L.B. Foster Company 2014 Form 10-K Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates, and distributes products and services for 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, 2014; fourth-quarter comparisons are for the three months ended December 31. Unless stated otherwise, amounts are in thousands of dollars.
2014 acquisitions included Carr Concrete for $12,480, FWO for $1,103, and Chemtec Energy Services for $66,719, net of cash received. The acquisitions were not material to 2014 reported revenue or profit because they were completed late in the year. Subsequent to year-end, the Company acquired Tew Holdings for approximately $26,600.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $607,192 | $597,963 | +1.5% |
| Gross profit | $121,591 | $115,939 | +4.9% |
| Gross margin | 20.0% | 19.4% | +60 bps |
| Operating profit | $37,082 | $41,571 | -10.8% |
| Income from continuing operations | $25,654 | $29,276 | -12.4% |
| Diluted EPS from continuing operations | $2.48 | $2.85 | -13.0% |
| Net income | $25,656 | $29,290 | -12.4% |
| Cash flow from continuing operations | $66,616 | $13,880 | +380.0% |
Operating profit and net income were pressured by $9,374 of pre-tax concrete-tie warranty charges, including a $4,766 charge in the fourth quarter. Excluding the 2014 warranty charges, management reported a full-year gross margin of 21.6% and a fourth-quarter gross margin of 22.6%; these are non-GAAP measures.
Full-year segment sales were $374,615 for Rail Products, $178,847 for Construction Products, and $53,730 for Tubular Products. Segment gross margins were 20.6%, 18.1%, and 21.8%, respectively.
Fourth-quarter sales were $161,149, up 3.0% from $156,458. Rail Products sales increased 6.6%, Construction Products declined 3.5%, and Tubular Products increased 13.3%. Fourth-quarter income from continuing operations declined to $6,038, or $0.58 diluted EPS, from $7,275, or $0.71 diluted EPS.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $52,024 at December 31, 2014, down from $64,623.
- Total debt was $26,428, including $24,200 outstanding under the revolving credit facility, versus $56 at year-end 2013.
- The amended revolving credit facility provides up to $200,000 of commitments plus a $100,000 accordion feature. Reported availability was $175,375.
- Working capital was $138,908, compared with $171,885 in 2013.
- Capital expenditures were $17,056 in cash-flow reporting, with total long-lived-asset expenditures of $19,037. Management expects 2015 capital expenditures of approximately $18,000 to $22,000, including about $7,000 for ERP modernization.
- 2014 acquisitions used $80,797 of cash, while operating activities generated $66,616. Net cash decreased by $12,599 to $52,024.
- Approximately $49,233 of cash was held in non-domestic accounts and was not available for domestic operations unless repatriated. The Company intends to indefinitely reinvest foreign earnings outside the United States.
- The Company was in compliance with its credit agreement covenants at year-end. Contractual cash obligations totaled $92,189, including $44,499 of purchase obligations and $17,108 of operating lease obligations.
Material changes versus the prior comparable period
- Sales increased modestly, led by Tubular Products and Rail Products, while Construction Products declined because of lower piling volumes and supply constraints.
- Gross margin improved despite the warranty charge, supported by favorable mix and cost-reduction initiatives. Selling and administrative expenses increased 12.0%, reflecting higher headcount, acquisition costs, travel, and ERP-related spending.
- Cash generation improved substantially because working-capital management provided $29,259, compared with a $29,964 use in 2013. Days sales outstanding improved to 50 days from 52 days.
- Debt increased materially to fund acquisitions and other liquidity needs, although the Company retained substantial unused credit capacity.
- Backlog was $184,350 at year-end, broadly stable with $183,111 in 2013. Rail backlog declined to $104,821, while Construction backlog increased to $65,843 and Tubular backlog to $13,686. Approximately 6% related to 2014 acquisitions and approximately 2% extended beyond 2015.
- The quarterly dividend increased from $0.03 to $0.04 per share beginning in the fourth quarter. The full-year dividend paid was $0.13 per share.
Guidance, outlook, risks, and unusual items
Management expected transportation infrastructure markets, particularly freight rail and transit, to remain favorable in 2015. Energy markets were considered uncertain because of declining oil prices and expected reductions in customer operating and capital spending. Construction markets were expected to be broadly comparable with 2014, with lower fabricated-bridge sales potentially offset by piling and concrete-products growth.
Management planned to integrate the Carr, FWO, Chemtec, and Tew acquisitions, continue facility modernization in Birmingham and Niles, and advance the ERP implementation. The Company also identified long-term acquisition opportunities in existing and adjacent markets.
The most significant contingency is the dispute with Union Pacific Railroad regarding allegedly defective concrete ties manufactured at the former Grand Island, Nebraska facility. The Company recorded a concrete-tie warranty reserve of $10,331 at December 31, 2014, within a total product-warranty reserve of $11,500. UPRR asserted that approximately 90,100 ties replaced during 2014 were eligible for warranty coverage, while the Company disputed the eligibility of those ties. On January 23, 2015, UPRR filed a lawsuit seeking contract remedies and damages of an amount not specified. The Company believes the claims lack merit but states that an adverse outcome could materially affect earnings, liquidity, cash flows, and the Tucson facility.
Other risks include exposure to rail and government infrastructure spending, oil and gas markets, steel and cement availability and pricing, supplier concentration, competition, labor disruptions, foreign currency movements, cybersecurity, environmental matters, litigation, warranty estimates, acquisition integration, and potential impairment of goodwill or intangible assets. No goodwill or material asset impairments were recorded during 2014.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective, although the assessment excluded the internal controls of FWO and Chemtec, which represented approximately 16% of total assets and less than 1% of 2014 revenue and pre-tax income.
Important facts for investors to verify
- Whether the UPRR litigation and warranty dispute require additional accruals, replacement ties, settlements, or materially affect the supply agreement and Tucson operations.
- The sustainability of 2014 cash flow improvement and working-capital benefits after funding acquisitions and planned capital expenditures.
- The effect of declining energy-market spending on Tubular Products revenue, orders, margins, and Chemtec’s performance.
- Whether rail-market growth, backlog conversion, and the recently acquired businesses offset lower fabricated-bridge activity and potential UPRR-related disruption.
- The final purchase-price allocations and operating results of Carr, FWO, Chemtec, and Tew, including goodwill and intangible-asset amortization.
- Compliance with credit-facility covenants, borrowing costs, dividend restrictions, and the availability of domestic versus non-domestic cash.
- Implementation costs, timing, and operational benefits of the ERP modernization program.