L.B. Foster Company — FY2019 Form 10-K Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and provides services for transportation and energy infrastructure in North America and Europe. This Form 10-K covers the fiscal year ended December 31, 2019, with comparisons to 2018. The company operates through Rail Products and Services, Construction Products, and Tubular and Energy Services.
| Segment | 2019 sales | Change | 2019 sales mix |
|---|---|---|---|
| Rail Products and Services | $321.8 million | 0.7% increase | 49.1% |
| Construction Products | $182.5 million | 15.0% increase | 27.9% |
| Tubular and Energy Services | $150.8 million | 1.3% increase | 23.0% |
| Total | $655.1 million | 4.5% increase | 100.0% |
Key financial metrics
| Metric | 2019 | 2018 | Change or comment |
|---|---|---|---|
| Gross profit | $121.4 million | $117.2 million | Up 3.6% |
| Gross margin | 18.5% | 18.7% | Down 20 basis points |
| Income before taxes | $17.4 million | $(26.7) million | Returned to profitability |
| Net income | $42.6 million | $(31.2) million | Includes significant tax benefit |
| Diluted EPS | $4.00 | $(3.01) | Improved materially |
| Adjusted EBITDA | $45.6 million | $41.4 million | Up 10.1%; non-GAAP measure |
| Net cash from operations | $29.3 million | $26.0 million | Up $3.3 million |
| Capital expenditures | $8.8 million | $5.3 million | Increased $3.6 million |
| Cash and cash equivalents | $14.2 million | $10.3 million | Increased $3.9 million |
| Total debt | $58.2 million | $75.0 million | Down $16.8 million, or 22.4% |
| Net debt | $44.0 million | $64.7 million | Down $20.7 million |
Selling and administrative expense was $88.0 million, or 13.4% of sales, compared with 14.0% in 2018. The company reported a 60-basis-point improvement from cost-containment programs. No quarterly dividends were declared in 2019 or 2018.
Liquidity included $105.6 million of available borrowing capacity under the amended credit agreement. The company was in compliance with its debt covenants at December 31, 2019. The credit agreement provides a $140 million revolving facility, subject to a $25 million Canadian and U.K. sublimit, and matures April 30, 2024.
Material changes versus 2018
- Sales increased in all three segments, led by Construction Products, while total gross margin declined modestly.
- Rail benefited from North American transit demand and friction-management activities, partly offset by reduced London Crossrail activity and weaker freight rail conditions in the second half.
- Construction sales benefited from the Port Everglades piling project, higher precast demand, and bridge work, but segment profit declined because of project scope changes, rework, and supply-chain inefficiencies.
- Tubular and Energy benefited from midstream pipeline investment and a 12.1% increase in Protective Coatings and Measurement Systems sales. Upstream Test, Inspection, and Threading Services sales fell 14.7% amid lower rig activity, tariffs, quotas, and customer cost reductions.
- The 2018 results included a $43.4 million Concrete Tie Settlement expense. In 2019, the company paid $10.0 million under the settlement and recorded no new settlement expense.
- The company reversed $29.6 million of its U.S. deferred-tax valuation allowance, producing a $25.2 million income-tax benefit and materially increasing reported net income. Future realization remains dependent on taxable income and management projections.
- The company recorded $3.5 million of relocation and closure costs and a $2.2 million non-cash U.S. pension settlement expense.
- Backlog increased 4.4% to $230.1 million. Rail backlog rose 6.4% and Tubular and Energy backlog rose 23.7%, while Construction backlog declined 3.3%. Approximately 8.3% of total backlog was expected to extend beyond 2020.
Guidance, outlook, risks, and unusual items
Management did not provide a quantified 2020 earnings or revenue forecast in the filing. Management expressed confidence in the company’s cost structure, working-capital discipline, backlog, and growth opportunities, particularly in transit, infrastructure, rail technology, and midstream energy. The Spokane, Washington precast facility was relocated to Boise, Idaho during the first quarter of 2020 to pursue regional growth and logistical savings.
- Key operating risks include economic slowdowns, declining freight or passenger rail traffic, depressed oil and gas prices, reduced infrastructure funding, material and labor cost inflation, tariffs, foreign exchange, and intense competition.
- Upstream energy exposure remains a significant risk because of lower rig deployments and customer spending reductions.
- The company is implementing an enterprise resource planning system across additional divisions. Delays, disruptions, or inaccurate data could affect order processing, inventory, billing, and financial reporting.
- Variable-rate debt and LIBOR-based interest-rate swaps expose the company to interest-rate and benchmark-transition risks.
- The company has a $50.0 million Union Pacific settlement obligation, with $40.0 million remaining payable in $8.0 million annual installments from 2020 through 2024. The settlement also contemplates $48.0 million of cumulative purchases from the company and affiliates through 2024.
- Environmental liabilities totaled $6.1 million at year-end. The company is also a potentially responsible party regarding the Portland Harbor Superfund Site; the ultimate exposure cannot be predicted, although management does not currently expect a material adverse effect.
- The company faces product warranty claims, litigation, cybersecurity threats, supplier concentration, labor negotiations, Brexit-related uncertainty, and potential future asset impairment charges. No goodwill or long-lived-asset impairments were recorded in 2019 or 2018.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019.
Important facts for investors to verify
- Assess the sustainability of 2019 earnings excluding the $29.6 million deferred-tax valuation allowance reversal.
- Review the reconciliation and definitions of adjusted EBITDA and net debt, which are non-GAAP measures.
- Monitor the $40.0 million remaining Union Pacific settlement payments and the related customer-purchase commitments.
- Evaluate debt maturities, covenant compliance, variable-rate exposure, and the April 2024 credit-facility maturity.
- Track upstream energy demand, Test, Inspection, and Threading Services performance, and the effect of oil and gas market conditions.
- Confirm execution and financial benefits of the Boise relocation and ongoing ERP implementation.
- Review environmental, warranty, litigation, pension, and other contingent liabilities, including the Portland Harbor matter.
- Determine how much of backlog converts to revenue and profit, recognizing that management states backlog is not a reliable predictor of future financial performance.