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

(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, as updated and amended by Item 1A “Risk Factors,” in our Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission.

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

General Overview

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

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

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Third Quarter 2018 Compared to Third Quarter 2017 – Company Analysis

Net sales of $167,094 for the quarter ended September 30, 2018 increased by $35,602, or 27.1%, compared to the prior year quarter. The change was attributable to increases within each of our three segments. Rail Products and Services sales increased by 36.1%, Tubular and Energy Services sales increased by 35.5%, and Construction Products sales increased by 6.2%.

Gross profit increased $3,237 compared to the prior year quarter to $29,602 for the quarter ended September 30, 2018. Gross profit margin for the quarter ended September 30, 2018 was 17.7%, or 240 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 660 bps and 280 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 110 bps within Tubular and Energy Services.

Selling and administrative expenses increased by $1,444 or 7.1% from the prior year. The rise was primarily driven by increases in external service costs of $799 and personnel-related expenses of $750. As a percent of sales, selling and administrative expenses declined 240 bps compared to the prior year period.

Interest expense, net of interest income, decreased by $674, or 34.2%, 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 $704, which primarily relates to foreign exchange expense in the 2018 period compared to gains on the sale of certain assets in the 2017 period.

The Company’s effective income tax rate for the three months ended September 30, 2018 was (5.2)%, compared to (6.9)% in the prior year quarter. For the three months ended September 30, 2018, the Company recorded a tax benefit of $246, compared to $208 in the three months ended September 30, 2017. The Company's tax provision for the three months ended September 30, 2018 was primarily related to changes in our estimated annual effective tax rate.

Net income for the third quarter of 2018 was $4,971, or $0.47 per diluted share, compared to net income of $3,222, or $0.31 per diluted share, in the prior year quarter.

Results of Operations – Segment Analysis

Rail Products and Services

Third Quarter 2018 Compared to Third Quarter 2017

The Rail Products and Services segment sales increased by $22,422, or 36.1%, compared to the prior year period. The sales increase was driven by both our Rail Products and Rail Technologies businesses of $12,937 and $9,485, respectively. The segment continued to capitalize on opportunities with transit agencies that are expanding to serve further geographic areas and increased passenger traffic both domestically and in Europe. The growth was also attributable to North American new rail distribution volume.

The Rail Products and Services segment profit increased by $2,120 to 6.3% of net sales. The increase was primarily attributable to non-GAAP gross profit which increased by $2,670, or 19.3%, 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 350 bps compared to the prior year quarter, as the segment continued its focus on cost containment while increasing sales volume. The segment was negatively impacted during the third quarter of 2018 by a charge of $611 within our Rail Technologies business related to a commercial decision to support a customer concern for an automation project.

During the current quarter, the Rail Products and Services segment had a decrease in new orders of 4.5% compared to the prior year period. Backlog was $108,840 as of September 30, 2018, an increase of 26.9%, compared to $85,764 as of September 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

Third Quarter 2018 Compared to Third Quarter 2017

The Construction Products segment sales increased by $2,416, or 6.2%, compared to the prior year period. Piling sales increased year over year as the Company experienced increased new order activity during the quarter within this market. Partially offsetting the increase were reductions in Precast Concrete Product and Fabricated Bridge projects.

The Construction Products segment profit decreased by $2,243, or 58.3%. The decrease was primarily related to our Piling and Precast Concrete Products business units. Non-GAAP gross profit decreased by $2,232, or 27.7%, which was primarily attributable to aggressive market conditions impacting pricing on first half 2018 order activity that was fulfilled during the third quarter of 2018 within Piling. The decline in our Precast Concrete Products business was primarily related to an unexpected production interruption during the third quarter of 2018.

During the quarter, the Construction Products segment had an increase in new orders of 93.5% compared to the prior year period. The Company is encouraged by the significant order activity during the third quarter of 2018 and resulting backlog of $117,654 as of September 30, 2018, a 57.1% increase over the prior year period.

Tubular and Energy Services

Third Quarter 2018 Compared to Third Quarter 2017

Tubular and Energy Services segment sales increased by $10,764, or 35.5%, 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 $2,181 compared to the prior year quarter. The quarter was favorably impacted by non-GAAP gross profit increasing by $2,735, or 42.6%, which was supported by growth in all business units within the segment. Segment profit was also benefited by cost containment of selling and administrative expenses, which were reduced by 170 bps as a percentage of sales.

The Tubular and Energy Services segment had an increase of 19.0% in new orders compared to the prior year period. Orders for Protective Coatings and Measurement Systems increased by 21.7% and Test, Inspection, and Threading increased by 14.5%. The Company is pleased with the continued growth of new orders within the segment.

Nine Month Results

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First Nine Months 2018 Compared to First Nine Months 2017 – Company Analysis

Net sales of $462,438 for the nine month period ended September 30, 2018 increased by $67,384, or 17.1%, compared to the prior year period. The change was attributable to increases of 30.5% and 27.0% in Tubular and Energy Services and Rail Products and Services, respectively. This was partially offset by a 7.6% reduction in Construction Products sales.

Gross profit increased $8,791 compared to the prior year quarter to $84,144 for the nine months ended September 30, 2018. Gross profit margin for the nine months ended September 30, 2018 was 18.2%, or 90 bps, lower than the prior year period. The decline in gross profit margin was due to an increase in LIFO expense of $681 and a decrease in non-GAAP segment gross profit margin of 400 bps and 200 bps within Construction Products and Rail Products and Services, respectively. The non-GAAP segment gross profit margins were negatively impacted by an increased distribution product mix within these segments. This decline was partially offset by an increase in non-GAAP segment gross profit margin of 390 bps within Tubular and Energy Services driven by the stronger volumes in the current period.

Selling and administrative expenses increased by $5,465, or 9.1%, from the prior year. The increase was primarily driven by changes in personnel-related expenses of $3,266. The increase was also attributable to litigation costs related to the UPRR matter of $4,493 for the 2018 period, an increase of $2,959 compared to the prior year period. The increase was partially offset by a reduction in bad debt expense of $1,724. As a percent of sales, selling and administrative expenses declined 100 bps compared to the prior year period.

Interest expense, net of interest income, decreased by $1,336, or 21.7%, as a result of the reduction in outstanding debt as well as maintaining the lowest tier interest rate spread associated with our credit facility.

The Company’s effective income tax rate for the nine months ended September 30, 2018 was 10.8%, compared to 15.4% in the prior year period. For the nine months ended September 30, 2018, the Company recorded a tax expense of $952, compared to $698 in the nine months ended September 30, 2017. The Company's tax provision for the nine months ended September 30, 2018 was primarily comprised of taxes on our Canadian and United Kingdom operations.

Net income for the nine months ended September 30, 2018 was $7,889, or $0.75 per diluted share, compared to net income of $3,824, or $0.37 per diluted share, in the prior year period.

Results of Operations – Segment Analysis

Rail Products and Services

First Nine Months 2018 Compared to First Nine Months 2017

Rail Products and Services segment sales increased by $50,649, or 27.0%, compared to the prior year period. The sales increase was primarily driven by a $28,652 increase in our North American operations, as transit rail infrastructure and new rail volume remained strong. The growth was also attributable to our European business, increasing $21,997, which continued to capitalize on opportunities with transit agencies who are expanding to serve further geographic areas and increased passenger traffic.

The Rail Products and Services segment profit increased by $5,074 to 5.3% of net sales. Non-GAAP gross profit increased by $5,822, or 14.9%, as a result of increased volume in both our North American and European markets. Cost containment favorably impacted segment profit percentage as selling and administrative expenses as a percent of sales were reduced 300 bps compared to the prior year period. The segment was negatively impacted during the current year period by a charge of $611 within our Rail Technologies business related to a commercial decision to support a customer concern for an automation project.

During the nine months ended September 30, 2018, the Rail Products and Services segment had an increase in new orders of 31.6% compared to the prior year period. Backlog was $108,840 as of September 30, 2018, an increase of 26.9%, compared to $85,764 as of September 30, 2017. The Company is encouraged by continuing positive trends from increased rail traffic in the North American market and strength in transit system projects expanding globally.

Construction Products

First Nine Months 2018 Compared to First Nine Months 2017

Construction Products segment sales decreased by $9,264, or 7.6%, 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 a lack of a mega project such as the Peace Bridge project in the prior year period. Partially offsetting the reduction 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 $6,139, or 57.8%. The decrease was primarily within the Piling and Fabricated Bridge business unit. Non-GAAP gross profit decreased by $6,179, or 26.7%, which was primarily a result of aggressive market conditions impacting pricing on first half 2018 order activity that was fulfilled during the first nine 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.

During the nine months ended September 30, 2018, the Construction Products segment had an increase in new orders of 28.6% compared to the prior year period. Ending backlog in the Construction segment increased by 57.1% to $117,654 from the prior year period. While sales and profit reductions were experienced during the period, the Company is encouraged by a significant increase in third quarter new orders which strengthened the backlog going into the fourth quarter of 2018.

Tubular and Energy Services

First Nine Months 2018 Compared to First Nine Months 2017

Tubular and Energy Services segment sales increased by $25,999, or 30.5%, 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 both the upstream and midstream businesses.

Tubular and Energy Services segment profit increased by $9,417 compared to the prior year. The period was favorably impacted by a $217, or 1.8%, reduction in selling and administrative expenses. Non-GAAP gross profit increased by $9,200, or 58.1%, which was supported by favorable results 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 10.1% for the nine months ended September 30, 2018 compared to the prior year period. Backlog was reduced by $3,808, or 13.2%, as compared to the prior year period. Orders for Test, Inspection, and Threading increased by 15.6% while Protective Coatings and Measurement Systems increased by 6.5%. The Company remains encouraged as the upstream and midstream oil and gas markets continue to show positive trends in new order activity.

Other

Segment Backlog

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

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

Warranty

As of September 30, 2018, the Company maintained a total product warranty reserve of $9,363 for its estimate of all potential product warranty claims. Of this total, $7,701 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. During the third quarter of 2018, a claim of $611 was charged within the Rail Technologies product group within the Rail Products and Services segment related to a commercial decision to support a customer concern for an automation project.

Liquidity and Capital Resources

Total debt was $76,470 and $129,966 as of September 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, and debt service obligations.

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

Cash Flow from Operating Activities

During the current 2018 nine-month period, cash flows provided by operating activities were $22,425 compared to $27,516 during the prior year period. For the nine months ended September 30, 2018, income and adjustments to income from operating activities provided $23,443 compared to $18,985 in the 2017 period. Working capital and other assets and liabilities used $1,018 in the current period compared to providing $8,531 in the prior year period. Inventory and accounts receivable provided an increase in operating cash of $8,790 and $1,265, respectively, compared to the 2017 period, on a sales increase of 17.1% over the same period. During the nine months ended September 30, 2017, the Company received income tax refunds of $11,773.

The Company’s calculation for days sales outstanding at September 30, 2018 was 48 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 nine months ended September 30, 2018 and 2017 were $3,196 and $5,335, respectively. The current year expenditures relate to general plant and operational improvements. Expenditures for the nine months ended September 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 nine months ended September 30, 2018, the Company received $2,267 in proceeds from the sale of certain property, plant, and equipment as compared to $1,388 in the prior year period. On August 1, 2018, the Company executed the sale of its 45% ownership in L B Pipe and Coupling Products, LLC (“L B Pipe JV”), which provided $3,875 and $1,235 from the sale of its ownership interest and repayment of revolving line of credit from L B Pipe JV, respectively.

Cash Flow from Financing Activities

During the nine months ended September 30, 2018, the Company had a decrease in outstanding debt of $53,497, primarily related to payments against the revolving credit facility. This reduction of debt was facilitated by the repatriation of $31,517 in excess cash from our international locations. During the nine months ended September 30, 2017, the Company had a decrease in outstanding debt of $21,281, primarily related to payments against the revolving credit facility. Treasury stock acquisitions represent income tax withholdings from employees in connection with the vesting of restricted stock awards.

Financial Condition

As of September 30, 2018, we had $9,586 in cash and cash equivalents and a domestic credit facility with $119,174 of net availability while we had $76,470 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 $7,286 of our cash and cash equivalents was held in non-domestic bank accounts.

To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. As of September 30, 2018, the swap asset was $1,476 compared to $222 as of December 31, 2017.

For a discussion of the terms and availability of the Company's credit facilities, please refer to Note 9. Long-Term Debt of the Notes to Condensed Consolidated Financial Statements contained in the Quarterly Report of Form 10-Q.

Critical Accounting Policies

The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that, in its opinion, is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to reach opinions regarding estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has reached its opinions regarding the best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. We have updated our 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.

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 nine months ended September 30, 2018, a 1% change in the interest rate for variable rate debt as of September 30, 2018 would increase or decrease interest expense by approximately $857.

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

As of September 30, 2018 and December 31, 2017, the Company recorded a current asset of $1,476 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 nine months ended September 30, 2018 and 2017.

Evaluation of Disclosure Controls and Procedures

L.B. Foster Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 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 nine months ended September 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)

Other than as disclosed in Part II, Item 1A. of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2018, 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.