Foster L B Co: Form 10-Q for the period ended Mar 31, 2020

(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 management's 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 are based on management's current expectations and assumptions about future events that involve inherent risks and uncertainties and 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 and decisions regarding our strategic growth initiatives, market position, and product development. 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: the COVID-19 pandemic, and any future global health crises, and the related social, regulatory, and economic impact and the response thereto by the Company, our employees, our customers, and national, state, or local governments; a continued deterioration in the prices of oil and natural gas and the related impact on the upstream and midstream energy markets; a resumption of the economic slowdown we experienced in previous years in the markets we serve, whether as a result of the current COVID-19 pandemic, the deterioration in the prices of oil and gas, or otherwise; volatility in the global capital markets, including interest rate fluctuations, which could adversely affect our ability to access the capital markets on terms that are favorable to us; restrictions on our ability to draw on our credit agreement, including as a result of any future inability to comply with restrictive covenants contained therein; a continuing decrease in freight or transit rail traffic, including as a result of the COVID-19 pandemic; environmental matters, including any costs associated with any remediation and monitoring; 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; the timeliness and availability of materials from our major suppliers, including as a result of the COVID-19 pandemic, 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; cyber-security risks such as data security breaches, malware, ransomware, “hacking,” and identity theft, a failure of which could disrupt our business and may result in misuse or misappropriation of confidential or proprietary information, and could result in the disruption or damage to our systems, increased costs and losses, or an adverse effect to our reputation; 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 or the terms of any new credit agreement, and reforms regarding the use of LIBOR as a benchmark for establishing applicable interest rates; the Company’s ability to manage its working capital requirements and indebtedness; domestic and international taxes, including estimates that may impact these amounts; foreign currency fluctuations; inflation; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union in January 2020; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; the loss of future revenues from current customers; and risks inherent in litigation and the outcome of litigation and product warranty claims. 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 ended December 31, 2019, or as updated and amended by 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 and Business Update

L.B. Foster Company is a leading manufacturer and distributor of products and provider of 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.

During the month of March 2020, in response to the COVID-19 pandemic, several national, state, provincial, and local state of emergency orders were declared that included significant restrictive measures in the countries and other jurisdictions in which the Company sells, manufactures, and services products and systems. The Company is considered an “essential” business under the majority of these governmental orders and, as such, is allowed to continue operating in such jurisdictions. In response, the Company adopted its Pandemic Action Plan, pursuant to which the Company implemented a range of enhanced safety protocols recommended by the United States (“U.S.”) Centers for Disease Control and Prevention and applicable recommendations of non-U.S. governments and authorities to mitigate the spread of the virus while the Company continues operations in various locations. As a result of the COVID-19 pandemic, the Company has experienced disruptions in supply chains, customer acceptance of material, and customer willingness to have the Company's employees work on site, as well as general weakness in demand as stay-at-home orders were enacted and global, national, and regional economic slowdowns occurred.

The Company anticipates continued disruptions in the second quarter of 2020 and possibly beyond as stay-at-home orders have remained in effect to date in the major markets we serve. The Company has experienced minimal disruption with its workforce up to this point, and the Company expects to continue to operate under its established pandemic protocols with minimal changes. The second quarter has historically been an important quarter for the Company, as it typically experiences an increase in orders and backlog as construction projects are planned and started. The Rail Products and Services and Construction Products segments are currently experiencing steady proposal activity and continuation of planned projects as we expect economies to recover and to return to more normal operations. However, the outlook for the Tubular and Energy Services segment is much less favorable due to the impact on demand that the COVID-19 pandemic has had in the energy markets.

Since the middle of 2019, the upstream energy markets that the Company serves have deteriorated as prices of oil and natural gas have declined leading to production cuts from reduced drilling activity. This deterioration has recently accelerated as a result of the global COVID-19 pandemic and the associated reduction in demand due to reduced travel and movement of goods throughout the world. As U.S. exploration and production companies reduce production and implement spending cuts, demands for much of what the Company does in its Test, Inspection, and Threading Services division of the Tubular and Energy Services segment has sharply declined and further deterioration is anticipated. As a result, the Company is taking a number of steps to minimize the unfavorable impact from the anticipated loss in sales volume.

In the fourth quarter of 2019, the Company announced the closure of three service centers within the Test, Inspection, and Threading Services business that did not have a path to profitability as they were operating in markets that were not expected to recover. During the first quarter of 2020, the Company incurred approximately $204 related to those closures. On April 30, 2020, the Company approved the permanent closure of an additional three operating locations servicing the U.S. Niobrara and Bakken oil and gas production regions and the discontinuance of mobile services for the Permian production region. The Company believes that these actions will strengthen its core businesses, result in improved operating profitability, and allow for the reallocation of resources and investment opportunities to provide sustainable value to its shareholders. The Company expects the closure of these operations to be substantially completed during 2020. As a result of these activities, the Company expects to incur certain exit and disposal charges consisting of relocation and employee retention expenses, as well as asset impairments, site clean-up, and facility restoration expenses, totaling approximately $5,500 to $7,000. The approximate expense resulting from these actions could change materially as a result of certain factors including unknown or unforeseen costs as part of winding up these operations.

The Company is continuing to evaluate the market conditions and outlook for the energy markets and will continue to evaluate actions of this nature for the Test, Inspection, and Threading Services division. The Company may determine that additional service centers need to be shut down, or similar strategic actions may need to be undertaken in order to effectively navigate the very difficult market conditions in the upstream energy market. While the Company is anticipating an unfavorable impact of the current environment on its businesses serving the mid-stream energy market, the Company currently believes that, as the impact of the COVID-19 pandemic on oil and natural gas demand dissipates over time, these businesses will recover. However, the Company is taking steps to address the cost structure of its mid-stream businesses to mitigate the impact of the deterioration in energy prices on the Company’s mid-stream service offerings.

Results of the Quarter

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

First Quarter 2020 Compared to First Quarter 2019 – Company Analysis

Net sales of $128,775 for the three months ended March 31, 2020 decreased by $21,694, or 14.4%, compared to the prior year quarter. The decline was attributable to reductions within each of our three segments, due in part to disruptions across each of our segments due to the COVID-19 pandemic. Sales for the Construction Products segment decreased by 22.3%, the Tubular and Energy Services segment decreased by 21.1%, and the Rail Products and Services segment decreased by 7.3%.

Gross profit decreased by $7,505 compared to the prior year quarter to $21,657 for the three months ended March 31, 2020. The decline in gross profit was attributable to each of the three segments, as Tubular and Energy Services decreased by 45.2%, Construction Products decreased by 27.5%, and Rail Products and Services decreased by 12.3%. Gross profit margin for the three months ended March 31, 2020 was 16.8%, or 260 basis points (“bps”) lower than the prior year quarter, primarily due to Tubular and Energy Services.

Selling and administrative expenses decreased by $592, or 2.7%, compared to the prior year quarter. The decrease in expense was primarily driven by reductions in third-party professional service expenses of $718. As a percent of sales, selling and administrative expenses increased 200 bps compared to the prior year quarter, primarily due to the 14.4% reduction in sales.

The Company’s effective income tax rate for the three months ended March 31, 2020 was 30.7%, compared to 14.7% in the prior year quarter. For the three months ended March 31, 2020, the Company recorded an income tax benefit of $828, compared to income tax expense of $638 in the three months ended March 31, 2019. The Company's effective tax rate for the three months ended March 31, 2020 differed from the federal statutory rate of 21%, primarily due to state income taxes and nondeductible expenses. The increase in the effective tax rate compared to the prior year quarter was primarily due to the realization of a portion of U.S. deferred tax assets previously offset by a valuation allowance during the prior year quarter.

Net loss for the first quarter of 2020 was $1,866, or $0.18 loss per diluted share, compared to net income of $3,690, or $0.35 earnings per diluted share, in the prior year quarter.

Results of Operations – Segment Analysis

Rail Products and Services

First Quarter 2020 Compared to First Quarter 2019

The Rail Products and Services segment sales decreased by $5,490, or 7.3%, compared to the prior year quarter. The sales decline was primarily driven by our Rail Technologies business which decreased by $2,846, or 9.7%, from the prior year due primarily to our North American friction management consumable products and services as freight and transit rail customer traffic declined as a result of the impact of the COVID-19 pandemic. Also contributing to the decline was reduced activity levels on the London Crossrail project in the U.K, primarily from the project nearing its completion and stay-at-home orders resulting from the COVID-19 pandemic.

The Rail Products and Services segment gross profit decreased by $1,745, or 12.3%, from the prior year quarter. The decrease was primarily driven by the volume decline in our Rail Technologies business. Segment gross profit margin declined by 100 bps as a result of the reduction in demand in our friction management offerings due to weakened demand resulting from less movement of freight and transit traffic, coupled with stay-at-home orders that delayed services for the London Crossrail project. Segment profit was $1,171, a $2,308 decline over the prior year quarter. Selling, general, and administrative expenses incurred by the segment increased by $658 compared to the prior year quarter, primarily attributable to increased personnel costs.

During the current quarter, the Rail Products and Services segment had a decrease in new orders of 23.5% compared to the prior year period. The decrease was primarily related to activity within our global transit projects, friction management consumables, and on track services. Backlog as of March 31, 2020 was $108,910, a 5.0% increase from December 31, 2019.

Construction Products

First Quarter 2020 Compared to First Quarter 2019

The Construction Products segment sales decreased by $8,311, or 22.3%, compared to the prior year quarter. The decline was attributable to volume decreases in both the Piling and Fabricated Bridge division and the Precast Concrete Products division, resulting in sales reductions of $5,341 and $2,970, respectively. Piling and Fabricated Bridge experienced decreased volume during the current year quarter primarily due to inclement weather impacting the timing and ability to fulfill orders. In addition, the three months ended March 31, 2019 included revenue from the Port Everglades project, which was a project of a much larger size than any project that the business had in the current year quarter. Our Precast Concrete Products business unit sales were unfavorably impacted by the relocation of operations to Boise, ID during the first quarter of 2020. This relocation resulted in expected downtime of production until the new facility became fully operational.

Construction Products gross profit decreased by $1,533, or 27.5%, over the prior year quarter. The decrease was primarily attributable to relocation and start-up costs coupled with lower operational efficiency during the ramp-up of the new precast concrete facility in Boise, ID, which resulted in a year-over-year decline in gross profit of $1,221. This facility is expected to attain full operational efficiency by the third quarter of 2020. The segment loss of $1,639 was a reduction of $2,473 from the prior year quarter segment profit of $834. Included within the first quarter of 2020 segment loss are relocation and start-up costs of $677 related to the Boise, ID facility.

During the quarter, the Construction Products segment had a decrease in new orders of 13.5% compared to the prior year quarter, which was primarily related to a decline in bridge decking projects. The Company believes the decline is related to the stay-at-home orders associated with COVID-19, which delayed the progress of scheduled projects. As of March 31, 2020, backlog was $102,066, a 10.6% increase from December 31, 2019.

Tubular and Energy Services

First Quarter 2020 Compared to First Quarter 2019

Tubular and Energy Services segment sales decreased by $7,893, or 21.1%, compared to the prior year quarter. The decrease was due to deteriorating conditions in the served U.S. oil and gas market. The reduction in demand caused by reduced travel throughout the world as a result of the COVID-19 pandemic has caused exploration and production companies to decrease their activities and reduce spending, which impacted the need for our products and services within the segment. This led to sales decreases of $5,020 and $2,873 in our Test, Inspection, and Threading Services and Protective Coatings and Measurement Systems businesses, respectively, from the prior year quarter.

Tubular and Energy Services segment gross profit decreased by $4,227, or 45.2%, which was primarily attributable to the reduced volumes within our Test, Inspection, and Threading Services business unit and, to a lesser extent, Protective Coatings and Measurement Systems resulting in gross profit decreases of 163.3% and 19.3%, respectively. Segment gross profit margin decreased by 760 bps over the prior year quarter, which was primarily driven by reduced revenue volume supporting the fixed costs within the Test, Inspection, and Threading Services business. Segment profit decreased by $4,076, or 86.9%, over the prior year quarter. The first quarter of 2020 segment profit included closure costs of $204 related to the Test, Inspection, and Threading Services site closures enacted in the fourth quarter of 2019.

The Tubular and Energy Services segment had a decrease of 36.1% in new orders compared to the prior year quarter. Each of the business units within the segment contributed to the decline in new orders as capital spending and project delays within the served domestic oil and gas market negatively impacted the segment.

On April 30, 2020, the Company approved the permanent closure of three operating locations servicing the U.S. Niobrara and Bakken oil and gas production regions and the discontinuance of mobile services for the Permian production region within our Test, Inspection, and Threading Services business unit. These closures are a result of the Company’s continuing strategic review of operations serving the U.S. oil and gas market. The Company believes these actions will strengthen its core businesses, result in improved operating profitability, and allow for the reallocation of resources and investment opportunities to provide sustainable value to its shareholders. The Company expects the closure of these operations to be substantially completed during 2020.

As a result of these activities, the Company expects to incur certain exit and disposal charges consisting of relocation and employee retention expenses, as well as asset impairments, site clean-up, and facility restoration expenses, totaling approximately $5,500 to $7,000 in the Tubular and Energy Services operating segment. The approximate expense resulting from these actions could change materially as a result of certain factors including unknown or unforeseen costs as part of winding up these operations.

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.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated by operations, and our available capacity under our revolving credit facility, which provides for a total commitment of up to $140,000. Our primary needs for liquidity relate to working capital requirements for operations, capital expenditures, debt service obligations, and payments related to the Union Pacific Railroad Settlement. Our total debt was $64,187 and $58,193 as of March 31, 2020 and December 31, 2019, respectively, and was primarily comprised of borrowings under our revolving credit facility.

The following table reflects our available funding capacity as of March 31, 2020:

Our cash flows are impacted from period to period by fluctuations in working capital. While we place an emphasis on working capital management in our operations, factors such as our contract mix, commercial terms, days sales outstanding (“DSO”), and market conditions as well as seasonality may impact our working capital. We regularly assess our receivables for collectability, and provide allowances for doubtful accounts where appropriate. We believe that our reserves for doubtful accounts are appropriate as of March 31, 2020, but adverse changes in the economic environment, including further deterioration of demand for crude oil and natural gas in the energy markets, and adverse financial conditions of our customers resulting from, among other things, the COVID-19 pandemic, may impact certain of our customers' ability to access capital and compensate us for our products and services, as well as impact demand for our products and services.

The change in cash and cash equivalents for the three months ended March 31, 2020 and 2019 is as follows:

Cash Flow from Operating Activities

During the three months ended March 31, 2020, cash flows used in operating activities were $6,890, compared to $13,546 during the prior year period. For the three months ended March 31, 2020, the net (loss) income and adjustments to net (loss) income from operating activities provided $2,941, compared to $8,842 in the 2019 period. Working capital and other assets and liabilities used $9,831 in the current period, compared to $22,388 in the prior year period. During the three months ended March 31, 2019, the Company made a payment totaling $2,000 under the terms of the concrete tie settlement agreement with Union Pacific Railroad.

The Company’s calculation for DSO at March 31, 2020 and December 31, 2019 was 46 and 49 days, respectively, and we believe our receivables portfolio is strong.

Cash Flow from Investing Activities

Capital expenditures for the three months ended March 31, 2020 and 2019 were $4,444 and $2,572, respectively. The current year expenditures relate to the purchase of a continuous welded rail car and unloader within our Rail Products and Services segment, facility start-up expenditures within our Construction Products and Tubular and Energy Services segments, and general plant and operational improvements throughout the Company. Expenditures for the three months ended March 31, 2019 related to plant expansion and automation integration programs within our Tubular and Energy Services segment as well as general plant and operational improvements throughout the Company.

Cash Flow from Financing Activities

During the three months ended March 31, 2020, the Company had an increase in outstanding debt of $6,002, primarily related to the need for seasonal operational funding. During the three months ended March 31, 2019, the Company had an increase in outstanding debt of $15,200, primarily related to the funding of working capital for operations. Treasury stock acquisitions of $1,657 and $526 for the three months ended March 31, 2020 and 2019, respectively, represent income tax withholdings from employees in connection with the vesting of restricted stock awards.

Financial Condition

As of March 31, 2020, we had $6,418 in cash and cash equivalents. Our cash management priority continues to be short-term maturities and the preservation of our principal balances. As of March 31, 2020, approximately $5,178 of our cash and cash equivalents was held in non-domestic bank accounts. During the three months ended March 31, 2020, the Company repatriated $5,387 in excess cash from our international locations We principally maintain our cash and cash equivalents in accounts held by major banks and financial institutions.

Our principal uses of cash in recent years have been to fund our operations, including capital expenditures, and to service our indebtedness. We view our short and long-term liquidity as being dependent on our results of operations, changes in working capital and our borrowing capacity. As of March 31, 2020, our revolving credit facility had $98,753 of net availability, while we had $64,187 in total debt. Our current ratio as of March 31, 2020 was 1.93. We believe that the combination of our cash and cash equivalents, cash generated from operations and the capacity under our revolving credit facility will provide us with sufficient liquidity to provide the flexibility to operate the business in a prudent manner and enable us to continue to service our outstanding debt.

To reduce the impact of interest rate changes on outstanding variable-rate debt, we 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 March 31, 2020 and December 31, 2019, the swap liability was $1,640 and $480, respectively.

For a discussion of the terms and availability of our credit facilities, please refer to Note 9 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on 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 allowance for doubtful accounts policies since December 31, 2019, in conjunction with our adoption of Accounting Standards Codification Topic 326, “Financial Instruments - Credit Losses” (“ASC 326”), as further described in Note 5 and Note 6 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, 2019.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements include 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, 2019 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, 2019. 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 three months ended March 31, 2020, a 1% change in the interest rate for variable rate debt as of March 31, 2020 would increase or decrease interest expense by approximately $175.

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 value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.

As of March 31, 2020 and December 31, 2019, the Company recorded a current liability of $1,640 and $480, 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 months ended March 31, 2020.

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, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective such that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the chief executive officer, chief financial officer, or person performing such functions, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes 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, 2020, 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 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)

Except as set forth 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, 2019. 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, 2019, as filed with the SEC on February 27, 2020, 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.

The COVID-19 pandemic could continue to adversely affect our business.

The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations and supply chains, and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services. If we do not successfully manage our supply chain or identify new sources of supplies, we may be unable to satisfy customer orders, which could harm our reputation and customer relationships and materially adversely affect our business, financial condition, and operating results. While COVID-19 has adversely affected each of our segments, the impact on our upstream and midstream energy markets has been particularly adverse, contributing to deteriorating prices of oil and natural gas, weakening demand, and reducing customer spending, and we expect this trend may continue. While the majority of our employees have generally been permitted to continue to work because our businesses are regarded as essential, U.S. and non-domestic governmental pandemic mitigation measures such as stay-at-home orders have slowed travel and movement of goods throughout the world, contributing to reduction in demand for our products and services. We expect that these adverse impacts could continue but we are unable to predict the extent, nature, or duration of these impacts on our results of operations and financial condition at this time.