L.B. Foster Company — FY 2012 Form 10-K Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates, and distributes products serving rail, construction, energy, and utility markets through three segments: Rail Products, Construction Products, and Tubular Products. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. Prior periods were reclassified for the sale of the Shipping Systems Division and Precise structural products business as discontinued operations.
- Rail Products represented 62.9% of 2012 continuing-operations sales; Construction Products represented 28.8%; Tubular Products represented 8.3%.
- International sales were approximately 18% of total sales.
- The Company sold SSD for $8.6 million and Precise for $2.6 million during 2012.
Financial performance and condition
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $588.5 million | $575.3 million | 2.3% increase |
| Gross profit | $92.3 million | $98.4 million | 6.2% decrease |
| Gross margin | 15.7% | 17.1% | 140 basis-point decline |
| Operating profit | $22.7 million | $30.8 million | 26.5% decrease |
| Income from continuing operations | $14.8 million | $22.1 million | 33.1% decrease |
| Diluted EPS from continuing operations | $1.44 | $2.14 | 32.7% decrease |
| Net income | $16.2 million | $22.9 million | 29.3% decrease |
| Cash flow from continuing operations | $26.3 million | $31.5 million | Decrease |
| Capital expenditures | $7.2 million | $11.7 million | Decrease |
FY 2012 continuing-operations results included approximately $22.0 million of pre-tax warranty charges related to defective concrete railroad ties manufactured at the former Grand Island, Nebraska facility. Product warranty expense totaled $24.3 million, and the year-end product warranty accrual increased to $15.7 million from $6.6 million.
Fourth-quarter 2012 continuing-operations sales were $140.7 million, up 5.2% from $133.7 million in the prior-year quarter. Income from continuing operations was $6.6 million, or $0.65 diluted EPS, compared with $5.8 million, or $0.57 diluted EPS, in fourth-quarter 2011. Fourth-quarter gross margin was 19.6%, compared with 19.8%.
- Rail Products FY 2012 sales increased 17.5% to $370.3 million, but gross profit decreased 8.8% to $52.5 million, primarily because of warranty charges and lower margins.
- Construction Products sales declined 25.7% to $169.3 million; gross profit declined 29.1% to $25.1 million.
- Tubular Products sales increased 50.8% to $49.0 million; gross profit increased 71.6% to $15.2 million.
At December 31, 2012, cash and cash equivalents were $101.5 million, working capital was $184.4 million, total assets were $406.1 million, and stockholders’ equity was $287.6 million. Total debt was approximately $0.1 million, consisting primarily of capital lease obligations. The Company had no revolving-credit borrowings and approximately $123.8 million of domestic revolving-credit availability. The Company was in compliance with its credit covenants.
Material changes versus the prior comparable period
- Sales increased modestly, but profitability declined because of the $22.0 million concrete-tie warranty charge, higher operating expenses, and a higher effective tax rate.
- Rail Products sales growth was driven by rail distribution, transit products, and concrete ties, including the Honolulu transit project, but segment gross margin fell from 18.3% to 14.2%.
- Construction Products weakened because of lower heavy-civil construction activity, reduced backlog, competitive pressure, and uncertain government funding.
- Tubular Products benefited from energy-market demand and increased activity at the Birmingham, Alabama coating facility, as well as improved water-well demand.
- Cash from continuing operations declined despite working capital providing $2.3 million, as inventory increased for major projects and the Company paid $12.0 million to Union Pacific Railroad.
- Backlog increased to $210.9 million at December 31, 2012 from $140.3 million, led by Rail Products backlog of $140.6 million versus $66.4 million.
- The Company paid $1.0 million in common dividends and made no share repurchases during 2012.
Guidance, outlook, risks, contingencies, and unusual items
Management projected 2013 sales growth of approximately 5% to 6.5%, consisting of double-digit Construction Products growth and low- to mid-single-digit growth in Rail and Tubular Products. Management expected 2013 pre-tax margins of approximately 7.6% to 7.8% and capital expenditures of $10 million to $11 million.
- Management expected construction markets to improve, although state budget pressures and dependence on government infrastructure funding remain risks.
- Rail outlook was supported by expected 2% to 3% growth in Class 1 railroad capital spending, reasonable rail traffic, the approximately $60 million Honolulu transit order, and a multi-year Union Pacific concrete-tie contract extension.
- Management expected continued strength in tubular end markets but at a materially slower growth rate than in 2012.
- The Union Pacific warranty matter remains the most significant contingency. The Company agreed to a 15-year warranty and a 1:1 replacement ratio for affected ties, compared with the prior five-year warranty and 1.5:1 replacement ratio. The Company believes its accrual is reasonable but stated that future costs could materially exceed current estimates.
- The Company received a subpoena from the Department of Transportation Inspector General concerning Grand Island concrete-tie manufacturing and stated that it was cooperating fully.
- Environmental and litigation reserves were approximately $2.1 million at year-end 2012. Management stated that no material legal or environmental proceedings were pending, while acknowledging that individual matters could affect a reporting period.
- Other key risks include steel, cement, and aggregate prices and availability; customer and supplier concentration; competition; foreign-exchange movements; pension obligations; joint-venture funding needs; goodwill impairment; and changes in infrastructure funding or regulation.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether the $15.7 million warranty accrual adequately covers future concrete-tie replacements and related customer claims.
- The financial and legal status of the Department of Transportation Inspector General inquiry.
- Whether Construction Products sales and margins recover as projected in 2013.
- The conversion of the $210.9 million backlog into revenue, including timing, margins, and customer concentration.
- Execution of the Honolulu transit project and the Union Pacific contract extension.
- Actual 2013 sales growth, pre-tax margin, capital expenditures, operating cash flow, and warranty-related cash payments compared with management’s outlook.
- The availability and covenant terms of the revolving credit facility, including restrictions on dividends, acquisitions, and other capital allocation.