Business Context and Reporting Period
Company: L. B. Foster Company (Foster)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Foster manufactures, fabricates, and distributes products for the nation's surface transportation infrastructure. Operations are classified into three segments: Rail Products (50% of sales), Construction Products (45% of sales), and Tubular Products (5% of sales). The company serves railroads, mines, construction contractors, and utilities.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 |
|---|---|---|
| Net Sales | $257,950 | $282,119 |
| Gross Profit | $29,467 | $33,496 |
| Gross Margin % | 11.4% | 11.9% |
| Operating Profit | $2,992 | $5,098 |
| Net Loss (Continuing Ops) | $(5,029) | $1,303 |
| Net Loss (Total) | $(11,424) | $637 |
| EPS (Basic/Diluted) | $(1.20) | $0.07 |
| Working Capital | $46,694 | $62,011 |
| Long-Term Debt | $26,991 | $32,758 |
| Total Assets | $133,984 | $160,042 |
| Cash Flow from Operations | $18,214 | $22,088 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 8.6% to $257.9 million, driven by a 11.6% drop in Rail Products and a 38.5% drop in Tubular Products due to depressed market conditions. Construction Products sales increased slightly by 1.0%.
- Significant Non-Cash Charges: The 2002 net loss was heavily impacted by non-cash charges totaling approximately $19.3 million, including:
- $6.9 million impairment of equity investment and advances to a principal specialty trackwork supplier.
- $4.4 million (net of tax) cumulative effect of adopting SFAS 142 (Goodwill impairment).
- $2.2 million mark-to-market charge on derivative instruments.
- $0.8 million depreciation charge on assets previously held for resale.
- Discontinued Operations: The rail signaling and communication business (Foster Technologies) was reclassified as a discontinued operation, resulting in a $2.0 million loss for the year.
- Liquidity Improvement: Working capital decreased by $15.3 million, primarily due to a $13.7 million reduction in accounts receivable and a $10.4 million reduction in inventory.
- Debt Reduction: Long-term debt decreased by $5.8 million as the company reduced corporate borrowings by $12.0 million under a new credit facility.
Outlook, Risks, and Management Commentary
- Outlook: Management expects the availability of new Z-pile sheet piling products to positively impact 2003 earnings in the Construction segment. However, results remain dependent on government infrastructure funding and the renewal of a major contract with a Class I railroad for concrete ties.
- Supplier Concentration Risk: Specialty trackwork sales depend on a single supplier. The company wrote off $5.05 million in advances to this supplier, citing uncertainty regarding recoverability. Failure of this supplier to perform could negatively impact earnings.
- Market Risks: The company faces significant competition and is sensitive to raw material prices (steel) and energy market uncertainties affecting pipeline projects.
- Legal Proceedings: The company is appealing a December 2000 conviction regarding unlawful disposal of hazardous waste, which resulted in a $170,000 fine.
- Capital Expenditures: Expected to be approximately $5.0 million in 2003, funded by cash flow and external financing.
Investor Verification Checklist
- Supplier Solvency: Verify the financial health and operational status of the principal specialty trackwork supplier, given the $5.05 million write-off of advances and $10 million in contractual obligations.
- Contract Renewals: Monitor the status of the concrete tie contract with the major Class I railroad customer, which expires in September 2003.
- Goodwill Impairment: Review the assumptions used in the SFAS 142 goodwill impairment test to ensure no further write-downs are required in future periods.
- Derivative Accounting: Assess the ongoing impact of mark-to-market accounting on interest rate collars following the discontinuation of hedge accounting.
- Backlog Conversion: Track the conversion of the $109.1 million backlog (87% expected to ship in 2003) into actual revenue, noting the significant decline in Rail segment backlog.