L.B. Foster Company — FY2013 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. Reportable segments are Rail Products, Construction Products and Tubular Products. This filing covers the fiscal year ended December 31, 2013; fourth-quarter results are also presented. Amounts are in thousands unless otherwise noted.
On November 7, 2013, the Company acquired substantially all assets and liabilities of Ball Winch, LLC for a preliminary purchase price of $37,995, funded with cash. Ball Winch provides specialty pipe-coating and field-service capabilities and is included in Tubular Products from the acquisition date. Results contributed less than 1% of 2013 revenue and pretax income.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $597,963 | $588,541 | 1.6% |
| Gross profit | $115,939 | $92,269 | 25.7% |
| Gross margin | 19.4% | 15.7% | +3.7 percentage points |
| Operating profit | $41,571 | $22,657 | 83.5% |
| Income from continuing operations | $29,276 | $14,764 | 98.3% |
| Diluted EPS from continuing operations | $2.85 | $1.44 | +$1.41 |
| Net income | $29,290 | $16,188 | 80.9% |
| Cash flow from continuing operations | $13,880 | $26,959 | Down $13,079 |
FY2013 segment sales were $363,667 for Rail Products, $191,751 for Construction Products and $42,545 for Tubular Products. Segment gross-profit margins were 20.6%, 15.2% and 28.9%, respectively.
Fourth-quarter 2013 net sales were $156,458 versus $140,724 in the prior-year quarter, and income from continuing operations was $7,275, or $0.71 diluted EPS, versus $6,643, or $0.65 diluted EPS. Fourth-quarter gross margin was unchanged at 19.6%. Construction Products sales increased 67.0%, while Rail Products declined 6.0% and Tubular Products declined 29.3%.
At December 31, 2013, cash and cash equivalents were $64,623, total assets were $413,654, working capital was $171,885 and stockholders’ equity was $316,397. Total debt was $56, consisting of capital lease obligations; there were no borrowings under the $125,000 U.S. revolving credit facility, which had approximately $124,186 of availability. Approximately $43,560 of cash was held in non-domestic accounts and was intended to remain indefinitely reinvested outside the United States.
Capital expenditures were $9,674 in 2013, compared with $7,160 in 2012. The Company paid $1,240 in common dividends and increased the regular quarterly dividend to $0.03 per share. No shares were repurchased under the repurchase authorization during 2013.
Material changes versus the prior comparable period
- Revenue increased modestly, driven by Construction Products growth of 13.3%, partially offset by Rail Products down 1.8% and Tubular Products down 13.1%.
- Profitability improved substantially because FY2012 included a $22,000 pretax concrete-tie warranty charge. Excluding that charge, FY2012 gross margin would have been approximately 19.4%, broadly comparable to FY2013.
- Rail Products gross profit increased 42.7% despite lower sales, reflecting favorable mix, lower overhead and the absence of the prior-year warranty charge.
- Construction Products benefited from stronger piling demand, infrastructure spending and improved productivity in the concrete-buildings business.
- Tubular Products weakened because customers delayed coated-pipe purchases amid changing energy-market conditions; management reported improved order input late in 2013.
- Operating cash flow declined because accounts receivable increased materially and working capital used $29,964, partly reflecting tax payments and warranty replacements. Cash fell by $36,841 during the year, primarily due to the Ball Winch acquisition, capital expenditures and working-capital needs.
- Backlog declined to $183,111 at December 31, 2013 from $210,918, including Rail Products backlog of $121,853, Construction Products backlog of $53,483 and Tubular Products backlog of $7,775. Approximately 1% of backlog was expected to extend beyond 2014.
Guidance, outlook, risks and unusual items
Management described 2014 market conditions as favorable across all three segments and expected positive sales growth, supported by transportation and energy infrastructure investment. Expected declines included transit products following completion of the Honolulu project and concrete ties due to planned Union Pacific Railroad activity. Management was not forecasting pretax margin expansion because of planned investments in growth programs and ERP systems.
Management expected first-quarter 2014 sales of $123,000 to $128,000 and net income of $5,500 to $5,900. Planned 2014 capital expenditures were $18,000 to $22,000, substantially above the 2013 level, with spending directed toward facilities, land, service centers, technology, equipment and new products.
The most significant contingency is the dispute with Union Pacific Railroad over allegedly defective concrete ties manufactured at the former Grand Island, Nebraska facility. The Company recorded a $6,462 concrete-tie warranty reserve at December 31, 2013, within a total product-warranty liability of $7,483. UPRR asserted a material breach of the amended supply agreement in November 2013; the Company denied the breach and continued reconciliation efforts. Additional warranty charges, damages, termination of the supply agreement or impairment of the Tucson facility could materially affect results, liquidity and financial condition. Approximately 170,000 disputed replacement ties were identified in the Company’s documentation.
The Company also disclosed an Inspector General subpoena concerning Grand Island concrete-tie manufacturing and environmental and litigation reserves of approximately $2,190. Management stated that no material legal or environmental proceedings were pending, but acknowledged that individual matters could materially affect a reporting period. Other risks include infrastructure-funding changes, competition, steel and other raw-material costs, labor negotiations, foreign currency movements, supplier concentration, customer concentration, acquisition integration and potential goodwill or intangible-asset impairment.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The assessment excluded Ball Winch’s internal controls, representing approximately 9% of total assets and less than 1% of revenue and pretax income at year-end.
Most important facts for investors to verify
- Whether the UPRR warranty dispute is resolved and whether the $6,462 reserve adequately covers future replacement costs and related claims.
- Whether Construction Products growth and late-2013 Tubular order activity offset expected declines in transit products and concrete ties.
- Whether the planned $18,000–$22,000 of 2014 capital spending produces the expected growth and working-capital improvements.
- Whether operating cash flow recovers from the 2013 decline and supports acquisitions, dividends and investment without revolver borrowings.
- Whether Ball Winch achieves the expected strategic and financial benefits and whether its preliminary purchase-price allocation changes.
- The effect of transportation-funding legislation, including the expiration of MAP-21 authorization in September 2014, on project demand and backlog conversion.