Business Context and Reporting Period
Company: L. B. Foster Company (Foster)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Foster is a manufacturer, fabricator, and distributor of products for rail, construction, energy, and utility markets. Operations are divided into three segments: Rail Products (47% of 2009 sales), Construction Products (48%), and Tubular Products (5%). The company operates 14 sales offices and 17 warehouse/plant facilities across the U.S.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Sales | $381.96 million | $512.59 million |
| Operating Profit | $24.36 million | $39.25 million |
| Net Income | $15.73 million | $27.75 million |
| Diluted EPS | $1.53 | $2.57 |
| Cash Flow from Operations | $25.74 million | $24.10 million |
| Total Assets | $333.17 million | $332.12 million |
| Long-Term Debt | $13.20 million | $21.73 million |
| Working Capital | $210.33 million | $202.26 million |
| Cash & Equivalents | $124.85 million | $115.07 million |
Note: 2009 results include a pre-tax gain of $1.19 million from the sale of marketable securities. 2008 results included significant one-time gains from the sale of a DM&E investment and a facility sale-leaseback.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 25.5% to $381.96 million, driven by reduced demand and lower product prices across all segments due to the recessionary environment.
- Profitability Compression: Net income fell 43.3% to $15.73 million. Gross profit margins were impacted by market-related inventory adjustments and unfavorable manufacturing variances, partially offset by a $11.0 million reduction in LIFO reserve requirements.
- Segment Performance:
- Rail Products: Sales down 23.7%; gross profit down 55.2% due to warranty charges ($2.7 million) for cracked concrete ties and rejected inventory ($2.6 million).
- Construction Products: Sales down 25.0%; gross profit down 32.4% due to piling division margin compression.
- Tubular Products: Sales down 40.8%; gross profit turned negative (-16.5% margin) due to energy market slowdown and inventory write-downs.
- Debt Reduction: Long-term debt decreased by approximately $8.5 million as the company repaid $8.9 million in debt obligations.
Guidance, Outlook, and Risks
Outlook: Management expects 2010 to be challenged by reduced sales volumes, production volumes, and heightened competition. However, the company anticipates remaining profitable and generating positive cash flow. Capital expenditures for 2010 are projected between $6.0 million and $7.0 million.
Recent Developments:
- Merger Agreement: On February 16, 2010, Foster entered into an agreement to acquire Portec Rail Products, Inc. for approximately $112.4 million in cash ($11.71 per share). The deal is subject to regulatory approval and shareholder acceptance.
- Legal Challenges: Multiple lawsuits were filed in March 2010 by Portec shareholders alleging breach of fiduciary duties, seeking to enjoin the merger.
Key Risks & Contingencies:
- Customer Concentration: Significant reliance on Union Pacific Railroad (UPRR) for concrete tie sales; UPRR purchasing levels remain depressed.
- Product Liability: Ongoing warranty claims related to concrete tie failures; management estimates remaining costs but notes potential for material impact.
- Government Funding: Construction segment dependent on federal infrastructure funding (SAFETEA-LU), which expired in September 2009 and was only temporarily extended.
- Raw Materials: Exposure to cyclical steel prices and availability.
Investor Verification Checklist
- Merger Consummation: Verify the status of the Portec Rail Products acquisition, including regulatory approvals and resolution of shareholder lawsuits filed in March 2010.
- Concrete Tie Warranty: Monitor updates on the $2.7 million warranty charge for cracked ties and the $2.6 million charge for rejected inventory to ensure no further material costs arise.
- UPRR Contract Renewal: Confirm the renewal status of the concrete tie supply agreement with Union Pacific Railroad, which expires in December 2010 for the Grand Island facility.
- Government Stimulus Impact: Assess the actual impact of federal stimulus legislation on the Transit and Construction segments in 2010, given the expiration of SAFETEA-LU.
- Joint Venture Progress: Track the operational commencement and capital contribution requirements for the L B Pipe & Coupling Products, LLC joint venture.