L.B. Foster Company — FY2017 Form 10-K Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Reported segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This Form 10-K covers the fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter information.
- 2017 revenue mix: Rail 47.8%, Construction 30.2%, and Tubular and Energy Services 22.0%.
- Approximately 19% of sales were generated outside the United States; no customer accounted for more than 10% of consolidated sales.
Financial performance and key metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $536.4 million | $483.5 million | +10.9% |
| Gross profit | $103.3 million | $90.4 million | +14.3% |
| Gross margin | 19.2% | 18.7% | +50 bps |
| Operating profit (loss) | $15.7 million | $(5.2) million | Improved |
| Net income (loss) | $4.1 million | $(141.7) million | Returned to profit |
| Diluted EPS | $0.39 | $(13.79) | Improved |
| Net cash from operations | $39.4 million | $18.4 million | +114% |
| Adjusted EBITDA | $36.0 million | $18.5 million | +94% |
Fourth-quarter 2017 sales were $141.3 million, gross profit was $27.9 million, and net income was $0.3 million, or $0.03 diluted EPS. Fourth-quarter results included provisional Tax Cuts and Jobs Act amounts.
- Segment sales increased 7.1% in Rail, 11.1% in Construction, and 19.9% in Tubular and Energy Services.
- Segment profit was $12.2 million for Rail, $11.6 million for Construction, and $3.8 million for Tubular and Energy Services.
- Selling and administrative expense declined 6.3% to $80.5 million, primarily reflecting prior-year restructuring benefits and lower UPRR-related legal costs.
- Capital expenditures were $6.1 million. Working capital was $127.6 million, compared with $117.3 million at December 31, 2016.
- Cash and cash equivalents were $37.7 million, including $35.8 million held outside the United States. Total debt was $130.0 million, down from $159.6 million; the $30.0 million term loan was paid off.
- Revolving credit availability was $41.1 million, and the Company reported compliance with its credit agreement covenants.
- Stockholders’ equity increased to $146.5 million from $133.3 million. No dividends were paid in 2017, and the share repurchase authorization expired with approximately $29.9 million unused.
Material changes versus the prior comparable period
- Revenue recovered across all three segments, led by the energy-market recovery and stronger upstream and midstream activity.
- Net income improved substantially because 2017 included no asset impairments, compared with $135.9 million of non-cash goodwill, intangible-asset, and property impairments in 2016.
- Backlog increased 13.2% to $166.9 million at year-end, including Rail backlog of $68.9 million, Construction backlog of $71.3 million, and Tubular and Energy Services backlog of $26.7 million. Approximately 5% was expected to extend beyond 2018.
- Operating cash flow increased by $21.0 million, while debt declined by $29.6 million.
- The Company sold its Protective Coatings field-service assets for $1.2 million and recognized a $0.5 million gain on the sale of European transit rail patents.
- The 2017 effective tax rate was 48.9%, affected by provisional Tax Cuts and Jobs Act expense of $3.3 million for the transition tax and a $1.5 million benefit from deferred-tax remeasurement.
- The 45% interest in L B Pipe and Coupling Products, LLC was classified as held for sale and written down by $0.4 million.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2018 freight-rail spending, transit activity, energy services, rig counts, pipeline infrastructure demand, and Construction backlog opportunities to support continued improvement.
- Management planned to continue using operating cash flow to reduce debt and to modernize operations through continued ERP-system implementation.
- Key risks include cyclical rail, construction, and energy markets; steel, cement, labor, and other input-cost volatility; dependence on major suppliers; government infrastructure funding; foreign currency and Brexit-related exposure; cybersecurity; ERP implementation; and covenant or refinancing risk.
- The UPRR concrete-tie litigation remained material. Discovery was scheduled to conclude June 29, 2018, with trial possible on or after October 1, 2018. Management disputed UPRR’s claims, but stated that any judgment or settlement could materially affect earnings, liquidity, financial condition, and cash flows. The filing states that no additional loss or range of loss could be estimated.
- Product warranty reserves were $8.7 million at year-end, including approximately $7.6 million for concrete-tie claims. The Company recorded $0.8 million for a Protective Coatings warranty claim and $0.02 million of concrete-tie warranty charges during 2017.
- The Company received an EPA notice concerning potential responsibility for the Portland Harbor Superfund Site. Management did not expect current environmental matters to materially affect the Company, but environmental obligations totaled $6.1 million at year-end.
- Goodwill was $19.8 million at year-end, with no 2017 impairment. Management noted that weaker-than-expected market recovery could result in future Rail Technologies goodwill impairment.
- The Company’s financial statements and internal control over financial reporting received unqualified audit opinions from Ernst & Young LLP.
Most important facts for investors to verify
- Whether the energy and freight/transit rail recovery continues and converts the higher backlog into profitable revenue.
- The final outcome, timing, and cash exposure of the UPRR litigation and related warranty claims.
- Compliance with the credit facility’s liquidity, fixed-charge coverage, and leverage requirements as covenant restrictions change in 2018.
- Whether operating cash flow is sufficient to fund working capital, capital expenditures, debt repayment, and contractual obligations without additional financing.
- Final tax accounting under the Tax Cuts and Jobs Act, including transition-tax amounts, deferred-tax valuation allowances, and potential GILTI effects.
- Potential future goodwill or long-lived-asset impairments if projected market recovery does not occur.
- The impact of ERP implementation, supplier concentration, input costs, environmental matters, and other disclosed operational risks.