Business Context and Reporting Period
Company: L. B. Foster Company (Foster)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
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, Construction Products, and Tubular Products.
Key Event: On December 15, 2010, the Company acquired Portec Rail Products, Inc. (Portec) for approximately $113.3 million in cash. This acquisition expanded Foster's rail product offerings to include friction management, wayside data collection, and securement systems, and significantly increased its international presence in Canada and the United Kingdom.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net Sales | $475.1 million | $404.0 million | +17.6% |
| Operating Profit | $32.0 million | $24.4 million | +31.4% |
| Net Income | $20.5 million | $15.7 million | +30.3% |
| Diluted EPS | $1.98 | $1.53 | +29.4% |
| Gross Profit Margin | 15.7% | 14.8% | +0.9 pts |
| Cash from Operations | $59.5 million | $25.7 million | +131.5% |
| Total Debt | $4.8 million | $18.6 million | -74.2% |
| Working Capital | $142.5 million | $210.3 million | -32.2% |
| Cash & Equivalents | $74.8 million | $124.8 million | -40.1% |
Note: 2010 results include a pre-tax gain of $1.4 million from the remeasurement of Portec equity securities prior to acquisition.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.6% year-over-year, driven by volume increases in Rail and Construction segments and the inclusion of Portec sales ($4.8 million) for the two weeks following acquisition.
- Profitability: Net income rose 30.3%. Gross profit improved due to the resolution of a $1.8 million supply chain dispute and the absence of $5.3 million in concrete tie charges recorded in 2009. However, the LIFO credit to gross profit was $8.8 million lower than in 2009 due to reduced price volatility.
- Debt Reduction: The Company repaid its entire $13.1 million term loan in December 2010. Total debt decreased to $4.8 million, consisting primarily of capital leases and acquisition notes for IDSI.
- Segment Performance:
- Rail Products: Sales up 13.9%; Gross profit up 70.4% (benefiting from the absence of prior year charges).
- Construction Products: Sales up 19.9%; Gross profit up 20.9%.
- Tubular Products: Sales up 28.8%; Gross profit up 403.7% as the division returned to profitability.
Guidance, Outlook, and Risks
Outlook: Management expects to be profitable and generate positive cash flow in 2011 but anticipates challenges from moderating sales volumes, heightened competition, and margin compression for at least the next six months due to the recessionary environment.
Key Risks and Contingencies:
- Acquisition Integration: Risks associated with integrating Portec, including potential loss of key employees and disruption of operations. The inventory step-up to fair value ($3.2 million) is expected to negatively impact gross profit through Q1 2011.
- Customer Concentration: Significant dependence on Union Pacific Railroad (UPRR). UPRR opted not to extend the supply agreement for the Grand Island, NE facility, which will close in 2011. However, the Tucson, AZ facility contract continues through 2012.
- Legal Proceedings:
- Environmental (Niagara Mohawk): A Second Circuit Court decision reinstated CERCLA claims against Portec regarding the Troy Water Street Site. While management believes the case lacks merit, potential liability could be material.
- Product Liability: Ongoing warranty claims related to concrete railroad ties. A reserve of approximately $2.2 million was maintained as of year-end.
- Shareholder Litigation: Lawsuits regarding the Portec merger were largely resolved, though a motion for attorney fees remains pending.
- Government Funding: Construction segment performance is tied to federal infrastructure funding (SAFETEA-LU), which was extended only through September 2011, creating uncertainty for future projects.
Investor Verification Checklist
- Portec Integration: Verify the timeline and cost of integrating Portec's systems and the impact of the $3.2 million inventory step-up on Q1 2011 margins.
- UPRR Contract Status: Confirm the impact of the Grand Island facility closure on future Rail segment revenue and the capacity utilization of the Tucson facility.
- Legal Exposure: Monitor the status of the Niagara Mohawk CERCLA litigation and the potential for material environmental liability.
- Warranty Reserves: Track the adequacy of the $2.2 million concrete tie warranty reserve against future claims.
- Government Spending: Assess the impact of the expiration of SAFETEA-LU in September 2011 on the Construction Products backlog and future orders.