L.B. Foster Company — FY2020 Form 10-K Summary
Business context and reporting period
L.B. Foster Company provides rail products, technologies, services, and infrastructure solutions across North America, Europe, and Asia. This filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. Effective in the fourth quarter, the Company realigned reporting into two segments: Rail Technologies and Services, and Infrastructure Solutions.
- Rail Technologies and Services represented 55.6% of 2020 sales; Infrastructure Solutions represented 44.4%.
- The Company had approximately 1,130 employees at year-end and generated approximately 20% of sales outside the United States.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $497.4 million | $616.4 million | Down 19.3% |
| Gross profit | $95.0 million | $120.9 million | Down 21.4% |
| Gross margin | 19.1% | 19.6% | Down 50 bps |
| Income from continuing operations | $25.8 million | $48.0 million | Down 46.2% |
| Diluted EPS from continuing operations | $2.42 | $4.51 | Down 46.3% |
| Net income | $7.6 million | $42.6 million | Down 82.2% |
| Adjusted EBITDA | $32.0 million | $47.4 million | Down 32.5% |
| Cash flow from continuing operations | $20.5 million | $26.2 million | Down $5.7 million |
- Rail Technologies and Services sales were $276.4 million, down 14.1%; segment profit was $16.3 million, down 16.9%. Gross margin improved to 20.0% from 19.8%.
- Infrastructure Solutions sales were $221.0 million, down 25.0%; segment profit was $8.3 million, down 65.1%. Gross margin declined to 18.0% from 19.4%.
- Selling and administrative expense declined 10.8% to $73.6 million, reflecting cost-containment actions, although it increased as a percentage of sales because of lower volume.
- Fourth-quarter 2020 sales were $115.6 million, down 18.2% from the fourth quarter of 2019. Fourth-quarter net income was $2.1 million, compared with $26.3 million in the prior-year quarter; the 2019 quarter benefited from significant tax-related items.
- Backlog increased 8.4% to $248.2 million, including $121.2 million in Rail and $127.0 million in Infrastructure Solutions. Approximately 13.4% was expected to extend beyond 2021.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $7.6 million at December 31, 2020, versus $14.2 million at year-end 2019.
- Total debt declined to $45.0 million from $58.2 million; net debt declined to $37.5 million from $44.0 million.
- The revolving credit facility had $115.0 million of total capacity and $69.3 million of net available borrowing capacity at year-end. Total available funding capacity, including cash, was $76.8 million.
- The Company generated $20.5 million of operating cash flow, spent $9.2 million on capital expenditures, and used $15.3 million in continuing financing activities.
- The current ratio was 2.05. The Company was in compliance with its amended credit agreement covenants at year-end.
- The amended credit agreement matures April 30, 2024 and requires scheduled reductions in revolving capacity. Variable-rate debt remains exposed to LIBOR transition risk; interest-rate swaps had a $1.1 million liability at year-end.
- No dividends were declared in 2020, 2019, or 2018. Equity withholding for employee taxes totaled $1.7 million in 2020.
Material changes versus the prior comparable period
- COVID-19 reduced rail, transit, infrastructure, and energy-market demand, delayed projects, disrupted supply chains, and restricted customer access to worksites.
- Infrastructure Solutions was particularly affected by weak oil and gas markets, lower project activity, and inefficiencies associated with relocating precast concrete operations from Spokane, Washington, to Boise, Idaho.
- The Company completed the sale of its upstream Test and Inspection Services business on September 4, 2020 for $4.0 million. The business was reported as discontinued operations and generated an $18.2 million loss, including the loss on sale.
- The divestiture produced approximately $19.0 million of aggregate tax benefits and an expected tax refund of approximately $9.0 million under the CARES Act.
- The Company acquired LarKen Precast, LLC for $1.2 million and completed the Boise facility relocation.
- In October 2020, the Company experienced a cyber-attack that temporarily disrupted operations. Management reported no material operational, financial, or reputational impact, but the investigation remained ongoing at filing.
- The Company adopted the current expected credit loss standard and cloud-computing implementation-cost guidance in 2020 without a material financial statement impact.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected pandemic-related disruption to continue at least through the first half of 2021, with uncertainty regarding its duration and severity.
- Management expected a significant 2021 sales decline in Coatings and Measurement because of continued weakness in midstream energy markets, although project inquiries suggested modest improvement in the first half of 2021.
- Rail Technologies was expected to recover further, but U.K. lockdowns, reduced passenger and freight volumes, and transit-operator budget shortfalls could delay improvement. Fabricated Steel Products backlog was expected to support near-capacity production in 2021.
- Infrastructure spending and potential government stimulus could benefit Precast Concrete Products and other civil-construction businesses, but government funding and project timing remain uncertain.
- The Company remains subject to a Union Pacific Railroad settlement requiring $8.0 million annual payments through 2024; $32.0 million remained payable after 2020.
- Environmental obligations totaled $2.6 million. The Company is a potentially responsible party in the Portland Harbor Superfund matter but stated that the ultimate impact cannot be predicted and is not currently expected to be material.
- Key risks include COVID-19, energy-price volatility, supply-chain and raw-material availability, customer concentration and credit risk, labor negotiations, cyber threats, ERP implementation, foreign exchange and Brexit-related uncertainty, government infrastructure funding, debt covenants, interest rates and LIBOR replacement, litigation, warranties, environmental liabilities, and impairment of long-lived assets.
- Critical audit matters involved estimates to complete long-term contracts and valuation allowances for deferred tax assets. The Company reported unqualified audit opinions on its financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether rail and infrastructure demand recovered as projected after pandemic restrictions, particularly passenger and freight volumes and U.K. activity.
- The pace of recovery or further deterioration in Coatings and Measurement and the broader energy market.
- Conversion of the $248.2 million backlog into revenue and cash, including project execution, customer cancellations, and the portion extending beyond 2021.
- Compliance with leverage, fixed-charge coverage, and working-capital covenants as revolving capacity declines through 2024.
- Realization of the approximately $9.0 million expected tax refund and the sustainability of deferred tax assets supported by forecasted taxable income.
- Final findings and any costs, claims, or disclosures arising from the October 2020 cyber-attack.
- Remaining payments and commercial obligations under the Union Pacific settlement, as well as environmental and warranty exposures.
- Whether reported profitability can improve without reliance on the $15.8 million tax benefit related to the Test and Inspection Services disposition and other non-recurring items.