L.B. Foster Company 2018 Form 10-K Summary
Business Context and Reporting Period
L.B. Foster Company manufactures, distributes, and provides services for transportation and energy infrastructure in North America and Europe. Its three reportable segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This Form 10-K covers the fiscal year ended December 31, 2018, with comparisons to fiscal 2017. The company is an accelerated and smaller reporting company. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $627.0 million | $536.4 million | +16.9% |
| Gross profit | $117.2 million | $105.3 million | +11.3% |
| Gross margin | 18.7% | 19.6% | Down 90 bps |
| Selling and administrative expense | $87.7 million | $80.5 million | +8.9% |
| Operating cash flow | $26.0 million | $39.4 million | Down $13.4 million |
| Net income (loss) | $(31.2) million | $5.4 million | Declined $36.5 million |
| Diluted earnings per share | $(3.01) | $0.51 | Declined $3.52 |
| Adjusted EBITDA | $41.4 million | $38.0 million | +9.1% |
| Total debt | $75.0 million | $130.0 million | Down $55.0 million |
| Cash and cash equivalents | $10.3 million | $37.7 million | Down $27.4 million |
| Revolving credit availability | $120.6 million | $41.1 million | Up $79.5 million |
Rail Products and Services generated sales of $319.5 million, up 24.8%, and segment profit of $19.5 million, up 75.7%. Construction Products generated sales of $158.7 million, down 1.9%, and segment profit of $6.8 million, down 51.6%. Tubular and Energy Services generated sales of $148.8 million, up 25.6%, and segment profit of $12.6 million, up 263.1%.
Ending backlog was $220.4 million, up 32.1% from $166.9 million. Rail backlog was $97.4 million, Construction backlog was $95.4 million, and Tubular and Energy backlog was $27.6 million. Approximately 6.7% of total backlog was expected to extend beyond 2019.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by stronger rail, transit, pipeline, and upstream energy activity.
- Gross margin declined because of pricing pressure, unfavorable product mix, lower-margin distribution growth, competitive bridge-decking orders, and a production interruption at a precast facility.
- The company recognized $43.4 million of expense related to the Union Pacific Railroad concrete-tie settlement. This was the principal driver of the 2018 net loss and fourth-quarter net loss of $41.2 million.
- Interest expense declined $1.9 million as debt was reduced by approximately $55.0 million and the company reached the lowest interest-rate pricing tier under its credit agreement.
- Selling and administrative expense declined to 14.0% of sales from 15.0%, reflecting cost-containment efforts, despite higher legal and personnel costs.
- Operating cash flow declined because working capital used $8.4 million in 2018, compared with providing $13.7 million in 2017, and because 2017 included a $11.8 million federal tax refund.
- The company changed certain U.S. inventory accounting from LIFO to average cost during the fourth quarter. Prior periods were retrospectively adjusted, increasing beginning 2017 retained earnings by $6.8 million.
- The company sold its 45% interest in L B Pipe and Coupling Products, LLC, receiving $3.9 million for the ownership interest and $1.2 million in repayment of a revolving line of credit.
Liquidity, Debt, and Capital Resources
At December 31, 2018, total debt was $75.0 million, consisting primarily of $74.0 million drawn on the revolving credit facility, and cash was $10.3 million. The company reported $120.6 million of available borrowing capacity and compliance with its credit agreement covenants. The principal domestic credit facility matures March 13, 2020. The company paid down approximately $55.0 million of debt during 2018 using operating cash flow, international cash repatriation, and proceeds from asset sales.
Capital expenditures were $5.3 million, compared with $6.1 million in 2017. Contractual cash obligations totaled $195.5 million, including $50.0 million related to the concrete-tie settlement, $74.0 million of revolving debt, $15.2 million of operating leases, and $49.1 million of purchase obligations. The company used $50.0 million of LIBOR-based interest-rate swaps to hedge a portion of variable-rate debt.
Guidance, Outlook, Risks, and Unusual Items
Management stated that stronger order activity and the increased backlog supported higher 2019 projections, but the filing does not provide specific 2019 revenue or earnings guidance. Management expected continued rail infrastructure, transit, pipeline, and energy-service demand, while recognizing exposure to cyclical markets and pricing pressure.
- The Union Pacific settlement requires $50.0 million of payments through December 2024, beginning with $2.0 million immediately and followed by installments. Union Pacific also agreed to purchase a cumulative $48.0 million of products and services through 2024, targeting $8.0 million annually beginning in 2019.
- Key risks include debt and covenant compliance, refinancing requirements, variable interest rates and LIBOR reform, energy-price volatility, steel and other material costs, tariffs, supplier concentration, infrastructure funding, customer concentration, litigation and warranty claims, cybersecurity, ERP implementation, foreign exchange, Brexit, and international trade regulation.
- The company remains a potentially responsible party regarding the Portland Harbor Superfund Site. The EPA estimated the selected remedy at approximately $1.1 billion and undiscovered costs at approximately $1.7 billion, but management did not expect the matter to have a material adverse effect on the company. The company recorded an environmental liability of $6.1 million at year-end.
- The company maintained a $30.7 million valuation allowance against deferred tax assets, citing cumulative financial losses and uncertainty regarding realization. The 2018 effective tax rate was negative 16.7%.
- The company expects adoption of the new lease standard in 2019 to add approximately $13 million to $16 million of right-of-use assets and related liabilities, without an expected material effect on earnings or cash flow.
Most Important Facts for Investors to Verify
- Whether the company can sustain sales and backlog growth while restoring gross margins and Construction segment profitability.
- Progress in repaying or refinancing the revolving credit facility before its March 2020 maturity and continued compliance with financial covenants.
- Actual cash payments under the $50.0 million Union Pacific settlement and whether the related $48.0 million of anticipated purchases materializes.
- Whether the Portland Harbor environmental exposure could exceed the recorded $6.1 million liability.
- Realization of deferred tax assets and potential future changes to the $30.7 million valuation allowance.
- Execution of the ERP rollout, cost-containment initiatives, and planned operational improvements in the Construction segment.
- The effect of steel prices, tariffs, energy prices, foreign exchange, interest rates, and infrastructure spending on demand and margins.
- The impact of the inventory accounting change and other retrospective adjustments when comparing 2018 with prior periods.