Foster L B Co: Form 10-Q for the period ended Sep 30, 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, 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 impacts 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 continuation or worsening of the adverse economic conditions in the markets we serve, whether as a result of the current COVID-19 pandemic, including its impact on travel and demand for oil and gas, and the continued deterioration in the prices for 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, including compliance with anti-corruption and bribery laws, foreign currency fluctuations and inflation, and trade restrictions or embargoes; our ability to effectuate our strategy, including cost reduction initiatives, and our ability to effectively integrate acquired businesses or to divest businesses, such as the recent disposition of the IOS Test and Inspection Services business and acquisition of LarKen Precast, LLC and to realize anticipated benefits; costs of and impacts associated with shareholder activism; continued customer restrictions regarding the on-site presence of third party providers due to the COVID-19 pandemic; the timeliness and availability of materials from our major suppliers, including any continuation or worsening of the disruptions in the supply chain experienced 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 taxes; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union; 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 current or 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.

Beginning in 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 has been considered an “essential” business under the majority of these governmental orders and, as such, has been 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 by applicable recommendations of non-U.S. governments and authorities in order 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, delays in deliveries to customers, and customer unwillingness to have the Company's employees work on site, as well as general weakness in demand as certain restrictions continued to be in place in most areas. Most notably, the collapse in oil demand associated with reduced travel resulting from the COVID-19 pandemic that led to a significant drop in demand for most of the services offered by our Tubular and Energy Services segment has persisted.

Despite some easing of initial restrictive measures, the Company anticipates continued disruptions in the fourth quarter of 2020 and beyond as various restrictive measures have remained in effect in the major markets we serve. The Company has experienced minimal disruption with its on-premise workforce in its facilities up to this point, and the Company expects to continue to operate under its pandemic protocols with minimal changes. The third quarter has historically been an important quarter for the Company, as it typically experiences a seasonal increase in sales as construction projects are at the height of their activity. However, sales for the third quarter of 2020 declined when compared to the prior year quarter. While sales declined in the current quarter, the Rail Products and Services and Construction Products segments reported increased order activity during the third quarter of 2020, as compared to the third quarter of 2019, despite the COVID-19 pandemic, and continue to experience steady proposal activity as of the date of the filing of this Quarterly Report on Form 10-Q. However, the outlook for the Tubular and Energy Services segment continues to remain much less favorable due to the more severe impact on demand that the COVID-19 pandemic has had in the energy markets.

The year-over-year increase in new orders for the three months ended September 30, 2020 of 8.3% and 6.6% in Construction Products and Rail Products and Services, respectively, led to backlog increases in the third quarter of 2020 of 36.6% for the Construction Products segment and 23.9% for the Rail Products and Services segment compared to the prior year period. This increase highlights the ongoing spending in the infrastructure markets served by these two segments despite pockets of weakness associated with traffic volume and transportation related projects due to the COVID-19 pandemic.

The Rail Products and Services segment is anticipating further recovery in Rail Technologies, particularly products and services related to its operations in the United Kingdom, barring any new COVID-19 restrictive measures. Transit based bookings were strong in the third quarter of 2020, including concrete ties for transit systems. As the Company monitors the budget shortfalls incurred by transit operators in all markets, projects associated with long term planning have been moving forward. However, the Company is not expecting a notable improvement in the sales of consumable products that are usually correlated to traffic volume through the remainder of 2020 and into 2021 given the on-going depressed travel volume driven by the COVID-19 pandemic, which the Company expects to continue.

The Construction Products segment backlog increase was driven by a steady quarter of order activity in the Piling and Fabricated Bridge division. This division saw key projects drive growth in the segment's backlog, as it increased sequentially from the second quarter of 2020. The backlog for bridge decking is expected to continue to result in production rates at near capacity levels. The Precast Concrete Products division continues to benefit from new infrastructure in the regions that the Company serves. While this business depends on municipal, state, and federal spending for certain programs that may experience budget pressures, these programs could benefit from continued government spending on infrastructure and economic stimulus efforts related to civil construction projects.

Since the middle of 2019, the upstream energy markets that the Company served has deteriorated as prices of oil and natural gas declined due to weakening demand. 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 have reduced production and implemented spending cuts, demand for much of the Company’s offerings in its IOS Test and Inspection Services business of the Tubular and Energy segment had sharply declined. As a result, on September 4, 2020, the Company completed the sale of the issued and outstanding membership interests of its upstream oil and gas test and inspection business (“Test and Inspection Services”). Proceeds from the sale were $4,000 and resulted in a loss of $10,034, net of tax. As a result of the sale of this business, the Company recognized an aggregate of $18,962 in tax benefits, including tax benefits recognized in discontinued operations, for the three months ended September 30, 2020. In addition, the Company anticipates receiving approximately $9,008 in tax refunds within the next year due to extended carryback provisions in the CARES Act and the acceleration of existing deferred tax assets related to the sale. The sale represents a strategic shift away from providing services to the upstream oil and gas market. The Company believes that this divestiture also changes the risk profile of the Company by: (a) eliminating dependence on the upstream energy market and the liability associated with serving upstream applications; (b) reducing exposure to a volatile industry that can turnoff demand quickly under poor conditions; and (c) avoiding the price and production cyclicality of the global oil market. On a prospective basis, the Company’s tubular and energy businesses will continue to be focused on core competencies around corrosion protection and measurement systems in midstream pipeline applications, where the market has been much less volatile and tends to have longer term investments and associated backlog compared to upstream activities. The Company has reflected the results of operations of the Test and Inspection Services business as discontinued operations in the Condensed Consolidated Financial Statements and recast the Tubular and Energy Services segment results for all periods presented.

In the Tubular and Energy Services segment, the severe decline in travel due to the COVID-19 pandemic has led to significant reductions in the production of oil as demand for fuel has declined by record amounts. On a year-to-date basis for 2020, sales have declined 29.4% and orders have declined by 50.8% in the Tubular and Energy segment. As a result of the significant decline in order activity, backlog is down substantially compared to September 30, 2019 and December 31, 2019. This has led to the Company projecting material declines in sales for this segment for the remainder of 2020 and into 2021. As a result of these projections, the Company is continuing to take actions to align the costs associated with this segment to the projected revenue streams. The served midstream energy market has longer-term projects associated with it, and certain of these projects are expected to continue based on projected needs once the market returns to a more historically normalized volume level.

Results of the Quarter

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

Third Quarter 2020 Compared to Third Quarter 2019 – Company Analysis

Net sales of $118,365 for the three months ended September 30, 2020 decreased by $26,483, or 18.3%, compared to the prior year quarter. The decline was attributable to reductions within each of the three segments, due in part to disruptions across each of the segments caused by the COVID-19 pandemic. Sales for the Tubular and Energy Services segment decreased by 44.9%, the Construction Products segment decreased by 19.7%, and the Rail Products and Services segment decreased by 5.5%.

Gross profit decreased by $5,890 compared to the prior year quarter to $22,061 for the three months ended September 30, 2020. The decline in gross profit was attributable to each of the three segments, as Tubular and Energy Services decreased by 55.6%, Rail Products and Services decreased by 10.5%, and Construction Products decreased by 4.4%. Gross profit margin for the three months ended September 30, 2020 was 18.6%, or 70 basis points (“bps”) lower than the prior year quarter, primarily due to Tubular and Energy Services.

Selling and administrative expenses decreased by $3,969, or 18.9%, compared to the prior year quarter. The decrease in expense was primarily driven by reductions in personnel related expenses of $2,693 and third-party professional service expenses of $592, primarily as a result of cost containment measures across all segments. As a percent of sales, selling and administrative expenses decreased 10 bps compared to the prior year quarter, despite the 18.3% reduction in sales.

The Company’s effective income tax rate for the three months ended September 30, 2020 was (484.6)%, compared to 18.2% in the prior year quarter. For the three months ended September 30, 2020, the Company recorded an income tax benefit of $13,742, compared to income tax expense of $836 in the three months ended September 30, 2019. The Company’s provision for income taxes for the three months ended September 30, 2020 included a discrete income tax benefit of $15,824 related to the disposition of the Test and Inspection Services business. In addition to the impact of the discrete item, the effective tax rate for the quarter ended September 30, 2020 differed from the federal statutory rate of 21% primarily due to state income taxes, nondeductible expenses, and GILTI inclusions.

Net income from continuing operations for the third quarter of 2020 was $16,578, or $1.56 per diluted share, compared to $3,754, or $0.35 per diluted share, in the prior year quarter.

Results of Operations – Segment Analysis

Rail Products and Services

Third Quarter 2020 Compared to Third Quarter 2019

The Rail Products and Services segment sales for the three months ended September 30, 2020 decreased by $3,753, or 5.5%, compared to the prior year quarter. The sales decline was primarily driven by the Rail Technologies business unit, which decreased by $2,586, or 9.1%, due primarily to reduced sales of our North American friction management consumable products and services as freight and transit rail customer traffic declined due to the COVID-19 pandemic and also reduced activity levels on the London Crossrail project in the U.K., primarily from a work stoppage due to stay-at-home orders resulting from the COVID-19 pandemic. On-site services for the London Crossrail project resumed during the third quarter of 2020. Also contributing to the sales decline was the Rail Products business, which decreased by $1,167, or 3.0%, from the prior year, primarily related to the decline in freight and passenger traffic resulting in infrastructure spending reductions impacting the segment’s offerings.

The Rail Products and Services segment gross profit decreased by $1,523, or 10.5%, from the prior year quarter. The decrease was primarily driven by the volume decline in the Rail Technologies business. Segment gross profit margin decreased by 120 bps as a result of the reduced sales volume. Segment profit was $3,742, a $325 increase over the prior year quarter. Selling and administrative expenses incurred by the segment decreased by $1,804 compared to the prior year quarter, primarily attributable to decreased personnel related costs and third-party professional service costs, as cost containment remained a key focus given the challenging market conditions.

During the current quarter, the Rail Products and Services segment had an increase in new orders of 6.6% compared to the prior year period. The increase was primarily related to activity within our North American transit market, including new rail and concrete tie products.

Construction Products

Third Quarter 2020 Compared to Third Quarter 2019

The Construction Products segment sales for the three months ended September 30, 2020 decreased by $9,292, or 19.7%, 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 $6,565 and $2,727, respectively. Piling and Fabricated Bridge experienced a decline in volume during the current year quarter primarily due to the completion of the Port Everglades project in the fourth quarter of 2019. The Precast Concrete Products business unit sales were unfavorably impacted by installation delays of precast concrete buildings caused by inclement weather conditions, as well as wildfires effecting the western U.S.

Construction Products gross profit decreased by $267, or 4.4%, over the prior year quarter. The decrease was attributable to lower sales volume in the Precast Concrete Products division. Gross profit margin for the third quarter of 2020 increased by 250 bps compared to the prior year quarter, which was a result of margin improvements within Piling Products as project overage costs negatively impacted the prior year quarter. The segment profit of $1,756 was a reduction of $92 from the prior year quarter segment profit of $1,848.

During the quarter, the Construction Products segment had an increase in new orders of 8.3% compared to the prior year quarter, which was primarily related to Piling and Fabricated Bridge products. The Company believes that while order activity continues to be steady, the various restrictive measures enacted associated with COVID-19 are causing delays in the progress of scheduled projects. As of September 30, 2020, backlog for the Construction Products segment was $118,368, a 10.8% increase from June 30, 2020.

Tubular and Energy Services

On September 4, 2020, the Company sold its upstream oil and gas test and inspection business. Proceeds from the sale were $4,000 and resulted in a loss of $10,034, net of tax. The sale represents a strategic shift away from providing services to the upstream oil and gas market. We believe that this divestiture also changes the risk profile of the Company by (a) eliminating dependence on the upstream energy market and the liability associated with serving upstream applications; (b) reducing exposure to a volatile industry that can turnoff demand quickly under poor conditions; and (c) avoiding the price and production cyclicality of the global oil market. On a prospective basis, the Company’s tubular and energy businesses will continue to be focused on core competencies around corrosion protection and measurement systems in midstream pipeline applications, where the market has been much less volatile and tends to have longer term investments and associated backlog compared to upstream activities. We have reflected the results of operations of the Test and Inspection Services business as discontinued operations in the Condensed Consolidated Financial Statements and recast the segment results for all periods presented.

Third Quarter 2020 Compared to Third Quarter 2019

Tubular and Energy Services segment sales for the three months ended September 30, 2020 decreased by $13,438, or 44.9%, compared to the prior year quarter. The decrease was due to the deteriorated 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 further decrease their activities and reduce spending, which adversely impacted the need for our products and services offered by the segment. This led to a sales decrease of $14,141 in the Protective Coatings and Measurement Systems division.

Tubular and Energy Services segment gross profit decreased by $4,100, or 55.6%, which was primarily attributable to the reduced volumes within Protective Coatings and Measurement Systems. Segment gross profit margin decreased by 480 bps from the prior year quarter, primarily driven by reduced revenue volume. The segment profit decreased by $3,086, or 83.3%, from the prior year quarter.

The Tubular and Energy Services segment had a decrease of 50.7% 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.

Nine Month Results

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

First Nine Months 2020 Compared to First Nine Months 2019 – Company Analysis

Net sales of $381,835 for the nine months ended September 30, 2020 decreased by $93,262, or 19.6%, compared to the prior year period. The decline was attributable to reductions within each of the three segments, due in part to disruptions across each of our segments caused by the COVID-19 pandemic. Sales for the Tubular and Energy Services segment decreased by 29.4%, the Construction Products segment decreased by 22.2%, and the Rail Products and Services segment decreased by 14.6%.

Gross profit decreased by $19,419 compared to the prior year quarter to $73,321 for the nine months ended September 30, 2020. The decline in gross profit was attributable to each of the three segments, as Tubular and Energy Services decreased by 33.9%, Construction Products decreased by 18.4%, and Rail Products and Services decreased by 15.1%. Gross profit margin for the nine months ended September 30, 2020 was 19.2%, or 30 bps lower than the prior year period, primarily due to the reduced sales within the Tubular and Energy Services segment.

Selling and administrative expenses decreased by $6,598, or 10.5%, compared to the prior year quarter. The decrease in expense was primarily driven by reductions in personnel related costs of $4,094 and third-party professional service expenses of $1,804, primarily as a result of cost containment measures. As a percent of sales, selling and administrative expenses increased 150 bps compared to the prior year quarter, primarily due to the 19.6% reduction in sales. Other income for the nine months ended September 30, 2020 was $1,909 primarily due to the receipt of a non-recurring disbursement of $1,874 from an unconsolidated partnership.

The Company’s effective income tax rate for the nine months ended September 30, 2020 was (98.8)%, compared to 17.9% in the prior year period. For the nine months ended September 30, 2020, the Company recorded an income tax benefit of $11,698, compared to income tax expense of $3,883 for the nine months ended September 30, 2019. The Company’s provision for income taxes for the nine months ended September 30, 2020 included a discrete income tax benefit of $15,824 related to the disposition of the Test and Inspection Services business. In addition to the impact of the discrete item, the effective tax rate for the nine months ended September 30, 2020 differed from the federal statutory rate of 21% primarily due to state income taxes, nondeductible expenses, and GILTI inclusions.

Net income from continuing operations for the nine months ended September 30, 2020 was $23,543, or $2.21 per diluted share, compared to $17,773, or $1.67 per diluted share, in the prior year period.

Results of Operations – Segment Analysis

Rail Products and Services

First Nine Months 2020 Compared to First Nine Months 2019

The Rail Products and Services segment sales for the nine months ended September 30, 2020 decreased by $35,705, or 14.6%, compared to the prior year period. The sales decline was driven by our Rail Products business which declined by $19,595, or 12.8%, and our Rail Technologies business which decreased by $16,110, or 17.6%, from the prior year. The decreases were due primarily to our North American transit projects and 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 a temporary work stoppage due to stay-at-home orders resulting from the COVID-19 pandemic.

The Rail Products and Services segment gross profit decreased by $7,177, or 15.1%, from the prior year period. The decrease was primarily driven by the volume decline in the Rail Technologies business and, to a lesser extent, North American transit projects impacting the Rail Products business. Segment gross profit margin decreased by 10 bps as a result of reduced sales volume and was partially offset by favorable product mix of higher margin offerings within the Rail Products business. Segment profit was $10,729, a $4,086 decline from the prior year period.

During the nine months ended September 30, 2020, the Rail Products and Services segment had a decrease in new orders of 9.7% compared to the prior year period. The decrease was primarily related to reduced order activity related to global transit projects, friction management consumables, and on-track services. Backlog as of September 30, 2020 was $109,059, a 5.2% increase from December 31, 2019.

Construction Products

First Nine Months 2020 Compared to First Nine Months 2019

The Construction Products segment sales for the nine months ended September 30, 2020 decreased by $31,001, or 22.2%, compared to the prior year period. 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 $23,914 and $7,087, respectively. Piling and Fabricated Bridge experienced decreased volume compared to the prior year period due to the significant activity level on the Port Everglades piling project in the prior year period without a project of comparable size during the nine months ended September 30, 2020. Our Precast Concrete Products business unit sales were unfavorably impacted by the relocation of operations to Boise, ID during the first half of 2020. This relocation resulted in the expected downtime of production until the new facility achieved full operational efficiency.

Construction Products gross profit decreased by $3,600, or 18.4%, from the prior year period. The decrease was primarily attributable to start-up activities resulting in reduced operational efficiency during the ramp-up of the new precast concrete facility in Boise, ID. The segment profit of $1,623 was a reduction of $4,472 from the prior year period segment profit of $6,095. Included within the first nine months of 2020 segment profit are relocation costs of $674 related to the Boise, ID facility.

During the nine months ended September 30, 2020, the Construction Products segment had new orders that increased by 2.4% when compared to the prior year period. The Company believes that the stay-at-home orders associated with COVID-19 have delayed the progress of scheduled projects. As of September 30, 2020, backlog was $118,368, a 28.3% increase from December 31, 2019.

Tubular and Energy Services

First Nine Months 2020 Compared to First Nine Months 2019

Tubular and Energy Services segment sales decreased by $26,556, or 29.4%, compared to the prior year period. 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 a sales decrease of $27,190 from the prior year period in the Protective Coatings and Measurement Systems division, which primarily serves the midstream market.

Tubular and Energy Services segment gross profit decreased by $8,642, or 33.9%, which was primarily attributable to the reduced volumes within the Protective Coatings and Measurement Systems division. Segment gross profit margin decreased by 180 bps from the prior year period, which was primarily driven by reduced revenue volume. The segment profit decreased by $7,688, or 51.6%, from the prior year period to $7,213.

The Tubular and Energy Services segment had a decrease of 50.8% in new orders compared to the prior year period. 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.

Other

Segment Backlog

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

The Company’s backlog represents the sales price of received customer purchase orders and any contracts in which the performance obligations have not been met, and therefore are precluded from revenue recognition. Although the Company believes that the orders included in backlog are firm, customers may cancel or change their orders with limited advance notice; however, these instances have been rare. Backlog should not be considered a reliable indicator of the Company’s ability to achieve any particular level of revenue or financial performance. 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 the available capacity under our revolving credit facility, which provides for a total commitment of up to $120,000. 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 $49,104 and $58,152 as of September 30, 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 September 30, 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 September 30, 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 changes in cash and cash equivalents for the nine months ended September 30, 2020 and 2019 were as follows:

Cash Flow from Operating Activities

During the nine months ended September 30, 2020, cash flows provided by continuing operating activities were $16,201, compared $10,311 during the prior year to date period. For the nine months ended September 30, 2020, the net income from continuing operations and adjustments to net income from continuing operating activities provided $26,841, compared to $32,562 in the 2019 period. Working capital and other assets and liabilities used $10,640 in the current period, compared to $22,251 in the prior year period. During the nine months ended September 30, 2020 and 2019, the Company made payments totaling $4,000 and $6,000, respectively, under the terms of the concrete tie settlement agreement with Union Pacific Railroad. During the nine months ended September 30, 2020, the Company received a non-recurring disbursement of $1,874 from an unconsolidated partnership.

The Company’s calculation for DSO at September 30, 2020 and December 31, 2019 was 50 and 49 days, respectively, and we believe our receivables portfolio is strong.

Cash Flow from Investing Activities

Capital expenditures for the nine months ended September 30, 2020 and 2019 were $7,650 and $2,510, respectively. The current year expenditures include 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 segment, and general plant and operational improvements throughout the Company. Expenditures for the nine months ended September 30, 2019 related to plant expansion within our Tubular and Energy Services segment as well as general plant and operational improvements throughout the Company. Cash flows from investing activities also includes $1,050 paid for the asset acquisition of a company in Boise, Idaho to expand our precast concrete offerings in that region.

Cash Flow from Financing Activities

During the nine months ended September 30, 2020, the Company had a reduction in outstanding debt of $9,033, primarily attributable to the utilization of excess cash generated through operating activities. During the nine months ended September 30, 2019, the Company had a decrease in outstanding debt of $1,948, primarily related to the reduction of working capital for operations. Treasury stock acquisitions of $1,660 and $600 for the nine months ended September 30, 2020 and 2019, respectively, represent income tax withholdings from employees and non-employee directors in connection with the vesting of restricted stock awards. During the nine months ended September 30, 2020 and 2019, the Company incurred debt issuance costs of $454 and $836, respectively.

Financial Condition

As of September 30, 2020, we had $9,311 in cash and cash equivalents. Our cash management priority continues to be short-term maturities and the preservation of our principal balances. As of September 30, 2020, approximately $8,386 of our cash and cash equivalents was held in non-domestic bank accounts. During the nine months ended September 30, 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 September 30, 2020, our revolving credit facility had $70,105 of net availability, while we had $49,104 in total debt. Our current ratio as of September 30, 2020 was 2.05.

On June 26, 2020, we entered into the First Amendment that reduced the total commitments under the revolving credit facility to $120,000 from $140,000. The First Amendment requires additional $5,000 annual reductions to the revolving credit facility capacity beginning on December 31, 2020 through the maturity of the facility. In addition, the First Amendment terminated the existing term loan by drawing on the revolving credit facility. Borrowings under the First Amendment continue to bear interest rates based upon either the base rate or Euro-rate plus applicable margins. However, the First Amendment increased the applicable margins on the interest rates, and implemented an interest rate floor of 100 basis points. The First Amendment also modified the covenants associated with the credit agreement. 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. For a discussion of the terms and availability of our credit facilities, please refer to Note 10 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

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 September 30, 2020 and December 31, 2019, the swap liability was $1,332 and $480, respectively.

On September 4, 2020, the Company sold its membership interests in the Test and Inspection Services business for gross proceeds of $4,000. As a result of this divestiture, the Company has reclassified the results of this business into discontinued operations. Due to the sale of this business, the Company recognized approximately $18,962 in tax benefits, including tax benefits recognized in discontinued operations, for the three and nine months ended September 30, 2020. In addition, the Company anticipates receiving approximately $9,008 in tax refunds within the next year due to extended carryback provisions in the CARES Act and the acceleration of existing deferred tax assets related to the sale. For additional information regarding the Test and Inspection Services sale, please refer to Note 3 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 6 and Note 7 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 converted a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. See Note 11 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, 2020, a 1% change in the interest rate for variable rate debt as of September 30, 2020 would increase or decrease interest expense by approximately $753.

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 loss” and reclassified into earnings within “Interest expense - net” 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 September 30, 2020 and December 31, 2019, the Company recorded a current liability of $1,332 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 nine months ended September 30, 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 Principal Accounting 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, 2020. Based upon that evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of such date 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 nine months ended September 30, 2020, and 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)

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 or as subsequently updated in our Quarterly Reports on Form 10-Q. 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.