FSTR

Business Context and Reporting Period

Company: L. B. Foster Company (Foster)

Filing Type: Form 10-K (Annual Report)

Reporting Period: Fiscal year ended December 31, 1995

Business Overview: Foster manufactures, fabricates, and distributes rail and trackwork, piling, pile driving equipment, highway products, and tubular products. Operations are classified into three segments: Rail Products (42% of 1995 sales), Construction Products (34%), and Tubular Products (24%). The company operates 14 plants/warehouses and 11 sales offices nationwide.

Key Financial Metrics (Year Ended Dec 31, 1995)

Note: 1995 Net Income includes a $219,000 charge ($0.02/share) for the adoption of SFAS No. 121 regarding impairment of long-lived assets.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13% to $265.0 million, driven by a 26% increase in Rail Products sales and an 8% increase in Tubular Products. Construction Products sales rose 4%.
• Profitability Decline: Despite higher sales, Net Income decreased 11% to $4.8 million. Gross margin percentage declined to 11% from 12% due to lower margins on used rail, fabricated products, and vibratory pile driving equipment.
• Expense Increases: Selling and administrative expenses rose 5% (partially offset by a 1994 vacation policy change). Interest expense increased 37% due to higher borrowings.
• Segment Performance:
  • Rail: Sales up 26%; Operating profit down slightly to $5.7M from $6.1M due to margin compression.
  • Construction: Sales up 4%; Operating profit down to $2.6M from $4.2M due to lower margins on fabricated products and equipment.
  • Tubular: Sales up 8%; Operating profit improved to $0.7M from a $2.1M loss in 1994, aided by improved Fosterweld pipe margins.
• Backlog: Total backlog remained flat at approximately $81.0 million ($80.975M in 1995 vs. $80.932M in 1994).

Guidance, Outlook, and Risks

• Divestitures: Management decided to divest Fosterweld operations (Parkersburg, WV facility) and the Windsor, NJ facility. Discussions with buyers are ongoing, but outcomes are uncertain. The company also plans to reduce investment in warehouse pipe products.
• Capital Expenditures: 1995 CapEx was $4.1 million. 1996 CapEx is expected to be approximately $3 million, funded by operating cash flows.
• Liquidity: The company has a $45 million revolving credit agreement (expires July 1999). As of Dec 31, 1995, $29.8 million was borrowed, leaving $14.1 million in unused commitment. No dividends were paid in 1995 due to credit agreement restrictions.
• Risks and Contingencies:
  • Supplier Concentration: Approximately 70% of materials for the Construction Products segment are purchased from a single supplier.
  • Government Funding: Operations depend on government funding for infrastructure projects.
  • Environmental: Compliance with environmental laws may adversely affect future earnings, though management does not expect a material adverse effect on financial condition.
  • Investment: The company holds stock in a privately-held corporation (book value ~$2.0M, recorded at historical cost of $0.2M) which is planned for sale.

Investor Verification Checklist

• Divestiture Progress: Verify the status of negotiations to sell the Fosterweld (Parkersburg) and Windsor facilities, as these assets are classified as "held for resale."
• Supplier Dependency: Assess the risk associated with the single supplier providing 70% of materials for the Construction Products segment.
• Margin Sustainability: Monitor whether the decline in gross margins (11% in 1995) is a temporary anomaly or a structural shift in the rail and construction markets.
• Debt Covenants: Confirm continued compliance with the revolving credit agreement covenants (fixed charge coverage, leverage ratio) which restrict dividend payments.
• Deferred Tax Assets: Review the utilization of Net Operating Loss (NOL) carryforwards ($7.8M federal) and the remaining valuation allowance ($0.2M) to understand future tax liabilities.