L.B. Foster Company — Fiscal 2015 Form 10-K
Business context and reporting period
L.B. Foster manufactures, fabricates, distributes, and services products for rail, construction, energy, and utility markets. Reported segments were Rail Products and Services, Construction Products, and Tubular and Energy Services. The filing covers the fiscal year ended December 31, 2015; fourth-quarter results are also disclosed. Approximately 16% of 2015 sales were generated outside the United States.
2015 included the acquisitions of Tew, IOS Holdings, and Tew Plus. The company also completed its acquisition of the remaining 75% interest in Tew Plus during November 2015.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $624.5 million | $607.2 million | 2.9% increase |
| Gross profit | $133.7 million | $121.6 million | 9.9% increase |
| Gross margin | 21.4% | 20.0% | Up 138 basis points |
| Operating profit | $28.8 million | $37.1 million | 22.4% decrease |
| Net income (loss) | $(44.4) million | $25.7 million | Declined to a loss |
| Diluted EPS | $(4.33) | $2.48 | Declined to a loss |
| Adjusted EBITDA | $60.6 million | $51.6 million | 19.0% increase |
| Operating cash flow | $56.2 million | $66.7 million | 15.8% decrease |
| Total debt | $168.8 million | $26.4 million | Substantial increase |
| Cash and equivalents | $33.3 million | $52.0 million | Decrease |
Operating profit margin was approximately 4.6% in 2015 versus 6.1% in 2014, while net margin was approximately negative 7.1%. Adjusted EBITDA excludes the $80.3 million goodwill impairment charge and is a non-GAAP measure.
Fourth-quarter 2015 sales were $139.1 million, gross profit was $29.9 million, net income was $3.3 million, and diluted EPS was $0.32. Fourth-quarter 2014 sales were $161.1 million, gross profit was $31.6 million, net income was $6.0 million, and diluted EPS was $0.58.
Segment performance and material changes
- Rail Products and Services: Sales decreased 12.2% to $329.0 million. Lower North American freight rail spending, reduced commodity shipments, international weakness, and the loss of Union Pacific Railroad business were significant factors. Segment gross margin increased to 22.9% from 20.6%, partly because 2014 included higher concrete-tie warranty charges.
- Construction Products: Sales declined 1.4% to $176.4 million. Piling sales weakened because of competition and lower steel prices, while precast construction sales increased 43.0%. Gross margin improved to 19.4% from 18.1%.
- Tubular and Energy Services: Sales increased 121.8% to $119.1 million, primarily from acquisitions. Gross margin declined to 18.9% from 21.8% because of acquired-business mix and depressed oil and gas market conditions. The segment reported an $81.3 million loss, including goodwill impairment.
- Acquisition-related revenues contributed approximately $93.4 million of 2015 sales. The IOS acquisition cost approximately $167.4 million and was negatively affected by falling oil prices and declining U.S. land-rig activity.
- Backlog declined to $164.7 million at December 31, 2015 from $184.4 million. Rail and Construction backlog decreased, while Tubular and Energy backlog increased to $34.1 million from $13.7 million. Approximately 4% of 2015 backlog was expected to extend beyond 2016.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow of $56.2 million was more than offset by $205.6 million of investing cash outflows, primarily the $196.0 million spent on acquisitions and $14.9 million of capital expenditures.
- Financing activities provided $134.3 million, principally through borrowings used to fund acquisitions. The company reduced borrowings by $51.3 million from March 31, 2015, but year-end debt was substantially higher than in 2014.
- The amended revolving credit facility has a maximum commitment of $335 million, an additional $100 million accordion feature, and matures in March 2020. Year-end revolver borrowings were $165.0 million, with approximately $169.5 million of availability under the facility.
- The company reported compliance with its leverage and interest-coverage covenants at December 31, 2015. Contractual cash obligations totaled $245.3 million, including $165.0 million of revolving debt, $20.1 million of operating leases, and $40.7 million of purchase obligations.
- 2015 dividends were $0.16 per share. The company repurchased 80,512 shares for $1.6 million and authorized a new $30 million repurchase program effective January 1, 2016.
Outlook, unusual items, contingencies, and risks
- The largest unusual item was an $80.3 million non-cash goodwill impairment charge, or $63.9 million after tax, related to IOS and Chemtec. Management attributed the impairment to prolonged energy-market weakness, lower rig counts, and reduced forecasts.
- Excluding the after-tax impairment, management reported non-GAAP net income of $19.4 million, or $1.88 per diluted share. This measure should not be viewed as a substitute for GAAP results.
- Management expected North American freight rail spending to remain weak in 2016, while it viewed the U.K. rail outlook and the U.S. transit market more favorably. The FAST Act was expected to support U.S. transit infrastructure funding.
- Energy-market demand remained difficult to forecast. Management planned continued cost reductions, facility consolidation, and efficiency initiatives, but stated that the timing of a meaningful recovery was uncertain.
- The company planned to begin implementing a new enterprise resource planning system in the second quarter of 2016. Delays, disruptions, or deficiencies could affect operations and financial reporting.
- Union Pacific Railroad terminated the concrete-tie supply agreement and filed litigation alleging warranty and contractual breaches. The company disputed the claims and filed counterclaims. The potential outcome, including additional warranty costs, settlement amounts, or judgments, could materially affect results, liquidity, and cash flows.
- The year-end concrete-tie warranty reserve was $7.5 million, within a total product warranty reserve of $8.8 million. Management stated that the UPRR litigation outcome could exceed recorded accruals.
- Other risks include sustained low energy prices, rail and infrastructure spending declines, commodity and steel-price volatility, supplier concentration, acquisition integration, leverage and covenant compliance, foreign-exchange exposure, cybersecurity, labor disruptions, environmental matters, and competition.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded IOS and Tew Plus from the internal-control assessment; those businesses represented approximately $110.2 million of year-end assets and $37.2 million of 2015 sales.
Most important facts for investors to verify
- Whether the energy businesses can recover without further goodwill or other asset impairments.
- The ultimate cost and resolution of the UPRR concrete-tie litigation and related warranty claims.
- Debt reduction, revolver availability, interest costs, and compliance with leverage and interest-coverage covenants.
- Whether rail and construction order trends and backlog stabilize after the 2015 declines.
- The performance and integration of IOS, Tew, and Tew Plus, including the impact of acquisition-related costs.
- The implementation of the ERP system and whether controls over newly acquired businesses are incorporated without disruption.
- The sustainability of dividends and share repurchases given the company’s higher leverage and cyclical markets.