# Foster L B Co: Form 10-Q for the period ended Mar 31, 2018

- Company: [Foster L B Co](/companies/fstr.md) (CIK 352825)
- Form: 10-Q
- Filed: 2018-05-02
- Accepted by EDGAR: May 2, 2018, 15:15 ET
- Period: 2018-03-31
- Accession: 0000352825-18-000015
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/352825/000035282518000015/lbfosterco10-qq12018.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/352825/000035282518000015/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $122.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | $22.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $20.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $2.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $525.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$2.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | −$0.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 10,351,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $2.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $723.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $310.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $11.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $201.5m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $373.4m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $99.7m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2018-03-31 | $145.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,992 characters.

### (Dollars in thousands, except share data)

### Forward-Looking Statements

*This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Sentences containing words such as “believe,” “intend,” “plan,” “may,” “expect,” “should,” “could,” “anticipate,” “estimate,” “predict,” “project,” or their negatives, or other similar expressions of a future or forward-looking nature generally should be considered forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q may concern, among other things, L.B. Foster Company’s (the “Company’s”) expectations relating to our strategy, goals, projections, and plans regarding our financial position, liquidity, capital resources, and results of operations; the outcome of litigation and product warranty claims; decisions regarding our strategic growth initiatives, market position, and product development; all of which are based on current estimates that involve inherent risks and uncertainties. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory, and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control. The Company cautions readers that various factors could cause the actual results of the Company to differ materially from those indicated by forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: environmental matters, including any costs associated with any remediation and monitoring; a resumption of the economic slowdown we experienced in previous years in the markets we serve; the risk of doing business in international markets; our ability to effectuate our strategy, including cost reduction initiatives, and our ability to effectively integrate acquired businesses and realize anticipated benefits; costs of and impacts associated with shareholder activism; a decrease in freight or passenger rail traffic; the timeliness and availability of materials from our major suppliers as well as the impact on our access to supplies of customer preferences as to the origin of such supplies, such as customers' concerns about conflict minerals; labor disputes; the continuing effective implementation of an enterprise resource planning system; changes in current accounting estimates and their ultimate outcomes; the adequacy of internal and external sources of funds to meet financing needs, including our ability to negotiate any additional necessary amendments to our credit agreement; the Company’s ability to manage its working capital requirements and indebtedness; domestic and international taxes, including estimates that may impact these amounts, including as a result of any interpretations, regulatory actions, and amendments to the Tax Cuts and Jobs Act (the “Tax Act”); foreign currency fluctuations; inflation; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union; sustained declines in energy prices; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; the ultimate number of concrete ties that will have to be replaced pursuant to the previously disclosed product warranty claim of the Union Pacific Railroad (“UPRR”) and an overall resolution of the related contract claims as well as the possible costs associated with the outcome of the lawsuit filed by the UPRR; the loss of future revenues from current customers; and risks inherent in litigation. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. Significant risks and uncertainties that may affect the operations, performance, and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors,” and elsewhere in our Annual Report on Form 10-K and our other periodic filings with the Securities and Exchange Commission.*

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

### General Overview

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

### Quarter-to-Date Results

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

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

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

| Three months ended March 31, 2018 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Reportable Segment Profit | $2,048 | $18 | $1,885 | $3,951 |
| Segment and Allocated Selling & Administrative | 8,904 | 3,977 | 3,554 | 16,435 |
| Amortization Expense | 961 | 38 | 786 | 1,785 |
| Non-GAAP Segment Gross Profit | $11,913 | $4,033 | $6,225 | $22,171 |

| Three months ended March 31, 2017 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Reportable Segment Profit (Loss) | $823 | $1,666 | $(680) | $1,809 |
| Segment and Allocated Selling & Administrative | 9,437 | 4,330 | 4,096 | 17,863 |
| Amortization Expense | 935 | 38 | 786 | 1,759 |
| Non-GAAP Segment Gross Profit | $11,195 | $6,034 | $4,202 | $21,431 |

25

| Net Sales: | Three Months Ended March 31, 2018 2017 | Percent of Total Net Sales Three Months Ended March 31, 2018 2017 | Percent Increase/ (Decrease) 2018 vs. 2017 |
| --- | ---: | ---: | ---: |
| Rail Products and Services | $62,170 $56,480 | 50.8% 47.6% | 10.1% |
| Construction Products | 28,900 37,322 | 23.6 31.4 | (22.6) |
| Tubular and Energy Services | 31,384 24,900 | 25.6 21.0 | 26.0 |
| Total net sales | $122,454 $118,702 | 100.0% 100.0% | 3.2% |
|  |  | Non-GAAP / Reported Gross Profit Percentage | Percent Increase/ (Decrease) |
|  | Three Months Ended | Three Months Ended |  |
|  | March 31, | March 31, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Gross Profit: |  |  |  |
| Non-GAAP Rail Products and Services | $11,913 $11,195 | 19.2% 19.8% | 6.4% |
| Non-GAAP Construction Products | 4,033 6,034 | 14.0 16.2 | (33.2) |
| Non-GAAP Tubular and Energy Services | 6,225 4,202 | 19.8 16.9 | 48.1 |
| Non-GAAP Segment gross profit | 22,171 21,431 |  |  |
| LIFO (expense) income | (164) 11 | (0.1) — | \*\* |
| Other | 21 (190) | — (0.2) | 111.1 |
| Total gross profit | $22,028 $21,252 | 18.0% 17.9% | 3.7% |
|  |  |  | Percent Increase/ (Decrease) |
|  |  | Percent of Total Net Sales |  |
|  | Three Months Ended | Three Months Ended |  |
|  | March 31, | March 31, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Expenses: |  |  |  |
| Selling and administrative expenses | $20,458 $19,227 | 16.7% 16.2% | 6.4% |
| Amortization expense | 1,785 1,759 | 1.5 1.5 | 1.5 |
| Interest expense | 1,958 2,108 | 1.6 1.8 | (7.1) |
| Interest income | (71) (56) | (0.1) — | 26.8 |
| Equity in loss of nonconsolidated investments | 3 200 | — 0.2 | (98.5) |
| Other (income) expense | (608) 5 | (0.5) — | \*\* |
| Total expenses | $23,525 $23,243 | 19.2% 19.6% | 1.2% |
| Loss before income taxes | $(1,497) $(1,991) | (1.2)% (1.7)% | 24.8% |
| Income tax expense | 525 431 | 0.4 0.4 | 21.8 |
| Net loss | $(2,022) $(2,422) | (1.7)% (2.1)% | 16.5% |

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

### First Quarter 2018 Compared to First Quarter 2017 – Company Analysis

Net sales of $122,454 for the period ended March 31, 2018 increased by $3,752, or 3.2%, compared to the prior year quarter. The change was attributable to increases of 26.0% and 10.1%, in Tubular and Energy Services and Rail Products and Services, respectively. This was partially offset by a 22.6% reduction in Construction Products.

Gross profit margin for the quarter ended March 31, 2018 was 18.0% or 10 basis points (“bps”) higher than the prior year quarter. The growth in gross profit margin was due to an increase in non-GAAP segment gross profit margin of 290 bps within Tubular and Energy Services. This was partially offset by reductions in non-GAAP segment gross profit margin of 220 bps and 60 bps within Construction Products and Rail Products and Services, respectively.

Selling and administrative expenses increased by $1,231 or 6.4% from the prior year. The increase was primarily driven by litigation costs related to the UPRR matter of $1,182.

Interest expense, net of interest income, decreased by $165, or 8.0%, as a result of the reduction in outstanding debt. Other income increased $613 which primarily relates to gains on foreign exchange as the United States Dollar has strengthened compared to the Canadian Dollar during the current period versus the prior year period.

The Company’s effective income tax rate for the three-month period ended March 31, 2018 was (35.1)%, compared to (21.6)% in the prior year quarter. For the three months ended March 31, 2018, the Company recorded a tax expense of $525, compared to $431 in the three months ended March 31, 2017. Due to the full valuation allowance on domestic deferred tax assets, the Company's tax provision for the three months ended March 31, 2018 does not reflect any tax benefit for domestic pre-tax losses, and is primarily comprised of taxes related to our Canadian and United Kingdom operations.

Net loss for the first quarter of 2018 was $2,022, or $0.20 per diluted share, compared to a net loss of $2,422, or $0.23 per diluted share, in the prior year quarter.

### Results of Operations – Segment Analysis

### Rail Products and Services

|  | Three Months Ended March 31, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $62,170 | $56,480 | $5,690 | 10.1% |
| Segment Profit | $2,048 | $823 | $1,225 | 148.8% |
| Segment Profit Percentage | 3.3% | 1.5% | 1.8% | 120.0% |

#### First Quarter 2018 Compared to First Quarter 2017

Rail Products and Services segment sales increased by $5,690, or 10.1%, compared to the prior year period. The sales increase was primarily driven by a $4,076 increase in our European business, which continued to capitalize on opportunities with transit agencies who are expanding to serve further geographic areas and increase passenger traffic. The growth was also attributable to our North American operations, which increased by $1,614, as Class 1 freight rail activity remained strong.

The Rail Products and Services segment profit increased by $1,225 to 3.3% of net sales. The increase was primarily attributable to a reduction in selling and administrative expenses of $533, or 5.6%, compared to the prior year. Non-GAAP gross profit increased by $718, or 6.4%, as a result of increased volume in both our North American and European markets.

During the current quarter, the Rail Products and Services segment had an increase in new orders of 10.2% compared to the prior year period. Additionally, backlog was $104,923 at March 31, 2018, an increase of 14.5%, compared to $91,655 at March 31, 2017. The Company is encouraged by continuing positive trends from increasing carloads in the North American freight rail market and strength in transit system projects expanding globally.

### Construction Products

|  | Three Months Ended March 31, 2018 | 2017 | Decrease 2018 vs. 2017 | Percent Decrease 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $28,900 | $37,322 | $(8,422) | (22.6)% |
| Segment Profit | $18 | $1,666 | $(1,648) | (98.9)% |
| Segment Profit Percentage | 0.1% | 4.5% | (4.4)% | (97.8)% |

#### First Quarter 2018 Compared to First Quarter 2017

Construction Products segment sales decreased by $8,422, or 22.6%, compared to the prior year period. Piling first quarter 2018 sales declined year over year due to lower new orders during the three months ended December 31, 2017 as compared to the three months ended December 31, 2016. Fabricated Bridge sales declined due to reduced activity on the Peace Bridge project compared to the prior year period. Partially offsetting the reductions was an increase in Precast Concrete Products, which continued to be favorably impacted by increasing building sales to federal and state agencies.

The Construction Products segment profit decreased by $1,648, or 98.9%. The decrease was primarily volume related within the Piling and Fabricated Bridge business unit, which was partially offset by decreased selling and administrative expenses of $353, or 8.2%. Non-GAAP gross profit decreased by $2,001, or 33.2%, which was a result of prior quarter order activity that reduced volume levels and produced a lower margin product mix.

During the quarter, the Construction Products segment had an increase in new orders of 3.0% compared to the prior year period. Ending backlog in the Construction segment increased by 8.3% to $85,713 from the prior year period. While sales and profit reductions were experienced during the quarter, the Company is encouraged by increased new orders and strong backlog.

### Tubular and Energy Services

|  | Three Months Ended March 31, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $31,384 | $24,900 | $6,484 | 26.0% |
| Segment Profit (Loss) | $1,885 | $(680) | $2,565 | 377.2% |
| Segment Profit (Loss) Percentage | 6.0% | (2.7)% | 8.7% | 322.2% |

#### First Quarter 2018 Compared to First Quarter 2017

Tubular and Energy Services segment sales increased by $6,484, or 26.0%, compared to the prior year period. The increase was due to improvements from each of the business units within the segment, as compared to the prior year period. This was supported by strong orders within both the upstream and midstream businesses.

Tubular and Energy Services segment profit increased by $2,565, or 377.2%, compared to the prior year quarter. The quarter was favorably impacted by a $542, or 13.2%, reduction in selling and administrative expenses. Non-GAAP gross profit increased by $2,023, or 48.1%, which was supported by growth in all business units within the segment.

The Tubular and Energy Services segment had an increase in new orders of 9.6% compared to the prior year period, which resulted in an increase in backlog of 21.1%. Orders for Test, Inspection, and Threading increased by 15.5% and Protective Coatings and Measurement Systems increased by 5.4%. The upstream oil and gas market continues to show signs of recovery. We continue to be encouraged by increased order activity in the midstream market as well.

### Other

#### Segment Backlog

Total Company backlog is summarized by business segment in the following table for the periods indicated:

|  | Backlog March 31, 2018 | December 31, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| Rail Products and Services | $104,923 | $68,850 | $91,655 |
| Construction Products | 85,713 | 71,318 | 79,150 |
| Tubular and Energy Services | 29,665 | 26,737 | 24,497 |
| Total Backlog | $220,301 | $166,905 | $195,302 |

While a considerable portion of our business is backlog-driven, certain product lines within the Rail Products and Services and Tubular and Energy Services segments are not driven by backlog and therefore have insignificant levels throughout the year.

#### Warranty

As of March 31, 2018, the Company maintained a total product warranty reserve of $8,706 for its estimate of all potential product warranty claims. Of this total, $7,630 reflects the current estimate of the Company’s exposure for potential concrete tie warranty claims. While the Company believes this is a reasonable estimate of its potential exposure related to identified concrete tie warranty matters, the Company may incur future charges associated with new customer claims or further development of information of existing customer claims. Thus, there can be no assurance that future potential costs pertaining to warranty claims will not have a material impact on the Company’s results of operations and financial condition. See Note 14. Commitments and Contingent Liabilities of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional information.

### Liquidity and Capital Resources

Total debt was $102,404 and $129,966 as of March 31, 2018 and December 31, 2017, respectively, and was primarily comprised of borrowings under our revolving credit facility.

Our need for liquidity relates primarily to working capital requirements for operations, capital expenditures, joint venture capital obligations, and debt service obligations.

The change in cash and cash equivalents for the periods ended March 31 are as follows:

|  | March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $2,591 | $10,748 |
| Net cash used by investing activities | (714) | (3,315) |
| Net cash used by financing activities | (27,873) | (4,397) |
| Effect of exchange rate changes on cash and cash equivalents | (698) | 369 |
| Net (decrease) increase in cash and cash equivalents | $(26,694) | $3,405 |

#### Cash Flow from Operating Activities

During the current 2018 three-month period, cash flows provided by operating activities were $2,591 compared to $10,748 during the prior year period. For the three months ended March 31, 2018, income and adjustments to income from operating activities provided $2,537 compared to $3,010 in the 2017 period. Working capital and other assets and liabilities provided $54 in the current period compared to $7,738 in the prior year period. The decline in cash flows provided by operating activities is primarily a result of the increase in bonus payments in the amount of $4,110 compared to the prior year and inventory increases of $3,822 in the first quarter of 2018 due to stronger anticipated revenue outlook for the second quarter of 2018.

The Company’s calculation for days sales outstanding at March 31, 2018 was 54 days compared to 50 days at December 31, 2018, and we believe our receivables portfolio is strong.

#### Cash Flow from Investing Activities

Capital expenditures for the three months ended March 31, 2018 and 2017 were $723 and $3,453, respectively. The current year expenditures relate to general plant and operational improvements. Expenditures for the three months ended March 31, 2017 related to expenditures related to rail assets installed as part of a new long-term service contract and, to a lesser extent, general plant and operational improvements. During the three months ended March 31, 2018, the Company received $9 in proceeds from the sale of certain property, plant, and equipment as compared to $138 in the prior year period.

#### Cash Flow from Financing Activities

During the three months ended March 31, 2018, the Company had a decrease in outstanding debt of $27,563, primarily related to payments against the revolving credit facility. This reduction of debt was facilitated by the repatriation of $24,693 in excess cash from our international locations. During the three months ended March 31, 2017, the Company had a decrease in outstanding debt of $4,300, primarily related to payments against the revolving credit facility. Treasury stock acquisitions represent income tax withholdings from employees in connection with the vesting of restricted stock awards.

#### Financial Condition

As of March 31, 2018, we had $10,984 in cash and cash equivalents and a domestic credit facility with $68,502 of net availability while we had $102,404 in total debt. We believe this liquidity will provide the flexibility to operate the business in a prudent manner, and enable us to continue to service our revolving credit facility.

Our cash management priority continues to be short-term maturities and the preservation of our principal balances. Approximately $10,665 of our cash and cash equivalents was held in non-domestic bank accounts.

On November 7, 2016, the Company, its domestic subsidiaries, and certain of its Canadian subsidiaries entered into the Second Amendment (the “Second Amendment”) to the Second Amended and Restated Credit Agreement dated March 13, 2015 and as amended by the First Amendment dated June 29, 2016 (the “Amended and Restated Credit Agreement”), with PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company. This Second Amendment modified the Amended and Restated Credit Agreement, which had a maximum revolving credit line of $275,000. The Second Amendment reduced the permitted revolving credit borrowings to $195,000 and provided for additional term loan borrowings of $30,000 (the “Term Loan”). 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 provided for modifications to the financial covenants as defined in the Amended and Restated Credit Agreement. The Second Amendment calls for the elimination of the Maximum Leverage Ratio covenant through the quarter ending June 30, 2018. After that period, the Maximum Gross Leverage Ratio covenant will be reinstated to require a maximum ratio of 4.25 Consolidated Indebtedness to 1.00 Gross Leverage for the quarter ending September 30, 2018, and 3.75 to 1.00 for all periods thereafter until the maturity date of the credit facility. The Second Amendment also includes a Minimum Last Twelve Months EBITDA (as defined by the Amendment) covenant (“Minimum EBITDA”). For the quarter ended December 31, 2016 through the quarter ended June 30, 2017, the Minimum EBITDA must be at least $18,500. For each quarter thereafter, through the quarter ending June 30, 2018, the Minimum EBITDA requirement will increase by various increments. The incremental Minimum EBITDA requirement for the period ended March 31, 2018 must be at least $29,000. During the first quarter ended March 31, 2018, the rolling 12-month EBITDA calculation, as defined by the Amended and Restated Credit Agreement, was $38,214. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ending June 30, 2018, the Minimum EBITDA covenant will be eliminated through the maturity of the Amended and Restated Credit Agreement. The Second Amendment also includes a Minimum Fixed Charge Coverage Ratio covenant. The covenant represents the ratio of the Company’s fixed charges to the last twelve months of EBITDA, and is required to be a minimum of 1.00 to 1.00 through the quarter 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 Amended and Restated Credit Agreement. Through the maturity date of the loan, the Company is now prohibited from making any future acquisitions. The limitation on permitted annual distributions of dividends or redemptions of the Company’s stock was decreased from $4,000 to $1,700. The aggregate limitation on loans to and investments in non-loan parties was decreased from $10,000 to $5,000. Furthermore, the limitation on asset sales has been decreased from $25,000 annually with a carryover of up to $15,000 from the prior year to $25,000 in the aggregate through the maturity date of the credit facility.

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

To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. At March 31, 2018, the swap asset was $955 compared to $222 as of December 31, 2017.

### Cost in Excess of Net Assets Acquired

At March 31, 2018, L.B. Foster had $20,129 of goodwill on its Condensed Consolidated Balance Sheet. Of the total, $14,982 related to the Rail Products and Services segment and $5,147 related to the Construction Products segment. Goodwill is reviewed annually in the fourth quarter of each year for impairment or more frequently if impairment indicators arise. The Company recorded a $32,725 partial goodwill impairment related to the Rail Products and Services segment during the year ended December 31, 2016. Based on considerations of current year financial results, including consideration of macroeconomic conditions, such as performance of the Company’s stock price, we do not believe that it is more-likely-than-not that the fair values of these reporting units have decreased below their carrying values at March 31, 2018. Consequently, management concluded that none of the Company’s reporting units experienced any triggering event that would have required an interim goodwill impairment analysis at March 31, 2018. However, the previously recorded partial impairment included assumptions for certain market recoveries throughout the year ending December 31, 2018; if these recoveries do not fully develop, the Rail Products and Services segment may require an incremental goodwill impairment.

### Critical Accounting Policies

The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that, in its opinion, is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to reach opinions regarding estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has reached its opinions regarding the best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. We have updated our revenue recognition policies since December 31, 2017, in conjunction with our adoption of Accounting Standards Codification 606, “Revenue from Contracts with Customers” (“ASC 606”) as further described in Note 3. Revenue of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. A summary of the Company’s critical accounting policies and estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

### Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include operating leases, purchase obligations, and standby letters of credit. A schedule of the Company’s required payments under financial instruments and other commitments as of December 31, 2017 is included in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. There were no material changes to these off-balance sheet arrangements during the current quarter. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.

## Market risk

As filed, 2,391 characters.

### Interest Rate Risk

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

For the three months ended March 31, 2018, a 1% change in the interest rate for variable rate debt as of March 31, 2018 would increase or decrease interest expense by approximately $330.

The Company does not purchase or hold any derivative financial instruments for trading purposes. It does enter into interest rate hedges to reduce the risk in the variability of interest rate fluctuations. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in the value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.

As of March 31, 2018 and December 31, 2017, the Company recorded a current asset of $955 and $222, respectively, related to its LIBOR-based interest rate swap agreements.

### Foreign Currency Exchange Rate Risk

The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-month periods ended March 31, 2018 and 2017.

## Controls and procedures

As filed, 2,806 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2018. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective such that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the chief executive officer, chief financial officer, or person performing such functions, as appropriate to allow timely decisions regarding disclosure.

### Changes in Internal Control Over Financial Reporting

On January 1, 2018, the Company adopted the standards of Accounting Standards Codification 606, “Revenue from Contracts with Customers” (“ASC 606”). The adoption of ASC 606 had an immaterial effect on our financial statements, but required the Company to implement changes to our processes related to revenue recognition and the control activities within them. This included the development of new policies and procedures based on the five-step model provided in ASC 606, ongoing contract review processes, and implementation of processes to obtain information to the new disclosure requirements. There were no other changes to our “internal control over financial reporting” (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

### PART II. OTHER INFORMATION

### (Dollars in thousands, except share data)

## Risk factors

As filed, 1,077 characters.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017. You should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 28, 2018, which could materially affect our business, financial condition, financial results, or future performance. The risks described in our Annual Report on Form 10-K and quarterly reports on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known or that we currently deem to be immaterial may also materially affect our business, financial condition, and/or results of operations. Our earnings and sales could be affected by changes to international trade agreements in North America and elsewhere, including potential increases of import tariffs. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin, and net earnings.

Filed May 2, 2018.
Source: SEC EDGAR, the filing index for accession 0000352825-18-000015. Last ingested by Listed: Nov 4, 2026, 19:02 ET. No prices; not investment advice.