adversely impact our financial results. ***Fluctuations in the price, quality, and availability of the primary raw materials used in our business could have a material adverse effect on our operations and profitability.*** Most of our businesses utilize steel as a significant product component. The steel industry is cyclical and prices and availability are subject to these cycles as well as to international market forces. We also use significant amounts of cement and aggregate in our CXT Concrete Ties and Precast Concrete Products businesses. No assurances can be given that our financial results would not be adversely affected if prices or availability of these materials were to change in a significantly unfavorable manner. ***Labor disputes may have a material adverse effect on our operations and profitability.*** Four of our manufacturing facilities are staffed by employees represented by labor unions. Approximately 146 employees employed at these facilities are currently working under three separate collective bargaining agreements. Disputes with regard to the terms of these agreements or our potential inability to renegotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a disruption of our operations and have a material adverse effect on our results of operations, financial condition, and liquidity. ***Actions of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.*** In February 2016, the Company entered into an agreement with an activist investor, Legion Partners Asset Management, LLC and various of its affiliates (collectively, “Legion Partners”) that had filed a Schedule 13D with the SEC with respect to the Company. Pursuant to that agreement, the Company agreed to appoint a representative of Legion Partners to the Company’s Board of Directors and Legion Partners agreed to various standstill provisions and to vote for the Company’s director nominees at the Company’s 2016 and 2017 Annual Meetings of Shareholders. This agreement expired by its terms on February 13, 2018. Although our agreement with Legion Partners expired by its terms in February 2017, activist investors may attempt to effect changes in the Company’s strategic direction and how the Company is governed, or to acquire control over the Company. Some investors seek to increase short-term shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. While the Company welcomes varying opinions from all shareholders, activist campaigns that contest or conflict with our strategic direction could have an adverse effect on the Company’s results of operations and financial condition as responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of the Company’s board and senior management from the pursuit of business strategies. In addition, perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. ***Our success is highly dependent on the continued service and availability of qualified personnel.*** Much of our future success depends on the continued availability and service of key personnel, including our Chief Executive Officer, the executive team, and other highly skilled employees. Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to compete and lead to a reduction in our profitability. ***We may not foresee or be able to control certain events that could adversely affect our business.*** Unexpected events including fires or explosions at our facilities, natural disasters, armed conflicts, unplanned outages, equipment failures, failure to meet product specifications, or a disruption in certain of our operations, may cause our operating costs to increase or otherwise impact our financial performance. ***Shifting federal, state, local, and foreign regulatory policies impose risks to our operations.*** We are subject to regulation by federal, state, local, and foreign regulatory agencies. We are required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals, and certificates from governmental agencies. Compliance with emerging regulatory initiatives, delays, discontinuations, or reversals of existing regulatory policies in the markets in which we operate could have an adverse effect on our business, results of operations, cash flows, and financial condition. The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on previously deferred earnings of certain foreign subsidiaries, and creates new taxes on certain foreign sourced earnings. Our 2017 financial results include a provisional tax expense of $3,298 related to the one-time transition tax, partially offset by a provisional $1,508 tax benefit related to the remeasurement of certain deferred tax assets and liabilities. We will continue to refine our provisional tax amounts during 2018, as we gain a more thorough understanding of the tax law, as further guidance is issued, and as we evaluate our income tax accounting policies with regard to certain provisions of the Act. A substantial portion of our operations are heavily dependent on governmental funding of infrastructure projects. Many of these projects have “Buy America” or “Buy American” provisions. Significant changes in the level of government funding of these projects could have a favorable or unfavorable impact on our operating results. Additionally, government actions concerning “Buy America” provisions, taxation, tariffs, the environment, or other matters could impact our operating results. ## Properties As filed, 2,647 characters. The location and general description of the principal properties which are owned or leased by L.B. Foster Company, together with the segment of the Company’s business using such properties, are set forth in the following table: | Location | Function | Acres | Business Segment | Lease Expiration | | --- | --- | ---: | --- | --- | | Bedford, PA | Bridge component fabricating plant | 16 | Construction | Owned | | Birmingham, AL | Protective coatings facility | 32 | Tubular and Energy | 2022 | | Burnaby, British Columbia, Canada | Friction management products plant | N/A | Rail | 2021 | | Channelview, TX | Threading, test, and inspection facility | 73 | Tubular and Energy | Owned | | Columbia City, IN | Rail processing facility and yard storage | 22 | Rail | Owned | | Hillsboro, TX | Precast concrete facility | 9 | Construction | Owned | | Kimball, NE | Threading, test, and inspection facility | 145 | Tubular and Energy | Owned | | Leming, TX | Threading, test, and inspection facility | 63 | Tubular and Energy | Owned | | Magnolia, TX | Threading facility and joint venture manufacturing facility | 35 | Tubular and Energy | Owned | | Morgantown, WV | Test and inspection facility | N/A | Tubular and Energy | 2018 | | Niles, OH | Rail fabrication, friction management products, and yard storage | 35 | Rail | Owned | | Petersburg, VA | Piling storage facility | 35 | Construction | Owned | | Pueblo, CO | Rail joint manufacturing facility | 9 | Rail | Owned | | Saint-Jean-sur-Richelieu, Quebec, Canada | Rail anchors and track spikes manufacturing plant | 17 | Rail | Owned | | Sheffield, United Kingdom | Track component and friction management products facility | N/A | Rail | 2019 | | Spokane, WA | CXT concrete tie plant | 13 | Rail | 2018 | | Spokane, WA | Precast concrete facility | 5 | Construction | 2018 | | Waverly, WV | Precast concrete facility | 85 | Construction | Owned | | Willis, TX | Protective coatings facility | 16 | Tubular and Energy | Owned | | Willis, TX | Measurement services facility | 68 | Tubular and Energy | Owned | Included in the table above are certain facilities leased by the Company for which there is no acreage included in the lease. For these properties a “N/A” has been included in the “Acres” column. Including the properties listed above, the Company has a total of 17 sales offices, including its headquarters in Pittsburgh, PA and 32 warehouses, plants, and yard facilities located throughout the United States, Canada, and Europe. The Company’s facilities are in good condition and suitable for the Company’s business as currently conducted and as currently planned to be conducted. ## Legal proceedings As filed, 330 characters. Information regarding the Company’s legal proceedings and other commitments and contingencies is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 Commitments and Contingent Liabilities, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 3. ## Management's discussion and analysis As filed, 73,195 characters. (Dollars in thousands, except share data unless otherwise noted) ### Executive Level Overview ### 2017 Developments and 2018 Outlook During 2017, we: - Increased net sales by $52,863, or 10.9%, to $536,377; - Generated net income of $4,113, or $0.39 per diluted share; - Incurred provisional tax expense of $1,790 related to the enactment of the U.S. Tax Cuts and Jobs Act; - Generated EBITDA (earnings before interest, taxes, depreciation, and amortization) of $35,953; (a) - Effectively managed working capital levels, resulting in $39,372 of net cash provided by operating activities; - Reduced borrowings by $29,600, including the payoff of our term loan; - Decreased selling and administrative expenses by $5,455, primarily from our successful 2016 workforce and operations restructuring; - Successfully completed a $1,800 building expansion at our Waverly, WV precast concrete facility allowing us to broaden our product capabilities; - Installed and maintained 285 trackside rail lubricator units as part of a Class 1 long-term service agreement; and - Increased new orders by 14.5% resulting in a backlog of $166,905, which is a 13.2% increase over the prior year end. *(a) The following table displays a reconciliation of this non-GAAP financial measure for the three-year periods ended December 31, 2017, 2016, and 2015. Adjusted EBITDA adjusts EBITDA for the 2016 and 2015 asset impairments. EBITDA and Adjusted EBITDA are financial metrics utilized by management to evaluate the Company’s performance on a comparable basis. Management believes that disclosure of these non-GAAP financial measures is useful to investors as an additional way to evaluate the Company’s performance.* | Adjusted EBITDA Reconciliation | Twelve Months Ended December 31, 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Net income (loss) | $4,113 | $(141,660) | $(44,445) | | Interest expense, net | 8,070 | 6,323 | 4,172 | | Income tax expense (benefit) | 3,929 | (5,509) | (6,132) | | Depreciation | 12,849 | 13,917 | 14,429 | | Amortization | 6,992 | 9,575 | 12,245 | | Total EBITDA | 35,953 | (117,354) | (19,731) | | Asset impairments | — | 135,884 | 80,337 | | Adjusted EBITDA | $35,953 | $18,530 | $60,606 | Throughout 2017, the Company saw strengthening results compared to our prior year, as many of the markets we serve continued their recovery, which ultimately led to several of our businesses outperforming against projections. During 2017 our Rail Products and Services segment was encouraged as the North American freight rail market began increasing spending related to the Company’s product and service offerings. As Class I rail carriers reported steady, and in some instances, lower capital spending compared to the prior year, we believe this spending has been directed toward the need for maintenance and other track infrastructure programs compared to rolling stock and locomotives, which drove our sales growth. The first half of 2017 had strengthening commodity markets which translated into increased commodity carloads for rail carriers compared to the prior year period. Rail carloads were up throughout 2017 primarily driven by intermodal activity. However, carloads do remain suppressed compared to historical levels due to the continuing energy industry shift away from coal to natural gas as well as declining rail shipments of crude oil and most other metals, ores, and agriculture products. Our Rail Distribution business has been particularly impacted as this division serves Class II railroads and the North American industrial rail market, which have experienced reduced project activity and pricing declines to remain competitive. Freight rail in North America also experienced moderate increases in coal carloads, however, coal shipments are not expected to return to peak levels in the near future. Spending in 2018 by the freight rail operators in North America is anticipated to increase from 2017 levels as the market is expected to experience continued growth, particularly within intermodal, as the trucking market tightens and operators look to further efficiencies within their infrastructures. Freight rail operators are prioritizing spending against safety improvement, operating efficiency, and other cost reduction activities. The Company continues to target products and solutions to help improve safety and operating efficiency as well as introduce services that contribute to extending the useful life of certain rail equipment and lowering maintenance costs for operators. Freight rail operators are expected to benefit from the need for intermodal networks to efficiently ship goods. Funding for transit rail projects in North America continued to improve through 2017. While our revenues from this market are always affected by swings in large projects from one year to the next, we continue to believe the transit market will grow over the long run, which was indicative by significant increases in new orders positioning us with a very strong backlog as we enter 2018. During 2017, we capitalized on opportunities with transit agencies who continue to expand to serve further geographic areas and passenger traffic. Management believes that the global transit market represents an attractive opportunity for future growth. Our recent investments in the U.K. continue to provide growth as passenger networks are extended, especially in the most congested areas. Substantial job wins continued throughout 2017 as investments in London and inter-city networks within the U.K. remain solid. While certain key steel price indices have shown recent increases, pricing in the markets we serve has continued to lag. Management enacted multiple strategies in an effort to maximize profit margins throughout the prolonged downturn in the North American freight rail market. As we exit this downturn, we believe our current cost structure in place reflected positive returns in 2017 and positions us to meet our increased 2018 projections. Should business activity be weaker than projected, we are better positioned to handle these changes. As we exited 2016, the Tubular and Energy Services segment began to see recovery from the struggling energy market it serves. Throughout 2017, we experienced increases in both our upstream and midstream order activity. We saw rig counts increase during the year, driving our growth in our upstream services. As a result, upstream sales have increased sequentially each quarter during the year, ending the year at almost double the prior year sales total. Although overall rig counts began to moderate towards the end of the year, the Company is encouraged by the impact of productivity that is driving well count per rig at a higher rate along with increased depths and lateral lengths of wells. The midstream market recovery, which tends to lag the upstream market, strengthened considerably throughout the year as orders in our Protective Coatings and Precision Measurement Systems businesses increased over 50% from the prior year. It is our continued belief that there are widespread needs across the U.S. for pipeline infrastructure in the long term, and new demand will be driven by already developed wells, future export potential, and transition from coal to natural gas plants. With 2018 projections showing U.S. rig counts continuing to grow, production increases to over ten million barrels per day, and futures trading at prices not seen since 2015, the Company anticipates the Tubular and Energy Services segment’s solid performance to continue as we move into 2018. Within our Construction Products segment, heavy civil construction projects as well as bridge spending experienced marginal decreases in 2017 as compared to the prior year levels. This decline was particularly felt in the second half of 2017. We entered 2018 with an improved backlog across all businesses within the segment, with the exception of Fabricated Bridge Products. Although our bridge division has not booked a mega project during 2017, it is not indicative of any weakness in our capabilities to secure grid decking business. Neither the dynamics of this market nor the number of structurally deficient, obsolete bridges have changed in a meaningful way. While Piling sales increased compared to the prior year, primarily from our commoditized piling products, the overall profit was reduced. This was due to managements strategic initiative to aggressively pursue targeted opportunities at a reduced margin level, impacting the short-term results but is anticipated to develop favorable long-term market share in a highly competitive segment. We are encouraged by our strong backlog as we enter 2018 with several new winnable projects in front of us along with the current administration’s emphasis on infrastructure, a healthier overall economy, and a rising price environment. The Precast Concrete Products business continued to show moderate growth during 2017. Along with the successful investment made at our West Virginia facility to improve capacity and efficiency, we have added revenue from reaching new markets and customers throughout the northeast U.S. as well as increased product offerings. We anticipate this market to grow at a slower pace, but we enter 2018 with increased backlog and improved order entry. Management intends to stay focused on prudent working capital management and operating cash flow to continue to pay down our outstanding debt. With the prior year restructuring activities being fully realized during 2017, we believe that the Company’s expenses and operating leverage now provide the agility to succeed in the cyclical markets in which we participate. Our long-term objective is to continue the modernization of the entire Company with the ongoing integration of our ERP system from which we can grow and leverage best in class business processes. ### UPRR Product Warranty Claim On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT, asserting, among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various incidental and consequential damages. The amended 2005 supply agreement provides that UPRR’s exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or otherwise contained a material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Company’s warranty does not apply to ties that (a) have been repaired or altered without the Company’s written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been improperly maintained or used contrary to the specifications for which such ties were produced. The amended 2005 supply agreement also continues to provide that the Company’s warranty is in lieu of all other express or implied warranties and that neither party shall be subject to or liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are inaccurately rated under concrete tie rating guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that UPRR in future years will be entitled to warranty replacement ties for virtually all of the Grand Island ties. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system. By Third Amended Scheduling Order dated September 26, 2017, a June 29, 2018 deadline for completion of discovery has been established with trial to proceed at some future date on or after October 1, 2018. The parties continued to conduct discovery, with various disputes that required and will likely require court resolution. The Company intends to continue to engage in discussions in an effort to resolve the UPRR matter. However, we cannot predict that such discussions will be successful, or that the results of the litigation with UPRR, or any settlement or judgment amounts, will reasonably approximate our estimated accruals for loss contingencies. Future potential costs pertaining to UPRR’s claims and the outcome of the UPRR litigation could result in a material adverse effect on our results of operations, financial condition, and cash flows. ### Year-to-date Results Comparison The segment gross profit measures presented within Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) constitute non-GAAP financial measures disclosed by management to provide investors and other users information to evaluate the performance of the Company’s segments on a more comparable basis to market trends and peers. These non-GAAP financial measures exclude significant cost allocations to the reportable segments: - Allows users to understand the operational performance of our reportable segments; - Provides greater comparability to other registrants with similar businesses and avoids possible non-comparability at the reportable segment pre-tax profit level resulting from our specific corporate cost allocations; and - Facilitates a clearer, market-based perspective on the strength or weakness of our reportable segments in their markets to better aid in investment decisions. In addition, these non-GAAP financial measures have historically been key metrics utilized by segment managers to monitor selling prices and quantities as well as production and service costs to better evaluate key profitability drivers and trends that may develop due to industry and competitive conditions. The following table reconciles the non-GAAP financial measures to the profitability of the segments reporting in accordance with GAAP: | Twelve months ended December 31, 2017 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total | | --- | ---: | ---: | ---: | ---: | | Reportable Segment Profit | $12,216 | $11,620 | $3,849 | $27,685 | | Segment and Allocated Selling & Administrative | 36,975 | 18,796 | 16,036 | 71,807 | | Amortization Expense | 3,698 | 151 | 3,143 | 6,992 | | Asset Impairments | — | — | — | — | | Non-GAAP Segment Gross Profit | $52,889 | $30,567 | $23,028 | $106,484 | | **Twelve months ended December 31, 2016** | Rail Products and Services | Construction Products | Tubular and Energy Services | Total | | Reportable Segment (Loss) Profit | $(26,228) | $8,189 | $(116,126) | $(134,165) | | Segment and Allocated Selling & Administrative | 40,696 | 18,739 | 17,978 | 77,413 | | Amortization Expense | 3,881 | 151 | 5,543 | 9,575 | | Asset Impairments | 32,725 | — | 103,159 | 135,884 | | Non-GAAP Segment Gross Profit | $51,074 | $27,079 | $10,554 | $88,707 | | **Twelve months ended December 31, 2015** | Rail Products and Services | Construction Products | Tubular and Energy Services | Total | | Reportable Segment Profit (Loss) | $27,037 | $12,958 | $(81,344) | $(41,349) | | Segment and Allocated Selling & Administrative | 44,204 | 20,969 | 15,520 | 80,693 | | Amortization Expense | 4,035 | 242 | 7,968 | 12,245 | | Asset Impairments | — | — | 80,337 | 80,337 | | Non-GAAP Segment Gross Profit | $75,276 | $34,169 | $22,481 | $131,926 | 24 ### Results of Operations | Net Sales: | Twelve Months Ended December 31, 2017 2016 2015 | Percent of Total Net Sales Twelve Months Ended December 31, 2017 2016 2015 | Percent Increase/(Decrease) 2017 vs. 2016 2016 vs. 2015 | | --- | ---: | ---: | ---: | | Rail Products and Services | $256,127 $239,127 $328,982 | 47.8% 49.5% 52.7% | 7.1% (27.3)% | | Construction Products | 161,801 145,602 176,394 | 30.2 30.1 28.2 | 11.1 (17.5) | | Tubular and Energy Services | 118,449 98,785 119,147 | 22.0 20.4 19.1 | 19.9 (17.1) | | Total net sales | $536,377 $483,514 $624,523 | 100.0% 100.0% 100.0% | 10.9% (22.6)% | | | **Twelve Months Ended December 31,** | **Non-GAAP / Reported Gross Profit Percentage Twelve Months Ended December 31,** | **Percent Increase/(Decrease)** | | | **2017** **2016** **2015** | **2017** **2016** **2015** | **2017 vs. 2016** **2016 vs. 2015** | | Gross Profit: | | | | | Non-GAAP Rail Products and Services | $52,889 $51,074 $75,276 | 20.6% 21.4% 22.9% | 3.6% (32.2)% | | Non-GAAP Construction Products | 30,567 27,079 34,169 | 18.9 18.6 19.4 | 12.9 (20.7) | | Non-GAAP Tubular and Energy Services | 23,028 10,554 22,481 | 19.4 10.7 18.9 | 118.2 (53.1) | | Non-GAAP Segment gross profit | 106,484 88,707 131,926 | | | | LIFO (expense) income | (2,009) 2,643 2,468 | (0.4) 0.5 0.4 | (176.0) 7.1 | | Other | (1,223) (994) (741) | (0.2) (0.2) (0.1) | (23.0) (34.1) | | Total gross profit | $103,252 $90,356 $133,653 | 19.2% 18.7% 21.4% | 14.3% (32.4)% | | | **Twelve Months Ended December 31,** | **Percent of Total Net Sales Twelve Months Ended December 31,** | **Percent Increase/(Decrease)** | | | **2017** **2016** **2015** | **2017** **2016** **2015** | **2017 vs. 2016** **2016 vs. 2015** | | Expenses: | | | | | Selling and administrative expenses | $80,521 $85,976 $92,648 | 15.0% 17.8% 14.8% | (6.3)% (7.2)% | | Amortization expense | 6,992 9,575 12,245 | 1.3 2.0 2.0 | (27.0) (21.8) | | Asset impairments | — 135,884 80,337 | — 28.1 12.9 | (100.0) 69.1 | | Interest expense | 8,377 6,551 4,378 | 1.6 1.4 0.7 | 27.9 49.6 | | Interest income | (307) (228) (206) | (0.1) — — | (34.6) (10.7) | | Equity (income) loss of nonconsolidated investments | (6) 1,290 413 | — 0.3 0.1 | (100.5) 212.3 | | Other income | (367) (1,523) (5,585) | (0.1) (0.3) (0.9) | 75.9 72.7 | | Total expenses | $95,210 $237,525 $184,230 | 17.8% 49.1% 29.5% | (59.9)% 28.9% | | Income (loss) before income taxes | $8,042 $(147,169) $(50,577) | 1.5% (30.4)% (8.1)% | 105.5% (191.0)% | | Income tax expense (benefit) | 3,929 (5,509) (6,132) | 0.7 (1.1) (1.0) | 171.3 10.2 | | Net income (loss) | $4,113 $(141,660) $(44,445) | 0.8% (29.3)% (7.1)% | 102.9% (218.7)% | 25 ### Fiscal 2017 Compared to Fiscal 2016 — Company Analysis Net sales of $536,377 for the year ended December 31, 2017 increased by $52,863, or 10.9%, compared to the prior year period. Each of the three segments reported overall year over year increases of 19.9%, 11.1%, and 7.1% for Tubular and Energy Services, Construction Products, and Rail Products and Services, respectively. Gross profit margin for 2017 was 19.2%, or 50 basis points (“bps”) higher than the prior year. The current year margin was significantly impacted by the recovery in the oil and gas market but partially offset by pricing pressure within the rail market. Included in the 2017 gross profit was $2,009 related to LIFO expense compared to $2,643 of income in the prior year. Selling and administrative expenses decreased by $5,455, or 6.3%, over the prior year period. The decrease was primarily attributable to the prior year restructuring activity of $2,827 and, to a lesser extent, the reduction of legal costs related to the UPRR matter of $1,250 and reduced insurance reserves of $1,075. The Company did not record asset impairments for the year ended December 31, 2017. Non-cash asset impairments of $135,884 were recorded during the year ended December 31, 2016. During the second quarter of 2016, the Company identified various indicators that suggested that there was a more likely than not probability that the carrying values of certain assets and reporting units were less than their respective fair values in the prior year. The impairment indicators included a rapid deterioration in actual performance against forecasts, downward revisions in projected financial results, declines in the Company’s market capitalization, and reductions in new order activity. Asset groups that had indicators of impairment were analyzed to determine if the carrying values were recoverable. Based upon the recoverability assessment, the Company determined that certain intangible assets and property, plant, and equipment within the Test and Inspection Services business unit and certain intangible assets within the Chemtec business unit were impaired. The impairment assessment was finalized during the three-month period ended September 30, 2016 resulting in a $59,786 definite-lived intangible asset impairment and a $14,956 property, plant, and equipment impairment that were recorded within the Tubular and Energy Services segment. The remaining asset groups tested for recoverability were substantially in excess of their respective carrying values. The Company performed an interim goodwill impairment review as of June 1, 2016 as a result of the adverse effect on certain reporting units of reduced capital spending and cost reduction priorities that oil and gas developers and railroad customers have enacted as well as the indicators previously noted. The forecasts for the Chemtec, Protective Coatings, and Rail Technologies business units did not indicate a timely recovery to support the carrying values of the business units. Upon finalization of the interim impairment assessment during the three-month period ended September 30, 2016, the Company recognized a goodwill impairment of $61,142, which represented the full impairment of goodwill related to the Chemtec and Protective Coatings business units and approximately 68% of the Rail Technologies goodwill value. The estimated fair values of the remaining reporting units were substantially in excess of the carrying value of those reporting units. Amortization expense for the year ended December 31, 2017 was reduced by $2,583 as a direct result of the prior year definite-lived intangible asset impairments. Other income was reduced by $1,156 compared to the prior year which was primarily due to foreign exchange losses of $804. The Company’s effective income tax rate for 2017 was 48.9%, compared to 3.7% in the prior year period. The Company’s 2017 effective income tax rate was significantly affected by the recently enacted U.S. tax legislation, including a provisional tax expense of $3,298 related to the one-time transition tax on earnings of foreign subsidiaries, partially offset by a $1,508 provisional tax benefit related to the remeasurement of deferred tax assets and liabilities at the 21% federal corporate tax rate. In addition, the Company realized domestic tax benefits previously offset by a valuation allowance. The Company's effective income tax rate in the prior year period included a valuation allowance of $29,719 against deferred tax assets, as well as deferred U.S. income taxes and foreign withholding taxes of $7,932 related to accumulated foreign earnings not permanently reinvested outside of the United States. Net income for the year ended December 31, 2017 was $4,113, or $0.39 per diluted share, compared to the net loss for the 2016 period of $141,660, or $13.79 per diluted share. ### Fiscal 2016 Compared to Fiscal 2015 – Company Analysis Net sales of $483,514 for the year ended December 31, 2016 decreased by $141,009 or 22.6% compared to the prior year period. All segments reported overall year over year declines of 27.3%, 17.5% and 17.1% for Rail Products and Services, Construction Products and Tubular and Energy Services, respectively. Gross profit margin for 2016 was 18.7%, or 271 basis points lower than the prior year. The current year margin was significantly impacted by the prolonged weakness in the oil and gas market and reduced activity in the rail market. Included in the 2016 gross profit was $2,643 related to the LIFO income compared to $2,468 in the prior year. Selling and administrative expenses decreased by $6,672, or 7.2%, over the prior year period. The decrease was primarily attributable to cost reduction initiatives related to personnel and travel costs of $2,982, incentive compensation reductions of $3,777, prior year acquisition and integration costs of $1,212 and other strategic spending reductions of $4,024, which were partially offset by increased litigation related costs for the UPRR matter of $2,671, the fourth quarter employment claim settlement expense of $900, and other miscellaneous items including ERP costs totaling $1,799. The Company recorded non-cash asset impairments of $135,884 during the year ended December 31, 2016. During the second quarter of 2016, the Company identified various indicators that suggested that there was a more likely than not probability that the carrying values of certain assets and reporting units were less than their respective fair values. The impairment indicators included a rapid deterioration in actual performance against forecasts, downward revisions in projected financial results, declines in the Company’s market capitalization, and reductions in new order activity. Asset groups that had indicators of impairment were analyzed to determine if the carrying values were recoverable. Based upon the recoverability assessment, the Company determined that certain intangible assets and property, plant, and equipment within the Test and Inspection Services division and certain intangible assets within the Chemtec division were impaired. The impairment assessment was finalized during the three-month period ended September 30, 2016 resulting in a $59,786 definite-lived intangible asset impairment and a $14,956 property, plant, and equipment impairment that were recorded within the Tubular and Energy Services segment. The remaining asset groups tested for recoverability were substantially in excess of their respective carrying values. The Company performed an interim goodwill impairment review as of June 1, 2016 as a result of the adverse effect on certain reporting units of reduced capital spending and cost reduction priorities that oil and gas developers and railroad customers have enacted as well as the indicators previously noted. The forecasts for the Chemtec, Protective Coatings, and Rail Technologies reporting units did not indicate a timely recovery to support the carrying values of the reporting units. Upon finalization of the interim impairment assessment during the three-month period ended September 30, 2016, the Company recognized a goodwill impairment of $61,142, which represented the full impairment of goodwill related to the Chemtec and Protective Coatings reporting units and approximately 68% of the Rail Technologies goodwill value. The estimated fair values of the remaining reporting units were substantially in excess of the carrying value of those reporting units. Other income during the prior year was favorably impacted by the sale of assets at our Tucson, AZ facility resulting in a gain of $2,279, realized and unrealized foreign exchange gains totaling $1,616, and other less significant income items. The Company’s effective income tax rate for 2016 was 3.7%, compared to 12.1% in the prior year period. The Company accrued deferred U.S. income taxes and foreign withholding taxes of $7,932 in the current year, related to accumulated foreign earnings that management no longer intends to permanently reinvest outside of the United States. The Company also recorded a valuation allowance of $29,719 against deferred tax assets in the current year. Net loss for the year ended December 31, 2016 was $141,660, or $13.79 per diluted share, compared to the net loss for the 2015 period of $44,445, or $4.33 per diluted share. ### Results of Operations — Segment Analysis ### Rail Products and Services | | Twelve Months Ended December 31, 2017 | 2016 | 2015 | Increase 2017 vs. 2016 | Decrease 2016 vs. 2015 | Percent Increase 2017 vs. 2016 | Percent Decrease 2016 vs. 2015 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Net Sales | $256,127 | $239,127 | $328,982 | $17,000 | $(89,855) | 7.1% | (27.3)% | | Segment Profit (Loss) | $12,216 | $(26,228) | $27,037 | $38,444 | $(53,265) | 146.6% | (197.0)% | | Segment Profit (Loss) Percentage | 4.8% | (11.0)% | 8.2% | 15.7% | (19.2)% | 143.5% | (233.5)% | ### Fiscal 2017 Compared to Fiscal 2016 Rail Products and Services segment sales increased $17,000, or 7.1%, compared to the prior year period. For 2017, our Rail Technologies business accounted for 4.1% of the segment increase. This business unit serves the global market with locations in North America and Europe, with each of our regions experiencing sales growth in the current year. Our Rail Products and CXT Concrete Ties business units accounted for 1.6% and 1.4%, respectively, of the segment increase. The Company was encouraged by the impact of North American carload traffic during 2017, particularly intermodal traffic levels, as well as capitalizing on opportunities with the expansion of the global transit market. The Rail Products and Services segment profit for 2017 was $12,216, and a segment profit margin of 4.8% compared to segment loss of $26,228, and a margin of (11.0)% for 2016. The increase was primarily attributable to the 2016 goodwill impairment of $32,725 related to the Rail Technologies business unit. Additionally, profit was favorably impacted by a $3,221 reduction in selling and administrative expenses in 2017, resulting from the successful 2016 restructuring and a 2017 gain on patent sale of $500. Non-GAAP gross profit increased by $1,815, or 3.6%, although the segment gross profit margin decreased by 80 bps principally attributable to declines in Rail Technologies and, to a lesser extent, Rail Products margins. During 2017, the Rail Products and Services segment increased new orders by 17.0% compared to the prior year. Each of the three business units within the segment had increases in new orders compared to 2016. The growth in new orders strengthened backlog by 9.7% compared to the prior year, ending 2017 at $68,850. ### Fiscal 2016 Compared to Fiscal 2015 Rail Products and Services segment sales decreased $89,855, or 27.3%, compared to the prior year period. For 2016, our Rail Distribution business accounted for approximately 47.9% of the decrease. This division serves Class II freight, rail and transit railroads and the North American industrial rail market, which experienced price and project declines. All rail divisions experienced reductions in sales over the prior year period attributable to continued weakness in the North American freight rail market in both commodity carloads as well as intermodal rail traffic. Additionally, due to the ongoing litigation with UPRR, our rail divisions experienced a decline in sales to UPRR of approximately $12,600. The Rail Products and Services segment loss for 2016 was $26,244, and a margin of (11.0%) compared to segment profit of $27,037, and a margin of 8.2% for 2015. The reduction was primarily attributable to the $32,725 goodwill impairment related to the Rail Technologies reporting unit along with reductions in gross profit due to the lower sales volumes. The non-GAAP gross profit decreased by $24,202, or 32.2%, and the corresponding margin decreased by 150 basis points principally attributable to declines in Rail Technologies and CXT Concrete Tie margins, which were negatively impacted by reduced volumes and the related deleveraging of the businesses. Our Transit Products business also was negatively impacted by a $1,224 pretax warranty charge related to a transit products project. During 2016, the Rail Products and Services segment had a reduction in new orders of 23.9% compared to the prior year. The Rail Distribution and CXT Concrete Tie businesses represented 31.4% of the current year decline and all other rail divisions experienced double digit declines relative to the prior year due to reductions in rail capital spending. ### Construction Products | | Twelve Months Ended December 31, 2017 | 2016 | 2015 | Increase 2017 vs. 2016 | Decrease 2016 vs. 2015 | Percent Increase 2017 vs. 2016 | Percent Decrease 2016 vs. 2015 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Net Sales | $161,801 | $145,602 | $176,394 | $16,199 | $(30,792) | 11.1% | (17.5)% | | Segment Profit | $11,620 | $8,189 | $12,958 | $3,431 | $(4,769) | 41.9% | (36.8)% | | Segment Profit Percentage | 7.2% | 5.6% | 7.3% | 1.6% | (1.7)% | 27.7% | (23.4)% | ### Fiscal 2017 Compared to Fiscal 2016 Construction Products segment sales increased $16,199, or 11.1%, compared to the prior year period, with increases in each of the three business units. The Fabricated Bridge sales increase was primarily driven by several large projects throughout the year, including the continuation of the Peace Bridge project. Piling sales were favorably impacted by strong demand within the sheet and pipe piling product lines. Lastly, Precast Concrete Products experienced increases in their buildings sales, which were primarily driven by orders from state agencies. The Construction Products segment profit of $11,620 increased by $3,431 compared to the prior year to 7.2% of net sales. While selling and administrative expenses remained consistent with the prior year, the segment's non-GAAP gross profit increased by $3,488, or 12.9%. The non-GAAP gross profit increase was primarily due to sales volume but was also favorably impacted by improved manufacturing efficiencies. For 2017, the Construction Products segment had an 8.0% decrease in new orders compared to the prior year period. The decrease primarily relates to the Fabricated Bridge business unit as the prior year included the $15,000 Peace Bridge order. This was partially offset by an increase within our Precast Concrete Products business unit. The segment's backlog at December 31, 2017 was $71,318, a 0.9% decrease as compared to the prior year. ### Fiscal 2016 Compared to Fiscal 2015 Construction Products segment sales decreased $30,792, or 17.5%, compared to the prior year period. The Piling business unit represented $24,319 of the reduction and Fabricated Bridge sales represented $8,943, which were both attributable to fewer large project opportunities in the market as compared to the prior year period as well as increased competition leading to fewer project wins. Throughout the year, lower scrap input prices and very low factory utilization rates kept steel prices very competitive. As a result, the Company did not participate in some of the typical projects we serve with pipe pile and H-pile, resulting in lower sales volumes and pricing. Partially offsetting these declines were increased Precast Concrete Product sales. The Construction Products segment profit of $8,189 declined by $4,769 compared to the prior year as a result of reduced gross profit attributable to lower sales volumes. The non-GAAP gross profit decreased by $7,090, or 20.7%, due to reductions in Piling products and Fabricated Bridge gross profit as a result of the decline in volumes. For 2016, the Construction Products segment had a 10.1% increase in new orders compared to the prior year period. The increase relates to significant project wins within the Fabricated Bridge business, and to a lesser extent, Precast Concrete Products. ### Tubular and Energy Services | | Twelve Months Ended December 31, 2017 | 2016 | 2015 | Increase 2017 vs. 2016 | Decrease 2016 vs. 2015 | Percent Increase 2017 vs. 2016 | Percent Decrease 2016 vs. 2015 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Net Sales | $118,449 | $98,785 | $119,147 | $19,664 | $(20,362) | 19.9% | (17.1)% | | Segment Profit (Loss) | $3,849 | $(116,126) | $(81,344) | $119,975 | $(34,782) | 103.3% | (42.8)% | | Segment Profit (Loss) Percentage | 3.2% | (117.6)% | (68.3)% | 120.8% | (49.3)% | 102.8% | (72.2)% | ### Fiscal 2017 Compared to Fiscal 2016 Tubular and Energy Services segment sales increased $19,664, or 19.9%, compared to the prior year period. The increase was primarily related to our Test and Inspection Services and Protective Coatings business units. These increases were partially offset by a reduction within our Precision Measurement Systems business unit. Tubular and Energy Services segment profit increased 103.3% to $3,849 in 2017 compared to a loss of $116,126 in 2016. The current year profit increase was primarily attributable to the prior year asset impairment of $103,159 and the $2,400 reduction in 2017 amortization expense due to the 2016 definite-lived intangible asset impairment. Also contributing to the increased profit was the reduction of selling and administrative expenses of $1,942, which was primarily related to the prior year restructuring activity. Non-GAAP gross profit increased by $12,474 which was favorably impacted by improved margins within each division of the segment and most significantly in our Test and Inspection Services business unit. During 2017, our Protective Coatings business unit incurred a $839 warranty charge which negatively impacted the segment profit. The Tubular and Energy Services segment had an increase in new orders of 53.4% compared to the prior year period. New orders increased during 2017 as both the upstream and midstream energy markets showed recovery during the year and most significantly impacted our Test and Inspection Services and Protective Coatings business units. The increase in new orders lead to a 109.6% increase in backlog, with a December 31, 2017 balance of $26,737. During 2017, the lease at our Birmingham, Alabama facility expired. The Company negotiated a lease renewal for this facility. The renewal is for a term of five years and is scheduled to expire July 31, 2022. ### Fiscal 2016 Compared to Fiscal 2015 Tubular and Energy Services segment sales decreased $20,362, or 17.1%, compared to the prior year period. The decrease related primarily to $15,141 from Test and Inspection Services and $10,488 from Protective Coatings partially offset by an increase of $6,782 related to Precision Measurement Systems. Tubular and Energy Services segment loss increased 42.8% to $116,126 in 2016 compared to a loss of $81,344 in 2015. The margin for this segment also decreased 492 basis points to (117.5%) compared to (68.3%) in the prior year period. The losses were largely attributable to impairments of $103,176 and $80,337 for 2016 and 2015, respectively. The non-GAAP gross profit declined by $11,927, or 53.1%, which was negatively impacted by our Test and Inspection Services and Protective Coatings businesses. Despite improved volumes during the 2016 fourth quarter, our Test and Inspection Services business was negatively impacted by the weakness in the upstream oil and gas market, where demand levels remained low, leading to heightened competition and reductions in service prices. Similarly, Protective Coatings sales declined significantly beginning in the third quarter 2016, which led to a temporary idling of the Birmingham facility. The facility has restarted operations in early October 2016. Non-GAAP gross profit was also negatively impacted by Precision Measurement Systems sales which produced lower margins due to competitive pressures as a result of the depressed midstream oil and gas market. The Tubular and Energy Services segment had a reduction in new orders of 36.7% compared to the prior year period. Orders were down due to a reduction in midstream oil and gas new project lettings, with our Protective Coatings division reporting a 56.7% decline. ### Liquidity and Capital Resources Total debt at December 31, 2017 and 2016 was $129,966 and $159,565, respectively, and was primarily comprised of borrowings on the revolving credit facility and, in 2016, the term loan. Our need for liquidity relates primarily to working capital requirements for operating activities, debt service payments, capital expenditures, and JV capital obligations. The change in cash and cash equivalents for the three-year periods ended December 31 are as follows: | | 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Net cash provided by operating activities | $39,372 | $18,405 | $56,172 | | Net cash used by investing activities | (4,687) | (7,930) | (205,575) | | Net cash (used) provided by financing activities | (29,703) | (12,519) | 134,289 | | Effect of exchange rate changes on cash and cash equivalents | 2,333 | (905) | (3,598) | | Net increase (decrease) in cash and cash equivalents | $7,315 | $(2,949) | $(18,712) | ### Cash Flows from Operating Activities During the year ended December 31, 2017, net cash provided by operating activities was $39,372 compared to $18,405 during the prior year period. For the twelve months ended December 31, 2017, income and adjustments to income from operating activities provided $23,679 compared to $24,261 in 2016. Working capital and other assets and liabilities provided $15,693 in the current period compared to a use of $5,856 during 2016. During the twelve months ended December 31, 2017, the Company received $9,946 and $1,827 from our 2016 and 2015 federal income tax refunds, respectively. The Company’s calculation of days sales outstanding at December 31, 2017 was 50 days compared to 53 days at December 31, 2016. We believe our receivables portfolio is strong. During the 2016 period, net cash provided by operating activities provided $18,405, a decrease of $37,767, compared to the 2015 period. For the year ended December 31, 2016, income and adjustments to income from operating activities provided $24,261 compared to $46,971 in 2015. Working capital and other assets and liabilities used $5,856 in 2016 compared to providing $9,201 in 2015. The reduction in cash flows from operations was largely impacted by working capital movement. ### Cash Flows from Investing Activities For the year ended December 31, 2017, the Company had capital expenditures of $6,149, a $1,515 reduction from 2016. The current year expenditures were primarily related to the purchase of 285 trackside rail lubricator units as part of a multiple year service contract with a Class I railroad and, to a lesser extent, the building expansion at our Waverly, WV Precast Concrete Products facility. The Company received proceeds of $1,462 from the sale of assets. These proceeds were primarily from the sale of our Protective Coatings field service division. Capital expenditures for the year ended December 31, 2016 were $7,664, a decrease of $7,249, compared to 2015 of $14,913. The 2016 expenditures related primarily to the Birmingham, AL inside diameter coating line upgrade and application development of the Company’s new enterprise resource planning system. Also, the Company received proceeds of $969 related to the sale of assets and loaned $1,235 to its LB Pipe JV. Expenditures for the year ended December 31, 2015 related primarily to upgrades to the outside diameter coating line of the Birmingham, AL coating facility as well as general plant and yard improvements across each segment. During 2015, the Company acquired Tew Plus, Ltd. (“Tew Plus”), Tew Holdings, Ltd. (“Tew”) and IOS. The total purchase price of these acquisitions, net of cash acquired, was $196,001 as of December 31, 2015. Investing activities during 2015 included capital expenditures of $14,913. The 2015 expenditures related primarily to the Birmingham, AL protective coatings facility upgrades, application development of a new enterprise resource planning system, and general plant and yard improvements across each segment. Other investing activities related to cash proceeds of $5,339 from the sale of assets. The sale of the Tucson, AZ concrete tie facility contributed $2,750 of the total proceeds. ### Cash Flows from Financing Activities The Company reduced its outstanding debt by $29,600 during the year ended December 31, 2017, including the payoff of the term loan. During the year ended December 31, 2016, the Company reduced outstanding debt by approximately $9,184, primarily from operational cash flows. The Company also paid $1,417 in financing fees in 2016 related to our 2016 credit agreement amendments. During the 2015 period, the Company had an increase in outstanding debt of approximately $142,326, primarily related to drawings against the revolving credit facility to fund domestic acquisition activity. The Company withholds shares from employees to pay their withholding taxes in connection with the vesting of restricted stock awards. For the twelve months ended December 31, 2017, the Company withheld 7,277 shares having a value of approximately $103 to satisfy tax obligations. The Company withheld 20,186 shares having a value of approximately $275 for the twelve-month period ended December 31, 2016 compared to withholding 25,340 shares having a value of approximately $1,114 in the 2015 period. Cash outflows related to dividends were $1,244 and $1,656 for the periods ended December 31, 2016 and 2015, respectively. Lastly, for the years ended December 31, 2016 and 2015, the Company purchased 5,000 and 80,512 shares of common stock for $67 and $1,587, respectively, under our existing share repurchase authorization. There were no share repurchases during the twelve months ended December 31, 2016. ### Financial Condition On November 7, 2016, the Company, its domestic subsidiaries, and certain of its Canadian subsidiaries entered into the Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as amended by the First Amendment dated June 29, 2016 (the “Amended and Restated Credit Agreement”), with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This Second Amendment modified the Amended and Restated Credit Agreement which had a maximum revolving credit line of $275,000. The Second Amendment reduced the permitted revolving credit borrowings to $195,000 and provides for additional term loan borrowing of $30,000 (“Term Loan”). The Term Loan was subject to quarterly straight line amortization until fully paid off upon the final payment on January 1, 2020. Furthermore, certain matters, including excess cash flow, asset sales, and equity issuances, triggered mandatory prepayments to the Term Loan. Term Loan borrowings were not available to draw upon following repayment. During 2017, the Company paid off the balance of the Term Loan. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Second Amendment or Amended and Restated Credit Agreement, as applicable. The Second Amendment further provides for modifications to the financial covenants as defined in the Amended and Restated Credit Agreement. The Second Amendment calls for the elimination of the Maximum Leverage Ratio covenant through the quarter ending June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ending September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility. The Second Amendment also includes a Minimum Last Twelve Months EBITDA (as defined by the Amendment) covenant (“Minimum EBITDA”). For the quarter ended December 31, 2016 through the quarter ended June 30, 2017, the Minimum EBITDA had to be at least $18,500. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement increases by various increments. The incremental Minimum EBITDA requirement for the twelve month period ended December 31, 2017 had to be at least $25,000. For the twelve months ended December 31, 2017, the EBITDA calculation as defined by the Amended and Restated Credit Agreement was $37,341. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the credit agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter ended December 31, 2017 and 1.25 to 1.00 for each quarter thereafter through the maturity of the credit facility. The final financial covenant included in the Second Amendment is a Minimum Liquidity covenant which calls for a minimum of $25,000 in undrawn availability on the revolving credit loan at all times through the quarter ending June 30, 2018. The Second Amendment includes several changes to certain non-financial covenants as defined in the Credit Agreement. Through the maturity date of the agreement, the Company has been prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Company’s stock has been decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000 from the prior year to $25,000 in the aggregate through the maturity date of the credit facility. The Second Amendment provides for the elimination of the three lowest tiers of the pricing grid that had previously been defined in the First Amendment. Upon execution of the Second Amendment through the quarter ending March 31, 2018, the Company will be locked into the highest tier of the pricing grid which provides for pricing of the prime rate plus 225 basis points on base rate loans and the applicable LIBOR rate plus 325 basis points on euro rate loans. For each quarter after March 31, 2018 and through the maturity date of the credit facility, the Company’s position on the pricing grid will be governed by a Minimum Net Leverage ratio which is the ratio of Consolidated Indebtedness less cash on hand in excess of $15,000 to EBITDA. If, after March 31, 2018 the Minimum Net Leverage ratio positions the Company on the lowest tier of the pricing grid, pricing will be the prime rate plus 150 basis points on base rate loans or the applicable LIBOR rate plus 250 basis points on euro rate loans. The Company generated $39,372 from cash flows from operations during 2017 that was utilized to fund capital expenditures and make payments against our term loan and revolving credit facility. At December 31, 2017, we had $37,678 in cash and cash equivalents and $41,105 of availability under the Second Amendment to the Second Amended and Restated Credit Agreement while carrying $129,966 in total debt. We believe this liquidity will provide adequate flexibility to operate the business in a prudent manner, continue to service our revolving debt facility, and be better leveraged to weather any future downturn in our markets. Non-domestic cash balances of $35,807 are held in various locations throughout the world. Management determined that the cash balances of our Canadian and United Kingdom subsidiaries exceeded our projected capital needs by $30,200, and does not intend to permanently reinvest such amounts outside of the United States. Accordingly, the Company has accrued the U.S. income tax and foreign withholding taxes associated with the repatriation of the excess cash. At December 31, 2017, the Company was in compliance with the covenants in the Second Amendment. To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. At December 31, 2017, the swap asset was $222 compared to a liability of $334 at December 31, 2016. ### Tabular Disclosure of Contractual Obligations A summary of the Company’s required payments under financial instruments and other commitments at December 31, 2017 are presented in the following table: | Contractual Cash Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | | --- | ---: | ---: | ---: | ---: | ---: | | Revolving credit facility (1) | $128,470 | $— | $128,470 | $— | $— | | Interest | 12,461 | 5,912 | 6,549 | — | — | | Other debt | 1,496 | 656 | 840 | — | — | | Pension plan contributions | 253 | 253 | — | — | — | | Operating leases | 17,811 | 4,483 | 5,616 | 2,946 | 4,766 | | U.S. transition tax (2) | 2,617 | 209 | 419 | 419 | 1,570 | | Purchase obligations not reflected in the financial statements | 31,320 | 31,320 | — | — | — | | Total contractual cash obligations | $194,428 | $42,833 | $141,894 | $3,365 | $6,336 | | **Other Financial Commitments** | | | | | | | Standby letters of credit | $425 | $425 | $— | $— | $— | (1) Repayments of outstanding loan balances are disclosed in Note 10 Long-Term Debt and Related Matters, to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report. (2) Further detail on the U.S. Tax Cuts and Jobs Act transition tax is disclosed in Note 14 Income Taxes, to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report. Other long-term liabilities include items such as deferred income taxes which are not contractual obligations by nature. The Company cannot estimate the settlement years for these items and has excluded them from the above table. Management believes its internal and external sources of funds are adequate to meet anticipated needs, including those disclosed above, for the foreseeable future. ### Off-Balance Sheet Arrangements The Company’s off-balance sheet arrangements include the operating leases, purchase obligations, and standby letters of credit disclosed within the contractual obligations table above in the “Liquidity and Capital Resources” section. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources. ### Backlog Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment: | | Backlog December 31, 2017 | December 31, 2016 | December 31, 2015 | | --- | ---: | ---: | ---: | | Rail Products and Services | $68,850 | $62,743 | $85,199 | | Construction Products | 71,318 | 71,954 | 45,371 | | Tubular and Energy Services | 26,737 | 12,759 | 34,137 | | Total Backlog | $166,905 | $147,456 | $164,707 | While a considerable portion of our business is backlog driven, certain businesses, including the Test and Inspection Services and the Rail Technologies business units, are not driven by backlog and therefore have insignificant levels of backlog throughout the year. ### Critical Accounting Policies and Estimates The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstance. Application of these accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies relate to the Company’s more significant judgments and estimates used in the preparation of its consolidated financial statements. There can be no assurance that actual results will not differ from those estimates. For a summary of our significant accounting policies, including those discussed below, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1 Summary of Significant Accounting Polices to the Consolidated Financial Statements. **Revenue Recognition -** The Company’s revenues are comprised of product and service sales as well as products and services provided under long-term contracts. For product and service sales, the Company recognizes revenue when the following criteria have been satisfied: persuasive evidence of a sales arrangement exists; product delivery and transfer of title to the customer has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Generally, product title passes to the customer upon shipment. In limited cases, title does not transfer and revenue is not recognized until the customer has received the products at its physical location. Revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold. Revenues for products under long-term contracts are recognized using the percentage-of-completion method. Sales and gross profit are recognized as work is performed based upon the proportion of actual costs incurred to estimated total project costs. Sales and gross profit are adjusted prospectively for revisions in estimated total project costs and contract values. For certain products, the percentage-of-completion is based upon actual labor costs as a percentage of estimated total labor costs. At the time a loss contract becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statement of Operations. **Business Combinations, Goodwill, and Intangible Assets -** We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a business is allocated to the underlying net assets of the acquired business based on estimates of their respective fair values. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected cash flows from customer relationships, the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio, future expected cash flows from developed technology, and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates, or actual results. Intangible assets are amortized over the expected life of the asset. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The judgments made in determining the estimated fair values assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Fair values and useful lives are determined based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset, and projected cash flows. Because this process involves management making estimates with respect to future revenues and market conditions and because these estimates also form the basis for the determination of whether or not an impairment charge should be recorded, these estimates are considered to be critical accounting estimates. Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test as of October 1st or more frequently when indicators of impairment are present. The goodwill impairment test involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss equal to the excess is recorded as a component of operations. The Company uses a combination of a discounted cash flow model (“DCF model”) and a market approach to determine the current fair values of the reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volume and pricing, costs to produce, and working capital changes. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges. The Company considers historical experience and available information at the time the fair values of its reporting units are estimated. However, actual amounts realized may differ from those used to evaluate the impairment of goodwill. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, the Company may be exposed to impairment losses that could be material to our results of operations. There were no goodwill impairments recorded during the year ended December 31, 2017. The Company recorded goodwill impairment charges of $61,142 and $80,337 during 2016 and 2015, respectively, related to reporting units within the Tubular and Energy Services and Rail Products and Services segment. At December 31, 2017, the Company had $19,785 of goodwill on its Consolidated Balance Sheet. Of the total, $14,638 related to the Rail Products and Services segment and $5,147 related to the Construction Products segment. The Company recorded a $32,725 partial goodwill impairment related to the Rail Products and Services segment during the year ended December 31, 2016. Based on considerations of current year financial results, including consideration of macroeconomic conditions, such as performance of the Company's stock price, the segment's fair value was estimated to be in excess of its carrying value at December 31, 2017. However, the previously recorded partial impairment included assumptions for certain market recoveries throughout the years ended December 31, 2018 and beyond. If these recoveries do not fully develop, the Rail Products and Services segment may require an incremental goodwill impairment. Additional information concerning the impairments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 4 Goodwill and Other Intangible Assets, to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7. **Intangible Assets, Long-Lived Assets, and Investments -** The Company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The applicable guidance for assets held for use requires that, if the sum of the future expected cash flows associated with an asset, undiscounted and without interest charges, is less than the carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment is the difference between the fair value of the asset and the carrying value of the asset. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. The accounting estimate related to asset impairments is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the Consolidated Statements of Operations. The fair value of the Company’s equity investments is dependent on the performance of the investee companies as well as volatility inherent in the external markets for these investments. In assessing potential impairment of these investments, we consider these factors as well as the forecasted financial performance of the investees. If these forecasts are not met and indicate an other-than-temporary decline in value, impairment charges may be required. During 2017, the Company recorded an other-than-temporary impairment of $413 to its investment in L B Pipe and Coupling Products, LLC joint venture as the asset is held for sale at fair value. No other material impairments of intangible assets, long-lived assets, or investments were recored during the period ended December 31, 2017. The Company recorded definite-lived intangible asset impairments of $59,786 and property, plant and equipment impairment of $14,956 for the year ended December 31, 2016. The impairments related to the Tubular and Energy Services segment. There were no material impairments of intangible assets, long-lived assets, or investments for the years ended December 31, 2015. **Product Warranty -** The Company maintains a current warranty for the repair or replacement of defective products. For certain manufactured products, an accrual is made on a monthly basis as a percentage of cost of sales. For long-term construction projects, a product warranty accrual is established when the claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims. The underlying assumptions used to calculate the product warranty accrual can change from period to period and are dependent upon estimates of the amount and cost of future product repairs or replacements. At December 31, 2017 and 2016, the product warranty reserve was $8,682 and $10,154, respectively. During the years ended December 31, 2017, 2016, and 2015, the Company recorded product warranty expense of $3,564, $2,524, and $1,794, respectively. For additional information regarding the Company’s product warranty, refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements, Commitments and Contingent Liabilities, included herein. **Contingencies and Litigation** - The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period. In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. When a probable, estimable exposure exists, the Company accrues an estimate of the probable costs for the resolution of these matters. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. During 2016, we recorded $900 in legal expense related to the anticipated settlement of an employment dispute. This settlement was finalized during 2017 for $797, resulting in an adjustment of $103. There were no such charges for the years ended December 31, 2015. Future results of operations could be materially affected by changes in our assumptions or the outcome of these proceedings. The Company’s operations are subject to national, state, foreign, and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, regulated materials and waste. These regulations impose liability for the costs of investigation, remediation, and damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Liabilities are recorded when remediation efforts are probable and the costs can be reasonably estimated. Estimates are not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Established reserves are periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 Commitments and Contingent Liabilities, to the Consolidated Financial Statements for additional information regarding the Company’s commitments and contingent liabilities. **Income Taxes -** The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by Financial Accounting Standard’s Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. This guidance requires management to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. The determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires management to make estimates and judgments of future financial results. The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and various other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters. The Company’s income tax rate is significantly affected by the tax rate on global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. At December 31, 2017, management does not intend to repatriate accumulated foreign earnings of $2,318. Should we decide to repatriate these accumulated foreign earnings, the Company would have to accrue additional income and withholding taxes in the period in which it is determined that the earnings will no longer be indefinitely invested outside the United States. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 14 Income Taxes, included herein for additional information regarding the Company’s deferred tax assets. The Company’s ability to realize these tax benefits may affect the Company’s reported income tax expense and net income. **New Accounting Pronouncements -** See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 Summary of Significant Accounting Policies, to the Consolidated Financial Statements, included herein for information regarding new accounting pronouncements. ## Market risk As filed, 2,408 characters. #### (Dollars in thousands) ### Interest Rate Risk In the ordinary course of business, the Company is exposed to interest rate risks that may adversely affect funding costs associated with its variable-rate debt. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward starting interest rate swap agreements, which effectively convert a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18 Fair Value Measurements, to the Consolidated Financial Statements included herein, for additional information. For the year ended December 31, 2017, a 1% change in the interest rate for variable rate debt as of December 31, 2017 would increase or decrease interest expense by approximately $1,425. The Company does not purchase or hold any derivative financial instruments for trading purposes. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately. The Company has entered into three forward starting LIBOR-based interest rate swap agreements with notional values totaling $50,000. At December 31, 2017, the interest rate swap asset was $222 compared to a liability of $334 at December 31, 2016. ### Foreign Currency Exchange Rate Risk The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-year period ended December 31, 2017. ## Controls and procedures As filed, 7,074 characters. ### Evaluation of Disclosure Controls and Procedures L.B. Foster Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a–15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the end of the period covered by this report. ### Managements’ Report on Internal Control Over Financial Reporting The management of L.B. Foster Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a–15(f). L.B. Foster Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Accordingly, even effective controls can provide only reasonable assurance with respect to financial statement preparation and presentation. There were no significant changes in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. L.B. Foster Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control - Integrated Framework (2013 Framework)*. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting at December 31, 2017. Ernst & Young LLP, the independent registered public accounting firm that also audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young’s attestation report on the Company’s internal control over financial reporting appears in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference. ### Report of Independent Registered Public Accounting Firm ### To the Stockholders and the Board of Directors of L.B. Foster Company and Subsidiaries ### Opinion on Internal Control over Financial Reporting We have audited L.B. Foster Company and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, L.B. Foster Company and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the index at Item 15(a) and our report dated February 28, 2018 expressed an unqualified opinion thereon. ### Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements’ Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. ### Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania February 28, 2018 Filed Feb 28, 2018. Source: SEC EDGAR, the filing index for accession 0000352825-18-000004. Last ingested by Listed: Nov 4, 2026, 19:02 ET. No prices; not investment advice.