Business Context and Reporting Period
Company: L. B. Foster Company (Foster)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Foster is a manufacturer, fabricator, and distributor of products for rail, construction, energy, and utility markets. Operations are classified into three segments: Rail Products (46% of 2008 sales), Construction Products (47%), and Tubular Products (7%). The company serves railroads, mines, industrial plants, and government infrastructure projects.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Sales | $512.6 million | $509.0 million |
| Net Income | $27.7 million | $110.7 million |
| Diluted EPS | $2.57 | $10.09 |
| Operating Profit | $39.2 million | $39.0 million |
| Cash from Operations | $24.1 million | ($4.7 million) used |
| Total Assets | $332.1 million | $330.8 million |
| Total Debt | $27.5 million | $34.2 million |
| Working Capital | $202.3 million | $200.6 million |
| Cash & Equivalents | $115.1 million | $121.1 million |
Segment Performance (2008 vs 2007):
- Rail Products: Sales decreased 10.0% to $234.7 million; Gross profit margin improved to 15.3%.
- Construction Products: Sales increased 14.7% to $243.1 million; Gross profit margin improved to 20.3%.
- Tubular Products: Sales decreased 4.6% to $34.8 million; Gross profit margin decreased to 26.3%.
Material Changes vs. Prior Period
- Net Income Decline: Net income dropped significantly from $110.7 million in 2007 to $27.7 million in 2008. This is primarily due to the absence of a $122.9 million pre-tax gain from the sale of the company's investment in the Dakota, Minnesota & Eastern Railroad (DM&E) recorded in 2007.
- Adjusted Earnings: Excluding the DM&E gain and dividend income in 2007, and the $3.5 million in gains from escrow proceeds and property sales in 2008, adjusted diluted EPS increased slightly from $2.28 in 2007 to $2.36 in 2008.
- LIFO Charge: A $12.7 million LIFO charge was recorded in 2008 due to volatile steel prices, compared to a $1.5 million charge in 2007.
- Share Repurchases: The company repurchased 865,532 shares of common stock for approximately $26.5 million in 2008. No repurchases were made in 2007.
- Debt Reduction: Total debt decreased by $6.7 million as the company repaid long-term obligations.
Guidance, Outlook, and Risks
Outlook: Management expects 2009 to be challenged by reduced sales volumes, reduced production, and a recessionary economic environment. However, the company anticipates remaining profitable and generating solid positive cash flow. Margin compression is expected in the first half of 2009 due to falling commodity prices.
Key Risks and Contingencies:
- Customer Concentration: The CXT Rail and ARP divisions are heavily dependent on Union Pacific Railroad (UPRR). UPRR purchases are expected to decrease by approximately 14% in 2009 compared to 2008 levels.
- Government Funding: A substantial portion of operations relies on government infrastructure funding (e.g., SAFETEA-LU), which was set to expire in September 2009. The impact of the American Recovery and Reinvestment Act remains uncertain.
- Raw Materials: The company is exposed to cyclical steel prices and availability. While prices fell in late 2008, volatility remains a risk.
- Legal Proceedings: The company faces several lawsuits, including a 2004 claim regarding pipe coating defects and a 2008 third-party complaint regarding environmental contamination in Oklahoma. Management believes it has meritorious defenses and insurance coverage for these claims.
- DM&E Contingent Payments: The company retains a right to approximately 12.25% of future contingent payments (up to $1.057 billion total) from the DM&E sale to Canadian Pacific Railway, dependent on construction milestones and tonnage thresholds by 2025.
Investor Verification Checklist
- Adjusted Earnings Quality: Verify the sustainability of core operating earnings by excluding the one-time DM&E gain from 2007 and the escrow/property gains from 2008.
- UPRR Contract Exposure: Assess the impact of the anticipated 14% reduction in concrete tie sales to Union Pacific Railroad in 2009 on the Rail segment's profitability.
- Liquidity Position: Confirm the availability of the $86.4 million unused revolving credit facility and the $115.1 million cash balance to weather the recession.
- Share Repurchase Program: Note that $13.5 million remains authorized for share repurchases under the program expiring December 31, 2010.
- Legal Reserves: Review the adequacy of reserves for the pending environmental and product liability lawsuits, though management asserts no material adverse effect is expected.