# Foster L B Co: Form 10-Q for the period ended Jun 30, 2018

- Company: [Foster L B Co](/companies/fstr.md) (CIK 352825)
- Form: 10-Q
- Filed: 2018-07-31
- Accepted by EDGAR: Jul 31, 2018, 09:19 ET
- Period: 2018-06-30
- Accession: 0000352825-18-000034
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/352825/000035282518000034/fstr-20180630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/352825/000035282518000034/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $172.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $295.3m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Gross profit | 3 months, 2018-04-01 to 2018-06-30 | $32.5m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-01-01 to 2018-06-30 | $54.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $23.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-01-01 to 2018-06-30 | $43.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | $12.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | $16.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $1.7m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $3.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $673.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $1.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $4.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $2.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.47 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.48 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 10,484,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 10,477,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $7.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $1.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2018-01-01 to 2018-06-30 | $310.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-06-30 | $13.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $223.4m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $387.6m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $114.4m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2018-06-30 | $149.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,908 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” (“MD&A”). 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 for the year ending December 31, 2017 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 transportation and energy infrastructure with locations in North America and Europe. The Company is comprised of three operating segments: Rail Products and Services, Construction Products, and Tubular and Energy Services.

The segment profitability measures presented within the MD&A tables include non-GAAP segment gross profit because management believes that information provides investors and other users useful information to evaluate the performance of the Company’s segments on a more comparable basis to market trends and peers. Management believes that 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 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.

### Results of the Quarter

| Three months ended June 30, 2018 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Segment profit | $5,308 | $2,857 | $4,545 | $12,710 |
| Segment and allocated selling and administrative | 10,202 | 4,185 | 4,331 | 18,718 |
| Amortization expense | 952 | 37 | 786 | 1,775 |
| Non-GAAP segment gross profit | $16,462 | $7,079 | $9,662 | $33,203 |

| Three months ended June 30, 2017 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Segment profit (loss) | $3,579 | $5,105 | $(126) | $8,558 |
| Segment and allocated selling and administrative | 9,577 | 3,883 | 4,560 | 18,020 |
| Amortization expense | 872 | 37 | 786 | 1,695 |
| Non-GAAP segment gross profit | $14,028 | $9,025 | $5,220 | $28,273 |

25

| Net Sales: | Three Months Ended June 30, 2018 2017 | Percent of Total Net Sales Three Months Ended June 30, 2018 2017 | Percent Increase/ (Decrease) 2018 vs. 2017 |
| --- | ---: | ---: | ---: |
| Rail Products and Services | $91,884 $69,347 | 53.1% 47.9% | 32.5% |
| Construction Products | 42,207 45,465 | 24.4 31.4 | (7.2) |
| Tubular and Energy Services | 38,799 30,048 | 22.5 20.7 | 29.1 |
| Total net sales | $172,890 $144,860 | 100.0% 100.0% | 19.3% |
|  |  | Non-GAAP / Reported Gross Profit Percentage | Percent Increase/ (Decrease) |
|  | Three Months Ended | Three Months Ended |  |
|  | June 30, | June 30, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Gross Profit: |  |  |  |
| Non-GAAP Rail Products and Services | $16,462 $14,028 | 17.9% 20.2% | 17.4% |
| Non-GAAP Construction Products | 7,079 9,025 | 16.8 19.9 | (21.6) |
| Non-GAAP Tubular and Energy Services | 9,662 5,220 | 24.9 17.4 | 85.1 |
| Non-GAAP Segment gross profit | 33,203 28,273 |  |  |
| LIFO expense | (549) (192) | (0.3) (0.1) | 185.9 |
| Other | (140) (345) | (0.1) (0.2) | 59.4 |
| Total gross profit | $32,514 $27,736 | 18.8% 19.1% | 17.2% |
|  |  |  | Percent Increase/ (Decrease) |
|  |  | Percent of Total Net Sales |  |
|  | Three Months Ended | Three Months Ended |  |
|  | June 30, | June 30, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Expenses: |  |  |  |
| Selling and administrative expenses | $23,368 $20,578 | 13.5% 14.2% | 13.6% |
| Amortization expense | 1,775 1,695 | 1.0 1.2 | 4.7 |
| Interest expense | 1,654 2,181 | 1.0 1.5 | (24.2) |
| Interest income | (24) (54) | — — | 55.6 |
| Equity in income of nonconsolidated investments | — (145) | — (0.1) | 100.0 |
| Other expense (income) | 128 (18) | 0.1 — | \*\* |
| Total expenses | $26,901 $24,237 | 15.6% 16.7% | 11.0% |
| Income before income taxes | $5,613 $3,499 | 3.2% 2.4% | 60.4% |
| Income tax expense | 673 475 | 0.4 0.3 | 41.7 |
| Net income | $4,940 $3,024 | 2.9% 2.1% | 63.4% |

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

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

Net sales of $172,890 for the quarter ended June 30, 2018 increased by $28,030, or 19.3%, compared to the prior year quarter. The change was attributable to increases of 32.5% and 29.1%, in Rail Products and Services and Tubular and Energy Services, respectively. This was partially offset by a 7.2% reduction in Construction Products sales.

Gross profit increased $4,778 compared to the prior year quarter to $32,514 for the quarter ended June 30, 2018. Gross profit margin for the quarter ended June 30, 2018 was 18.8%, or 30 basis points (“bps”) lower than the prior year quarter. The reduction in gross profit margin was primarily due to declines in non-GAAP segment gross profit margin of 310 bps and 230 bps within Construction Products and Rail Products and Services, respectively. The decreases were partially offset by an increase in non-GAAP segment gross profit margin of 750 bps within Tubular and Energy Services.

Selling and administrative expenses increased by $2,790 or 13.6% from the prior year. The rise was primarily driven by increases in personnel-related expenses of $1,981 and litigation costs related to the UPRR matter of $1,622. These increases were partially offset by a reduction in bad debt expense of $527. As a percent of sales, selling and administrative expenses declined 70 bps compared to the prior year period.

Interest expense, net of interest income, decreased by $497, or 23.4%, as a result of the reduction in outstanding debt as well as an interest rate at the lowest tier within the interest rate spread under our credit facility agreement. Other expense increased $146, which primarily relates to the $269 loss on the sale of land during the current quarter.

The Company’s effective income tax rate for the three-month period ended June 30, 2018 was 12.0%, compared to 13.6% in the prior year quarter. For the three months ended June 30, 2018, the Company recorded a tax expense of $673, compared to $475 in the three months ended June 30, 2017. The Company's tax provision for the three months ended June 30, 2018 is primarily comprised of taxes related to our Canadian and United Kingdom operations.

Net income for the second quarter of 2018 was $4,940, or $0.47 per diluted share, compared to net income of $3,024, or $0.29 per diluted share, in the prior year quarter.

### Results of Operations – Segment Analysis

### Rail Products and Services

|  | Three Months Ended June 30, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $91,884 | $69,347 | $22,537 | 32.5% |
| Segment profit | $5,308 | $3,579 | $1,729 | 48.3% |
| Segment profit percentage | 5.8% | 5.2% | 0.6% | 11.9% |

#### Second Quarter 2018 Compared to Second Quarter 2017

The Rail Products and Services segment sales increased by $22,537, or 32.5%, compared to the prior year period. The sales increase was driven by both our Rail Technologies and Rail Products businesses of $12,604 and $9,933, respectively. The segment continued to capitalize on opportunities with transit agencies who are expanding to serve further geographic areas and increase passenger traffic both domestically and in Europe. The growth was also attributable to North American Class 1 freight rail spending as activity continued to remain strong through the quarter.

The Rail Products and Services segment profit increased by $1,729 to 5.8% of net sales. The increase was primarily attributable to non-GAAP gross profit which increased by $2,434, or 17.4%, as a result of increased volume in both our North American and European markets. Selling and administrative expenses as a percent of sales were reduced 270 bps compared to the prior year quarter.

During the current quarter, the Rail Products and Services segment had an increase in new orders of 110.3% compared to the prior year period. Additionally, backlog was $126,856 at June 30, 2018, an increase of 61.7%, compared to $78,460 at June 30, 2017. The Company continues to be encouraged by 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 June 30, 2018 | 2017 | Decrease 2018 vs. 2017 | Percent Decrease 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $42,207 | $45,465 | $(3,258) | (7.2)% |
| Segment profit | $2,857 | $5,105 | $(2,248) | (44.0)% |
| Segment profit percentage | 6.8% | 11.2% | (4.5)% | (39.7)% |

#### Second Quarter 2018 Compared to Second Quarter 2017

The Construction Products segment sales decreased by $3,258, or 7.2%, compared to the prior year period. Piling sales declined year over year as the Company continued to experience declining new orders within this market. Partially offsetting the reduction was an increase in Precast Concrete Products, which continued to be favorably impacted by increasing precast building sales to federal and city agencies.

The Construction Products segment profit decreased by $2,248, or 44.0%. The decrease was related to our Piling and Fabricated Bridge business unit. Non-GAAP gross profit decreased by $1,946, or 21.6%, which was primarily related to aggressive market conditions impacting pricing on first quarter 2018 order activity that was fulfilled during the second quarter of 2018 within Piling. The Fabricated Bridge decline was impacted by a project mix that did not include a mega project, such as the Peace Bridge project in the 2017 period. Partially offsetting the decrease was a $609, or 18.9%, increase in Precast Concrete Products non-GAAP gross profit.

During the quarter, the Construction Products segment had a decrease in new orders of 5.4% compared to the prior year period. While sales and profit reductions were experienced during the quarter, the Company continues to be encouraged by its strong backlog.

### Tubular and Energy Services

|  | Three Months Ended June 30, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $38,799 | $30,048 | $8,751 | 29.1% |
| Segment profit (loss) | $4,545 | $(126) | $4,671 | 3,707.1% |
| Segment profit (loss) percentage | 11.7% | (0.4)% | 12.1% | 2,893.6% |

#### Second Quarter 2018 Compared to Second Quarter 2017

Tubular and Energy Services segment sales increased by $8,751, or 29.1%, 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 $4,671 compared to the prior year quarter. The quarter was favorably impacted by a $229, or 5.0%, reduction in selling and administrative expenses, which was partially offset by a $269 loss on the sale of land during the quarter. Non-GAAP gross profit increased by $4,442, or 85.1%, which was supported by growth in both our upstream and midstream offerings.

The Tubular and Energy Services segment had an increase of less than 1.0% in new orders compared to the prior year period. Orders for Test, Inspection, and Threading increased by 17.0% and Protective Coatings and Measurement Systems decreased by 10.9%. The Company remains encouraged as the upstream and midstream oil and gas markets continue to recover.

### Six Month Results

| Six months ended June 30, 2018 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Segment profit | $7,356 | $2,875 | $6,430 | $16,661 |
| Segment and allocated selling and administrative | 19,106 | 8,162 | 7,885 | 35,153 |
| Amortization expense | 1,913 | 75 | 1,572 | 3,560 |
| Non-GAAP segment gross profit | $28,375 | $11,112 | $15,887 | $55,374 |

| Six months ended June 30, 2017 | Rail Products and Services | Construction Products | Tubular and Energy Services | Total |
| --- | ---: | ---: | ---: | ---: |
| Segment profit (loss) | $4,402 | $6,771 | $(806) | $10,367 |
| Segment and allocated selling and administrative | 19,014 | 8,213 | 8,656 | 35,883 |
| Amortization expense | 1,807 | 75 | 1,572 | 3,454 |
| Non-GAAP segment gross profit | $25,223 | $15,059 | $9,422 | $49,704 |

29

| Net Sales: | Six Months Ended June 30, 2018 2017 | Percent of Total Net Sales Six Months Ended June 30, 2018 2017 | Percent Increase/ (Decrease) 2018 vs. 2017 |
| --- | ---: | ---: | ---: |
| Rail Products and Services | $154,054 $125,827 | 52.2% 47.7% | 22.4% |
| Construction Products | 71,107 82,787 | 24.1 31.4 | (14.1) |
| Tubular and Energy Services | 70,183 54,948 | 23.7 20.9 | 27.7 |
| Total net sales | $295,344 $263,562 | 100.0% 100.0% | 12.1% |
|  |  | Non-GAAP / Reported Gross Profit Percentage | Percent Increase/ (Decrease) |
|  | Six Months Ended | Six Months Ended |  |
|  | June 30, | June 30, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Gross Profit: |  |  |  |
| Non-GAAP Rail Products and Services | $28,375 $25,223 | 18.4% 20.0% | 12.5% |
| Non-GAAP Construction Products | 11,112 15,059 | 15.6 18.2 | (26.2) |
| Non-GAAP Tubular and Energy Services | 15,887 9,422 | 22.6 17.1 | 68.6 |
| Non-GAAP Segment gross profit | 55,374 49,704 |  |  |
| LIFO expense | (713) (181) | (0.2) (0.1) | \*\* |
| Other | (119) (535) | — (0.2) | 77.8 |
| Total gross profit | $54,542 $48,988 | 18.5% 18.6% | 11.3% |
|  |  |  | Percent Increase/ (Decrease) |
|  |  | Percent of Total Net Sales |  |
|  | Six Months Ended | Six Months Ended |  |
|  | June 30, | June 30, |  |
|  | 2018 2017 | 2018 2017 | 2018 vs. 2017 |
| Expenses: |  |  |  |
| Selling and administrative expenses | $43,826 $39,805 | 14.8% 15.1% | 10.1% |
| Amortization expense | 3,560 3,454 | 1.2 1.3 | 3.1 |
| Interest expense | 3,612 4,289 | 1.2 1.6 | (15.8) |
| Interest income | (95) (110) | — — | 13.6 |
| Equity in loss of nonconsolidated investments | 3 55 | — — | (94.5) |
| Other income | (480) (13) | (0.2) — | \*\* |
| Total expenses | $50,426 $47,480 | 17.1% 18.0% | 6.2% |
| Income before income taxes | $4,116 $1,508 | 1.4% 0.6% | 172.9% |
| Income tax expense | 1,198 906 | 0.4 0.3 | 32.2 |
| Net income | $2,918 $602 | 1.0% 0.2% | \*\* |

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

### First Six Months 2018 Compared to First Six Months 2017 – Company Analysis

Net sales of $295,344 for the period ended June 30, 2018 increased by $31,782, or 12.1%, compared to the prior year period. The change was attributable to increases of 27.7% and 22.4%, in Tubular and Energy Services and Rail Products and Services, respectively. This was partially offset by a 14.1% reduction in Construction Products.

Gross profit increased $5,554 compared to the prior year quarter to $54,542 for the six months ended June 30, 2018. Gross profit margin for the six months ended June 30, 2018 was 18.5%, or 10 bps, lower than the prior year period. The decline in gross profit margin was due to a decrease in non-GAAP segment gross profit margin of of 260 bps and 160 bps within Construction Products and Rail Products and Services, respectively. This was partially offset by an increase in non-GAAP segment gross profit margin of 550 bps within Tubular and Energy Services.

Selling and administrative expenses increased by $4,021 or 10.1% from the prior year. The increase was primarily driven by changes in personnel-related expenses of $2,881 and litigation costs related to the UPRR matter of $2,790. The increase was partially offset by a reduction in bad debt expense of $1,248. As a percent of sales, selling and administrative expenses declined 30 bps compared to the prior year period.

Interest expense, net of interest income, decreased by $662, or 15.8%, as a result of the reduction in outstanding debt. Other income increased $467 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 six months ended June 30, 2018 was 29.1%, compared to 60.1% in the prior year period. For the six months ended June 30, 2018, the Company recorded a tax expense of $1,198, compared to $906 in the six months ended June 30, 2017. Due to the full valuation allowance on domestic deferred tax assets, the Company's tax provision for the six months ended June 30, 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 income for the six months ended June 30, 2018 was $2,918, or $0.28 per diluted share, compared to net income of $602, or $0.06 per diluted share, in the prior year period.

### Results of Operations – Segment Analysis

### Rail Products and Services

|  | Six Months Ended June 30, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $154,054 | $125,827 | $28,227 | 22.4% |
| Segment profit | $7,356 | $4,402 | $2,954 | 67.1% |
| Segment profit percentage | 4.8% | 3.5% | 1.3% | 36.5% |

#### First Six Months 2018 Compared to First Six Months 2017

Rail Products and Services segment sales increased by $28,227, or 22.4%, compared to the prior year period. The sales increase was primarily driven by a $14,620 increase in our North American operations, as transit rail infrastructure and Class 1 freight rail activity remained strong. The growth was also attributable to our European business, increasing $13,607, which continued to capitalize on opportunities with transit agencies who are expanding to serve further geographic areas and increase passenger traffic.

The Rail Products and Services segment profit increased by $2,954 to 4.8% of net sales. Non-GAAP gross profit increased by $3,152, or 12.5%, as a result of increased volume in both our North American and European markets. Cost containment favorably impacted segment profit as selling and administrative expenses as a percent of sales were reduced 270 bps compared to the prior year period.

During the six months ended June 30, 2018, the Rail Products and Services segment had an increase in new orders of 49.2% compared to the prior year period. Backlog was $126,856 at June 30, 2018, an increase of 61.7%, compared to $78,460 at June 30, 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

|  | Six Months Ended June 30, 2018 | 2017 | Decrease 2018 vs. 2017 | Percent Decrease 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $71,107 | $82,787 | $(11,680) | (14.1)% |
| Segment profit | $2,875 | $6,771 | $(3,896) | (57.5)% |
| Segment profit percentage | 4.0% | 8.2% | (4.1)% | (50.6)% |

#### First Six Months 2018 Compared to First Six Months 2017

Construction Products segment sales decreased by $11,680, or 14.1%, compared to the prior year period. Piling sales declined year over year due to lower new order activity through the first half of 2018. 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 city agencies.

The Construction Products segment profit decreased by $3,896, or 57.5%. The decrease was primarily within the Piling and Fabricated Bridge business unit, which was partially offset by decreased selling and administrative expenses. Non-GAAP gross profit decreased by $3,947, or 26.2%, which was primarily a result of aggressive market conditions impacting pricing on first quarter 2018 order activity that was fulfilled during the first six months of 2018 within Piling. Fabricated Bridge was impacted by project mix in the current year compared to the Peace Bridge mega project in 2017. Partially offsetting the reduction was a $970, or 21.5%, increase in Precast Concrete Products non-GAAP gross profit.

During the six months ended June 30, 2018, the Construction Products segment had a decrease in new orders of 1.0% compared to the prior year period. Ending backlog in the Construction segment increased by 9.1% to $82,405 from the prior year period. While sales and profit reductions were experienced during the period, the Company is encouraged by the strong backlog going into the second half of 2018.

### Tubular and Energy Services

|  | Six Months Ended June 30, 2018 | 2017 | Increase 2018 vs. 2017 | Percent Increase 2018 vs. 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $70,183 | $54,948 | $15,235 | 27.7% |
| Segment profit (loss) | $6,430 | $(806) | $7,236 | 897.8% |
| Segment profit (loss) percentage | 9.2% | (1.5)% | 10.6% | 724.6% |

#### First Six Months 2018 Compared to First Six Months 2017

Tubular and Energy Services segment sales increased by $15,235, or 27.7%, 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 continuing within the upstream businesses.

Tubular and Energy Services segment profit increased by $7,236 compared to the prior year. The period was favorably impacted by a $771, or 8.9%, reduction in selling and administrative expenses. Non-GAAP gross profit increased by $6,465, or 68.6%, which was supported by growth in all business units within the segment. The growth was a result of increases in both volume and margin.

The Tubular and Energy Services segment had an increase in new orders of 4.9% for the six months ended June 30, 2018 compared to the prior year period. Backlog remained flat as compared to the prior year period. Orders for Test, Inspection, and Threading increased by 16.2% while Protective Coatings and Measurement Systems decreased by 2.9%. The Company remains encouraged as the upstream and midstream oil and gas markets continue to recover.

### Other

#### Segment Backlog

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

|  | Backlog June 30, 2018 | December 31, 2017 | June 30, 2017 |
| --- | ---: | ---: | ---: |
| Rail Products and Services | $126,856 | $68,850 | $78,460 |
| Construction Products | 82,405 | 71,318 | 75,540 |
| Tubular and Energy Services | 21,991 | 26,737 | 22,023 |
| Total Backlog | $231,252 | $166,905 | $176,023 |

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 June 30, 2018, the Company maintained a total product warranty reserve of $8,705 for its estimate of all potential product warranty claims. Of this total, $7,668 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 $99,037 and $129,966 as of June 30, 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 June 30 are as follows:

|  | June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $7,902 | $29,921 |
| Net cash provided by (used in) investing activities | 270 | (4,454) |
| Net cash used by financing activities | (31,240) | (21,678) |
| Effect of exchange rate changes on cash and cash equivalents | (1,339) | 1,305 |
| Net (decrease) increase in cash and cash equivalents | $(24,407) | $5,094 |

#### Cash Flow from Operating Activities

During the current 2018 six-month period, cash flows provided by operating activities were $7,902 compared to $29,921 during the prior year period. For the six months ended June 30, 2018, income and adjustments to income from operating activities provided $13,211 compared to $11,053 in the 2017 period. Working capital and other assets and liabilities used $5,309 in the current period compared to providing $18,868 in the prior year period. The decline in cash flows provided by operating activities is primarily a result of the increase in accounts receivable of $10,109 from the increased sales level and inventory of $4,051 due to our stronger anticipated revenue outlook for the second half of 2018. During the six months ended June 30, 2017, the Company received $11,773 from its 2016 and 2015 tax refunds.

The Company’s calculation for days sales outstanding at June 30, 2018 was 46 days compared to 50 days at December 31, 2017, and we believe our receivables portfolio is strong.

#### Cash Flow from Investing Activities

Capital expenditures for the six months ended June 30, 2018 and 2017 were $1,816 and $4,597, respectively. The current year expenditures relate to general plant and operational improvements. Expenditures for the six months ended June 30, 2017 related to expenditures for rail assets installed as part of a new long-term service contract and, to a lesser extent, general plant and operational improvements. During the six months ended June 30, 2018, the Company received $2,086 in proceeds from the sale of certain property, plant, and equipment as compared to $143 in the prior year period.

#### Cash Flow from Financing Activities

During the six months ended June 30, 2018, the Company had a decrease in outstanding debt of $30,930, primarily related to payments against the revolving credit facility. This reduction of debt was facilitated by the repatriation of $24,693 in excess cash from our international locations. During the six months ended June 30, 2017, the Company had a decrease in outstanding debt of $21,581, 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 June 30, 2018, we had $13,271 in cash and cash equivalents and a domestic credit facility with $71,708 of net availability while we had $99,037 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 $12,408 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 ended 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 ended June 30, 2018, the Minimum EBITDA requirement will increase by various increments. During the second quarter ended June 30, 2018, the rolling 12-month EBITDA calculation, as defined by the Amended and Restated Credit Agreement, was $41,515. At June 30, 2018, the Minimum EBITDA requirement will be $31,000. After the quarter ended June 30, 2018, the Minimum EBITDA covenant was eliminated through the remainder 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 ended 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 June 30, 2018, the swap asset was $1,263 compared to $222 as of December 31, 2017.

### 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 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Tabular Disclosure of Contractual Obligations in the Company’s Annual Report on Form 10-K for the year ended December 31, 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, 2,385 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 six months ended June 30, 2018, a 1% change in the interest rate for variable rate debt as of June 30, 2018 would increase or decrease interest expense by approximately $618.

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 June 30, 2018 and December 31, 2017, the Company recorded a current asset of $1,263 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 six-month periods ended June 30, 2018 and 2017.

## Controls and procedures

As filed, 2,802 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 June 30, 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 six months ended June 30, 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, 2,893 characters.

Other than discussed below, 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.

***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. Federal, state, and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, and disclosure of personal information obtained from customers and individuals. The costs of compliance with, and other burdens imposed by, such data privacy laws and regulations, including those of the European Union and the United Kingdom which are, in some respects, more stringent than U.S. standards, could be significant. 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.

Filed Jul 31, 2018.
Source: SEC EDGAR, the filing index for accession 0000352825-18-000034. Last ingested by Listed: Nov 4, 2026, 19:02 ET. No prices; not investment advice.